FL Sales Tax: How to Settle with the Tax Man - Part II

Settlement authority of the Department of Revenue

due to doubt as to collectability

Part 2 of 2

A statement addressing context

This article is written, as the title would suggest, to discuss settlement. It is does not address the very real authority of the Department of Revenue (DOR) to obtain a binding civil judgment of tax liability nor does it address authority to record tax liens or engage in collection of tax warrants. Further it is not an analysis of strategy to defend against DOR from obtaining a judgment. The latter has been addressed previously in part I of this two- part discussion. However, the Department is given authority to settle cases (eg. compromise tax, penalties and interest) when an inability to pay exists. This is statutorily referred to as “Doubt as to Collectability the subject of this discussion.

The source of authority for “Doubt as to Collectability”

Section 213.21(7)(b) F.S. is the statutory authority for the DOR to compromise of tax or interest based upon “Doubt as to Collectability”. As mentioned in Part I, Collectability is treated as conceptually separate from Doubt as to Liability. Separate treatment in its rules makes sense, as the conceptual elements to evaluate whether a tax is collectible is separate and apart from the question of whether liability exists. Generally, liability is focused on facts surrounding the transactions giving rise to the obligation to pay tax. For purposes of this article the issue of “Liability” is presumed to have been either acknowledged by the taxpayer as a fact or time has elapsed to challenge the assessment with a timely protest. If a taxpayer is unsure if liability exists and a protest period has not run, then the first priority should be to analyze liability before turning to evaluate “collectability”. As to whether a time for protest as run, this is set out in a Florida statute but will not be elaborated upon in this discussion. [i]

Section 213.21(7)(b) F.S provides the DOR with broad discretion in deciding upon a compromise settlement based upon “doubt as to collectability”. This is done through the use of the terms “in the best interests of the state…”. This phrase is so broad as to beg the question of what such a broad delegation even means in practical terms. A broad delegation of authority may be challenged on its face as unconstitutionally broad delegation of authority. Is the phrase best interest of the state a subjective judgment, one which is “in the eye of the beholder”? Such a standard would lead, unless based on concrete conditions or concepts, to arbitrary and unequal treatment under the law. There are however collectibility” criteria contained in the statute. However, one must keep in mind the following criteria are used when a voluntary self-disclosure occurs and in certain circumstances, the agency will not view the situation as a voluntary disclosure. The criteria are:

1. the amount of tax and interest that will be collected and compromised under a voluntary self disclosure.

2. The financial ability of the taxpayer and the future outlook of the taxpayer's business and the industry involved;

3. Whether the taxpayer has paid or will be paying other taxes to the state;

4. The future voluntary compliance of the taxpayer; and

5. Any other factor that the department considers relevant to this determination.

Breaking down the voluntary disclosure factors

Factor No. 1 above (concerning amounts compromised and amount to be collected) is plain enough, these are two sides of the same coin. Yet this clarity is true only if there is no dispute as to what is due ( liability issues are discussed in Part I). Item No. 2 seems murky, at least in part, with regard to the future outlook of a business and/or industry. Does a government agency really have sufficient expertise to use this criteria? The second factor, regarding the financial ability of the taxpayer, is not defined but logically must be understood as an expression calling for evaluation of the financial strength of the taxpayer registrant, without reference to sources beyond the registrant/taxpayer. This is a the only possible interpretation of the statute, which uses the terms “financial ability of the taxpayer”, rather than expansive terms such as the taxpayer and related parties or like terms. Hence the plain language of the statute should control this issue.

Of course, any financial strength evaluation requires cooperation from the taxpayer, who seeks a compromise of tax liability on the basis of “collectability”. This cooperation should be viewed in the context of the statutory terms “voluntary self- disclosure” (discussed separately in this commentary). Financial ability is not defined but should logically be based upon qualities commonly employed, such as strength, or lack thereof. Financial strength is commonly measured by financial statements of the legal entity registered as the taxpayer, assuming these are available. Because financial ability is not a defined criteria, other possible markers of financial ability could, and probably would, be used by the agency to satisfy itself of this criteria, keeping in mind that many small businesses operate on a cash basis. These smaller taxpayers operate without regular preparation of financial statements and such statements are not a criteria for obtaining registration. For these businesses, the DOR undoubtedly look to federal tax returns.

