The Florida Department of Revenue is increasing the amount of audits conducted and those being assessed. Many times, the Florida Department of Revenue makes an assessment and tells their victim that if they do not like it, they can avail themselves of their protest rights. In other words, audit staff will not make adjustments to assessments but simply make an assessment and move on to their next target. This article will discuss the audit process from beginning to end as well as how one must be weary of what might be done.
The audit process usually starts with a “lead” internally at the Florida Department of Revenue. The lead is evaluated. Staff of the Florida Department of Revenue may confirm contact information of the person or business to be audited. From there, the Florida Department of Revenue will send out one of two types of audit notices. One type of notice is a “Notice of Intent to Audit Books and Records,” which is Form DR-840. The other type of notice is a “Notice of Intent to Conduct a Limited Scope Audit,” which is Form DR-846. Though both notices convey the intent of the Florida Department of Revenue to conduct an audit, the notices arguably have different connotations.
The DR-840 is what one might consider to be the traditional full audit. The Florida Department of Revenue wants to look at everything when auditing. This type of an audit can be the most labor intensive, as the auditor will continue to request document after document. Sometimes, these deadlines given by auditors are devoid of the realities needed to pull the information. The DR-846 connotates a significantly narrower approach. Usually, the Florida Department of Revenue will want to use the DR-846 to audit a very specific issue or transaction. Common examples of this would be sending the notice to a commercial real property landlord, or sending a business the notice to look at items that were brought into Florida – by truck, imported through customs, or otherwise making its way into the state. There have been some instances where an auditor attempts to conduct a full audit under the DR-846. I have advocated, and won several times, the DR-846 is for a specific issue and not a full audit.
After the initial audit notice is received, the one being audited is entitled to wait sixty (60) days before the audit can commence. Despite how it might be phrased or demanded by auditors, you do not have to waive this initial time period. Generally, the auditor wants you to waive the period so they can get started sooner rather than waiting, as they are statutorily required to wait. Auditors have become quite aggressive on this front in multiple ways. In some cases, auditors attempt to start immediately on the sixty-first (61) day. If information is not provided within a short but untenable amount of time, auditors might issue a Formal Demand and threaten the person with various punishments, including potential jail time. What audit staff get wrong so frequency is the one being audited has really until one hundred twenty (120) days from the audit notice to get information. Because of some internal policies of the Florida Department of Revenue, auditors attempt to strongarm their victims any way they can.
Eventually, the auditor will issue a Notice of Intent to Make Audit Changes. This Notice of Intent to Make Audit Changes shows the issues and amounts being assessed. It normally carries an automated penalty as well. By rule, the Florida Department of Revenue is required to give the company/person thirty (30) calendar days. While many auditors will provide this timeframe, many auditors will not. It goes toward the auditor’s mentality of you being guilty until proven innocent. Like before and despite statements made by the auditor, you do not have to sign the Notice of Intent to Make Audit Changes. It only benefits the Florida Department of Revenue for you to sign this document.
If the auditor does provide the opportunity to submit more information in hopes of reducing the assessment, the auditor might send out an updated revised Notice of Intent to Make Audit Changes. The vast majority of the time, the updated revision will reduce the assessment. There have been cases where a revision results in an INCREASED ASSESSMENT. One must be quite careful to ensure the assessment does not go up, since this is still within the realm of possibility.
In some cases, it might be brought up about extending the statute of limitations to continue working on the audit. This is discussed because the Florida Department of Revenue only has a certain amount of time to compete the audit. If this happens, then you might be given a “Consent to Extend the Time to Issue an Assessment or to File a Claim for Refund,” which is Form DR-872. If you sign the DR-872, then you are keeping the audit “open” to continue working on it instead of summarily closing the audit and fighting the issue on appeal. There are instances where signing a DR-872 makes sense but other cases where it does not. It is quite factually specific.
After the issues being assessed have been narrowed as much as possible, the next document that comes out is the “Notice of Proposed Assessment” and is the formal conclusion to the audit process. When this document is received, it is critical you do not miss the deadline in the notice. You have sixty (60) days to file an informal protest (i.e., appeal) or one hundred twenty (120) days to file a formal protest (i.e., litigation). These are your only options to continue fighting the assessment. If you do not timely file before either deadline, you will lose your right to fight the assessment. It would, of course, be different if you never received the Notice of Proposed Assessment or received it very late. Then, you certainly can argue about the deficiency of the notice of the assessment to you.
Knowing the general process by which the Florida Department of Revenue can and does audit is key. However, this is not everything that must be known for an audit. Another critical component are the issues upon which the Florida Department of Revenue might assess. If you know what these issues might be, then you can prepare yourself for the potential outcome.
The issues upon which the Florida Department of Revenue likes to assess upon depends on what information is being provided. By way of example, if bank statements are provided to the auditor, then the auditor will compare the deposits to the sales tax return sales. Any differences in which the bank deposits are higher will result in said difference being assessed and assumed to be taxable. The auditor will make it your burden to prove the deposits are not taxable transactions. Ways in which deposits are not subject to sales tax are shareholder loans, other types of loans, capital contributions, and nontaxable transactions (e.g., legal services).
Another document the Florida Department of Revenue might look at are the federal tax returns. Like the bank deposits, an auditor will assume any reported gross sales are automatically subject to Florida sales and use tax. Where the federal tax returns gross sales are higher for the same period as the sales tax return gross sales, the auditor will make an assessment. Moreover, and as it relates to federal tax returns, the auditor may use other aspects to the federal tax returns to make additional issues to be assessed. For instances, the auditor may assess on newly acquired fixed assets or certain types of expenses. Again, auditors assume all of this is taxable and occurred in Florida. The examples could go on and on.
You must be absolutely careful when being audited by the Florida Department of Revenue. If not, you could find yourself staring down the barrel of six figure assessment (or larger). Furthermore, you will be dealing with personnel who believe you owe the money until you can conclusively prove you do not. What could be less American than being presumed guilty until proven innocent?
About the author: David Brennan is partner with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on various sales and use tax issues, including that of aircraft. You can read his BIO HERE.
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. Contact us for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Section 212.13, F.S. - Records required to be kept; power to inspect; audit procedure.
Section 212.12, F.S. - Dealer’s credit for collecting tax; records required.
ADDITIONAL RESOURCES
PHONE CALL FROM FLORIDA DEPARTMENT OF REVENUE: SALES TAX, published October 15, 2022, by Jeanette Moffa, Esq.
LETTER FROM FLORIDA DEPARTMENT OF REVENUE: SALES TAX, published October 9, 2022, by Jeanette Moffa, Esq.
FLORIDA SALES TAX INFORMAL WRITTEN PROTEST, published November 17, 2018, by James Sutton, C.P.A., Esq.
FLORIDA SALES TAX - VOLUNTARY DISCLOSURE PROGRAM, published April 9, 2018, by Jeanette Moffa, Esq.
NO FLORIDA SALES TAX ON AIRCRAFT PURCHASED BY NON-RESIDENT?, published November 6, 2016, by David J. Brennan, Jr., Esq.