FL Sales Tax: How To Settle with the Tax Man - Part 1

Understanding settlement authority of the Department of Revenue

when there is doubt as to liability

Part I of 2

1. The statutory framework for compromise of taxes, interest and associated penalties.

This article discusses issues surrounding settling tax assessments and related accrued interest. There are two main reasons for the government in Florida to settle a tax assessment. These are: “Doubt as to Liability” and “Doubt as to Collectability”. The key statute to understanding compromise authority of the Department of Revenue is located in Chapter 213 Florida Statutes. Section 213.21 is entitled “Informal Conferences; Compromises”.

Section 213.21(2)(a). provides that the Executive Director of the Department of Revenue (DOR) is authorized to enter into agreements with taxpayers settling the taxpayer's liability for any tax, interest, or penalty assessed based upon authority to tax listed Section 72.011(1). There is a limit imposed of $500,000 or less. Id. This dollar limit excludes the authority of the Executive Director with explicit Florida Cabinet approval. Section 72.011 contains a list of the types of taxes subject to the compromise provisions given to the state agency. These include all taxes and fees created in Chapters 201,202,203, 206,207, 212,213, and Chapter 220. These Chapters include Documentary taxes, Gross Receipts tax, Motor Fuel taxes, the many applications of the Sales and Use tax and Corporate Income tax. This authority does not address local taxation.

2. Rules of the agency come into play as well

Fla. Stat. § 213.21(3)(a) is the provision in the law which authorizes compromise of tax or interest on the basis of “doubt as to liability for or collectability of such tax or interest…” These are, as noted, two separate, but not necessarily mutually exclusive grounds for seeking compromise for taxes assessed. Each category is treated separately in the regulations promulgated by DOR based on the authority in Chapter 213 F.S. and my discussion in Part I and Part II will be separated based upon that same division.

It is worth knowing for purpose of further analysis that there are rules ( aka “regulations” for those familiar with federal tax terminology) promulgated by the agency which are located in Chp.12-13 F.A.C. This Chapter of the Florida Administrative Code (FAC) contains certain key provisions including Rule 12-13.0075 entitled: “Guidelines for Determining Amount of Compromise.” Rule 12-13.005 addresses Grounds for Finding Doubt as to Liability. These rules are, of course, the DOR view of how the two grounds for settlement will be carried out, at least in theory anyway!

3. Breaking down what constitutes “Doubt as to Liability”

The statutory framework provides that doubt as to “liability” exists when the taxpayer demonstrates that he or she reasonably relied on a written determination of the department. See: Fla. Stat. § 213.21(3)(b). Naturally, the introduction of a concept of “reasonableness” leaves some room for debate. In any case, reasonable reliance is a key concept in understanding the path to compromise based on “Doubt as to Liability”.

Reasonable reliance is said to exist in three (3) specific enumerated statutory circumstances. The first two (2) of these relate to prior audits where the same issue was raised or considered by the Department and a determination of no assessment was reached. These are listed in the statute as follows:

1. The audit workpapers clearly show that the same issue was considered in a prior audit of the taxpayer conducted by or on behalf of the department and, after consideration of the issue, the department's auditor determined that no assessment was appropriate in regard to that issue.

2. The same issue was raised in a prior audit of the taxpayer and, during the informal protest of the proposed assessment, the department issued a notice of decision withdrawing the issue from the assessment.

3. The third ground is the receipt of a TAA or technical assistance advisement. Authority to issue and scope of application of these announcements are set forth in Section 213.22 F.S. A TAA is binding on the agency but it cannot be relied upon by other taxpayers.

The statutory term “written determination” is also elaborated upon in Rule 12-13.005 (2)(a) and includes audit workpapers including all documents the auditor generates ( including a prior audit of the taxpayer) and ITA’s ( an internal technical advisement directed to the auditor). It should be noted this rule points out that a failure of a prior audit to assess tax is not a basis for a written advisement and therefore not a basis for reasonable reliance.

In addition, the same statute anticipates that other fact specific circumstances could arise which lead to doubt as to liability, this last provision is stated in connection with recognition that the agency is able to reach a settlement on the basis of doubt as to liability based on a “ judicially determined constitutional defect in the tax law”.

4. Considering Rule 12-13.0075 F.A.C.

As noted earlier, Rule 12-13.0075 F.A.C. lists circumstances not specifically identified in Section 213.21(3) F.S. These reasons are not so surprising and somewhat repetitive of the statutory elements, but do add some interpretative nuances so it bears explicitly mentioning each. These are:

A. Likelihood of prevailing on the issue in litigation;

B. Ambiguity in the applicable laws or rules, as evidenced by both the laws or rules themselves and the common interpretation and application of same among members of the taxpayer's industry;

C. Whether doubt as to liability is based upon reasonable reliance by the taxpayer on a written determination by the Department as provided in subsection 12-13.005(2), F.A.C.; and

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

Item D above is the clearest and self-explanatory, but difficult to settle since a majority of the taxes administered fall into the category of a tax collected in trust and the legislature has so designated sales taxes to be state funds from the moment of collection. [i] In those circumstances, a payment plan and the issue of collectability should be evaluated. These areas will be discussed in Part II.

Items A and B both leave room for doubt and debate. Item A frankly depends, in part, on the counsel you hire. Competent counsel can make a big difference in litigation because of the many factors which go into either winning or convincing DOR early settlement will be most efficient. Item B addresses ambiguity in the laws or rules and the norms of the industry. Doubt as to liability is indicated when: “an action is required in view of conflicting rulings, decisions, or ambiguities in the law, and the taxpayer has exercised ordinary care and prudence in attempting to comply with the revenue laws of this state”.