How broad of an inquiry into financial ability is appropriate? Does the form of the business matter?

Suppose financial ability is judged not just on the financial wellness of the registered taxpayer, but the owners of the business. Is that fair and valid grounds, if these are separate legal entities ? Suppose for example the registered entity is a Florida Limited Liability Corporation under Chapter 605 F.S. ? Should evaluation by DOR of financial ability extend to the members of the LLC? Would this not defeat the purpose of the Limited Liability laws also created by the legislature in Chapter 605[ii] ? Should the financial strength of an individual majority corporate stockholder be relevant if the stockholder is not the taxpayer? What about if the registered entity is controlled by someone who had filed bankruptcy individually?

Generally speaking, Florida law suggests that any analysis of the registered entity should be driven by the financial records of the registered entity and the laws surrounding such entities (such as LLC legislation) but not extend to individuals such as corporate officers and shareholders, absent evidence of outright fraud. Indeed, a decision to reject a settlement offer based upon the presence of “outside” financial strength may be challenged as being beyond lawful discretion by the agency and inconsistent with statutory terminology concerning financial ability.

These are issues not directly addressed by the statute (Section 213.21 F.S. ) nor in a rule and as such can be misapplied or abused by the agency despite its legitimately delegated statutory discretion. The possible circumstances are too varied to address here but can be anticipated as issues when compromise is desired, but an offer to the Department is rejected. These circumstances require expertise in negotiating with the agency or carrying forward to possible litigation over liability or collectability upon rejection of the proposed compromise. The firm of Moffa, Sutton and Donnini has specific expertise in financial analysis by partners who are Florida CPA’s.

More on those factors

The third factor listed is the history of tax payment for other taxes payable to the state. This is a documentable fact for past payments, but provisions which address future payments of other taxes would depend on the type of tax due which, in turn, would depend upon the type of business of the taxpayer and the form of the taxpayer entity. The fourth factor, regarding future compliance, should be seen in relation to the historical record of compliance. A history, if available, of historical compliance would predict voluntary future compliance.

The last of these statutory criteria is a catchall provision: “… any other factor the Department considers relevant”. This would appear to be ripe for potential abuse or arbitrary application, depending upon how it is administered. Administration of this provision is determined with reference to DOR rules and informal interpretations. Hence, one must look to the promulgated rules of the agency and rulings on point. Here again, Moffa, Sutton and Donnini has specific expertise in both Florida taxes and Florida Administrative law as these skills are important to help a client seeking to settle with DOR an assessment on the grounds of liability or collectability. Discussion of the DOR rules follows.

Considering applicable DOR rules on Collectability and some good news

First, the the good news. There are rules on administration of delegated authority in the area of “collectability”. Those persons who seek a settlement on the basis of collectability can approach the agency knowing DOR is not permitted to engage in policy decisions without adopting guidelines for those decisions and is required to avoid arbitrary individual decisions.[iii] This statement, in plain language, means the agency is required to write rules to implement its delegated authority, especially for an open ended delegation such as “any other factor”. This is necessary for fair and uniform administration of statutory delegated authority.

The Department has promulgated rules in Chapter 12-13 F.A.C. These are: Rule 12-13.075 FAC and Rule 12-13.006 F.A.C. Rule 12-13.075 should be reviewed with care because the rule elaborates on the statutory phrase “best interests of the state” by identifying factors which will be considered by the Department. These are :

1. Whether the financial problems of the taxpayer can be addressed, in whole or in part, through use of a stipulated payment arrangement, in lieu of reduction of the taxpayer's liability;

2. Whether a pattern of chronic tax delinquencies by the taxpayer exists to indicate that efforts to assist this taxpayer because of its financial problems will not ultimately serve the public interest but will simply afford this taxpayer a competitive advantage in the market; and

3. Whether tax was collected but not remitted to the state by the taxpayer.

Nos. 1 and 2 leave a fair amount of range to agency judgment while No. 3 is clear enough as stated as to what will be considered. No 2 would seem to apply only when financial problems are so deep compromise will not work, but exactly when is such a demarcation point reached? This is not addressed in the rule. Likewise, as to criteria No. 3, it is unclear how the agency will apply the phrase “will not ultimately serve the public interest”. However, it is fairly certain that a failure to remit a tax collected for a prior specific period would likely prejudice the taxpayers ability to secure acceptance of an offer to compromise for a later period on the basis of collectability unless the earlier period is resolved as well.

In any case, item No 1 above will almost always be the first consideration for the agency. Any decision concerning a stipulated payment plan requires a financial analysis of the business so this should be anticipated by the taxpayer. The agency will very likely (based on past actions) request 1120 or 1120S federal tax returns as filed with the IRS for 3 prior years. The information requested will likely also include a request for financial statements for the current tax reporting year and W-2 information for officers and shareholders for prior years. Obviously, the use of a stipulated payment plan which does not compromise tax and interest must project future cash flows which will allow a pay down under the stipulated plan.

Rule 12-13.006 is also important because it provides DOR authority to compromise based on collectability ”… because full payment of the unpaid obligation is highly doubtful ….” This language gives DOR discretion in deciding the “best interest of the state” requires compromise because “full payment is highly doubtful”. One application of this rule is found in a DOAH decision styled asROWE'S SUPERMARKETS, LLC, Petitioner v. DEPARTMENT OF REVENUE, 2012 WL 3161964.[iv] In the Rowe decision, the facts seem to suggest the agency looked beyond the financial ability of the taxpayer in applying its rule with respect to ability to pay.

It is important to keep in mind that a decision by DOR, such as Rowe Supermarkets, can be challenged in an administrative hearing setting..[v] Such a challenge would likely also seek to incorporate issues addressing a lack of liability.[vi] This is an area in which Moffa, Sutton and Donnini has specific legal expertise in engaging with the agency.

When voluntary self- disclosuredoes not occur

As noted in the previous discussion of “collectability”, the legislature delegated DOR authority to settle tax and interest under a “Voluntary self- disclosure” procedure. There does not seem to be a definition of what qualifies as a voluntary self -disclosure. Instead, these terms are implicitly defined by a statutory statement as to when a “voluntary self-disclosure” does not occur.[vii] Specifically, whenever the DOR has “contacted or informed the taxpayer” it is “inquiring into the taxpayers liability for tax……” In simplest terms, if the tax man knocks on your door to audit for a particular audit period and this occurs prior to initiation of an offer to compromise tax and interest for the same period, the legislature excluded such circumstances from” voluntary self -disclosure”. Likewise, the legislature excluded from voluntary self -disclosure any taxes collected which the taxpayer failed to remit. Under the self -disclosure provisions, the amounts of tax and interest may be compromised for a period of three (3) calendar year or tax years, whichever is applicable.

Some Take Aways

1. Section 213.21(7)(b) F.S. is the statutory authority for the DOR to compromise tax or interest based upon “Doubt as to Collectability”.
2. Collectability grounds are found in DOR Rule 12-13.006 F.A.C.
3. Section 213.21(7)(b) F.S provides the DOR with broad discretion when deciding upon a compromise settlement offer based upon “doubt as to collectability”.
4. The legislature delegated DOR authority to settle tax and interest under a “voluntary self- disclosure” procedure which is also located in Section 213.21 F.S
5. Under a “Voluntary self-disclosure” there are 5 explicit factors to guide a settlement offer. One of these calls for evaluation of financial ability of the taxpayer.
6. DOR has promulgated rules in Chapter 12-13 F.A.C. Rule 12-13.075 FAC and Rule 12-13.006 F.A.C. are key.
7. One of these Rules, No. 12-13.075 FAC requires an evaluation of the use of a stipulated payment arrangement, in lieu of reduction of the taxpayer's liability. This will likely be considered in most offers based on voluntary disclosure.
8. Rule 12-13.006 provides DOR authority to compromise based on the criteria of “best interest of the state”. The terms “full payment of the unpaid obligation is highly doubtful” is used to condition the “best interest” statement, but the conditioning terms “highly doubtful “is not defined in the rule in financial terminology.