Item C is duplicative of the statute and turns on the concept of reasonableness mentioned above. It certainly leaves room for agency interpretation and when seeking to settle, agency interpretation is key in that area of the rule regarding written interpretations by the agency. Under principles of Administrative law agencies issue Declaratory Statement which can be relied upon by taxpayers. As noted earlier, written statement also includes Technical Assistance Advisement ( TAA ) to a particular taxpayer issued under Section 213.22 F.S. Rule 12-11 F.A.C. contains these guidelines. Particularly see Rule 12-11.003 FAC. Because TAA’s cannot be relied by other taxpayers, the reasonableness requirement would not be met except when it is addressed to that particular taxpayer.

Also, while it will not be acknowledged by DOR, but evidence exists it is a fact, doubt as to liability should be applied in cases in which another taxpayer has been treated differently than the current position of the agency. Sometimes this can simply be a lack of knowledge in a field office of a decision taken in an audit in another part of the state or country. Sometimes the agency may view circumstances as distinguishable but reasonable minds may differ. This can lead to certain equitable defenses if litigation occurs.

5. Statutory boundary of settlement authority: What is off limits

Section 213.21 F.S. excludes four (4) specific circumstances where a taxpayer shall not be considered to have reasonably relied on a prior written determination. The first two specific instances involve a taxpayer misepresenting facts which are material or, alternatively, the facts have simply changed in a material manner. The next two relate to either: A) a legislative change to the statute or judicia overruling of the Department interpretation (“statutes or regulations on which the determination was based have been materially revised or a published judicial opinion constituting precedent in the taxpayer's jurisdiction has overruled…”) or; B) a written statement by the Department notifying revision of its prior position. (“The department has informed the taxpayer in writing that its previous written determination has been revised and should no longer be relied upon”). In these instances, reason able reliance is not available as a defense. But the absence of statutory grounds does not mean the taxpayer has no alternatives, including early voluntary disclosure and collectability. In addition, it may be necessary tobring a challenge in court or an administrative forum.

6. Hope is not lost even if agency cannot settle or does not believe it necessary

It must be kept in mind that the agency’s interpretation of how a circumstance has changed (i.e. different facts are present or the existence of a change in law has occurred) may not necessarily be the last word or only interpretation. The agency’s view of changed circumstances, either factual or legal (such as the prospective application of a judicial opinion adverse to DOR or a positive court opinion from a court which it seeks to extend to other circumstances) can be challenged and contested in an appropriate forum and timely manner. In such circumstances, settlement is still possible later in the administrative process based upon the hazard of litigation to both sides. And, of course many other reasons exist beyond contesting a “reasonable interpretation”, these include looking to determine if the position taken in the assessment complies with administrative law requirements and equitable defenses such as estoppel. The legal principal of estoppel is available if there in fact has been circumstances when no real difference exists from a prior position of the agency with another taxpayer. Estoppel has been applied in Florida when a plaintiff has been misled or lulled into inaction and has in some extraordinary way been prevented from asserting his rights. Machules v. Department of Administration, 523 So.2d 1132, 1134 (Fla.1988) In these examples and others not mentioned here, the assistance of experienced counsel with expertise in this area of the law is absolutely crucial.

Take Away on Settling with the tax man because of doubt as to liability

1. When real questions exist as to doubt as to liability exists DOR has broad authority to compromise.
2. Audit records created by DOR and TAAs are written materials which form a basis for reasonable reliance and therefore supply grounds for Doubt as to Liability
3. If tax has been collected and not remitted, no compromise is likely based on Doubt as to Liability. There may be an alternative however. Issues surrounding inability to pay fall within the category of “Collectability”.
4. Ambiguity as to the law and interpretation of facts and circumstances is very important both to the agency and to the taxpayer. Sometimes, the concerns of the agency are broader in scope than just one taxpayer and understanding these differences can be important and advantageous in settlement talks if it is known. Often these and other distinctions require local counsel with legal expertise based on specialized experience and training.

Part II will discuss Doubt as to Collectability and Advantages of Voluntary Self Disclosure and Extended Payment Options.

About the Author: James (Jim) F. McAuley is an experienced attorney, joining the firm in 2015 after an exemplary career with the state of Florida. Holding the Florida Bar board certification as a specialist in State and Federal Administrative Law, Mr. McAuley represented the State of Florida for more than 20 years in the area of state and local taxation and administrative law with an emphasis on litigation. Mr. McAuley is Board Certified by the Florida Bar in the area of State and Federal Government Administrative Practice. Mr. McAuley holds the highest rating given to lawyers by Martindale Hubbell (Av) and has maintained that rating for more than 15 years. He is also a published legal author in both State taxation and Administrative law. He is an alumni & author of the Nova Law Review (Fall 2007). You can read more about Mr. McAuley in his firm bio.

About the Firm: At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.

ADDITIONAL RESOURCES

FLORIDA SALES TAX AUDIT HELP, published August 24, 2020, by James Sutton, CPA, Esq.

GO TO JAIL FOR NOT PAYING SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.

CHOICE OF FORUM IN DEFENDING AGAINST A FLORIDA TAX ASSESSMENT - PART 1, published January 13, 2019, by James McAuley, Esq.

BURDEN OF PROOF & PERSUASION IN FL TAX CASES, published May 31, 2015, by James McAuley, Esq.