For businesses in the state of Florida, the most likely audit would be a Florida Sales and Use Tax audit. Many businesses might not realize that just behind that is the chance (risk) of a Florida Reemployment Tax (RT) audit. RT audits are not nearly as well know. And, depending on the age of business owners or managers, they still might refer to it as unemployment compensation audits. I have talked recently with some business owners who remember it as that since that was the last time they went through that “pleasant” experience. I had to prepare them for what to expect with current RT audits (by whatever name you might want to call them).
The Florida Department of Revenue (FDOR) provides a form on its website that generally prepares a business for an audit. While it hits most of the topics to at least be a reasonable resource ahead of a RT audit, business owners and tax professionals should be prepared for what “really” will happen apart from the “theoretical” explanation in FDOR Form RT-800063 (last revised in October 2018).
The FDOR’s form on RT audits starts with pertinent taxpayer questions related to “why are taxpayers audited” and “how was I selected.” While there is interesting information provided on each subject, the Department likely is not going to give you the specific answer if/when your client is contacted about being selected for an audit. That is not much consolation and generally is related to whatever “hot button” the Department is looking into per federal guidance/request. Recently, the Department has looked into reclassifying contactors to employees as well as reclassifying distributions as wages. This information is shared with the IRS so it can have larger federal implications and consequences if the IRS acts on the information relayed by the FDOR and its auditors.
Where the FDOR’s form “strays” from the reality of Florida RT audits is in the next section addressing “what happens during the audit.” After referencing the issuance of the audit notice, the Department lists the “types” of records needed for the RT audit that includes:
Balance sheets
Canceled checks
Cash disbursement journal
Chart of accounts
Check registers
Check stubs
Corporate charter
Form 940 (FUTA)
Form 1040, Schedule C (sole proprietor)
Form 1065 (partnership)
Form 1120 and attachments (C‐Corp)
Form 1120S and attachments (S‐Corp)
Form 990 (non‐profit organizations)
Forms 1099 and 1096
Forms 941, 943, 944 (as applicable)
Forms W‐2 and W‐3
General ledger
Income statements
Independent contractor agreement
Individual earning records
Master vendor files
Partnership agreement
Payroll ledger
Payroll summaries
Petty cash
Quarterly Reports, RT-6s (SUTA)
Time Cards
Work orders/invoices
As you can see, it is not a short list. It is rather encompassing, and many RT auditors find ways to ask for even more information. What I routinely see is that FDOR RT auditors like to push for information that seems more related to “sales” rather than employment or wages and related expenses.
Probably the most important statement in the entire form is a little below the list of “needed” records for the RT audit. That statement says:
Failure to produce all requested work records will result in the loss of your “earned tax rate” and the assignment of the “standard tax rate” (5.4%) until the quarter following your production of the requested records.
Make sure to slowly and closely read the sentence so you can see the gravity of the statement. Yes, you read it correctly that the Department will raise a business’ RT tax rate to 5.4% if it fails to produce ALL requested work records. The Department makes this decision unilaterally. A notice is sent out and takes effect the next quarter. You can protest the notice and possible tax rate increase. However, be prepared for a slow process that is going to boil down to what the Department is requesting and what information the business did and can provide. Even with a broad request for an entire general ledger or sales information, the Department will propose a generally “theoretical” basis for the request and the hearing officer will try to identify what can be provided of similar detail and information to resolve the matter and avoid a final order.
What seems to surprise many taxpayers who go into the RT audit process is the duration of the audit. Many businesses have experienced a sales tax audit or are slightly versed in the audit process. It is very common for an auditor to ask for information. The auditor then receives that information. Subsequently, the auditor asks for more information after a varying amount of time. The auditor receives the additional information. The auditor then goes dark (or appears to “ghost” the taxpayer). I have had this happen in several recent audits. After providing all information showing employees were paid full wages and contractors had their payments reported to the IRS, the auditor goes silent – for a long period of time. At this point, many taxpayers ask about the statute of limitations (SOL) for the audit. This is when taxpayers learn the unfortunate fact that the Department operates under the impression there is not SOL. Even worse, the Department auditor could extend the audit by additional years up to a maximum of five years under audit. I have contacted auditors and asked the status of the audit or what questions remain. I am simply told that the audit “is being worked on” and that follow up will occur when needs arise. Think about if you or your client provided that answer to a customer and imagine what would then be posted online!!
The Department’s form then addresses the “end” of the audit in sections about “after the audit” and “what can I do if I encounter problems during the audit.” Again, the Department’s information touches on the subject but fails to provide any substantive information that will have ultimate impact – unless you or your client pays the assessment. The actual amount due per the FDOR audit could be low in terms of the check that has to be written. However, as noted above, the information will be transmitted to the IRS. So, a reclassification of wages could be no tax due if that person reported wages to or above the cap for taxable wages ($7K after being at $8K for a short period). That information going to the IRS, though, could have much larger consequences on their end with tax, penalty and interest. Should you disagree, then you can protest the audit findings. The FDOR form barely touches on the issue and only references the ability to “protest the audit findings” should you disagree. The protest process starts innocently with a filed protest. It then proceeds to the DEO (Department of Economic Opportunity) where a hearing is arranged. The hearing process generally is reasonable. Where it becomes a problem is when the matter isn’t resolved there and the taxpayer or Department disagrees. That then goes into the much more involved appellate process that is better addressed in its own article. Suffice it to say, it will take a lot of time and cost a lot of money for a represented taxpayer.
As with most FDOR audits, a RT audit rarely happens at a convenient time. Many RT audit notices are issued in the beginning of the year 9and then drag on through the year into the next). This means it makes sense to consider the RT audit notice when you or your client receive it. Determining level of exposure and records to provide is of the utmost importance at early stages. Preparation at this point can avoid later Department communications and information requests that take time and distract from tax season or running your business. While you might want to start with the FDOR form referenced above, you should also look to get guidance from someone experienced with Florida RT audits. Find someone to talk to about the audit and you or your client’s particular situation. Professional representation might not be needed to avoid a large tax bill. Nevertheless, representation could be worth the money by avoiding FDOR auditor contact and interruptions to your daily business operations or practice. We can talk about the FDOR RT audit process and help point out issues or concerns to help you or your client decide the best way to proceed with the RT audit process. Benjamin Franklin advised “an ounce of prevention is worth a pound of cure.” That definitely still rings true with FDOR audits.
About the author: Mr. Parker is a partner in the Law Offices of Moffa, Sutton, & Donnini, P.A., based in the firm's Tampa office. Mr. Parker's practice concentrates on sales and use tax and includes criminal defense of sales tax cases and state tax audits/controversies proceeding from audit through administrative litigation involving sales and use tax and all other state taxes including reemployment tax, communication service tax, and cigarette & tobacco tax. Mr. Parker also handles matters involving the Department of Business and Personal Regulation and Office of Financial Regulation and the industries they oversee. Mr. Parker received his accounting degree, law degree, and L.L.M. in Taxation from the University of Florida. If you have any questions please do not hesitate to contact him at 813-775-2132 or MatthewParker@FloridaSalesTax.com or his firm bio.
About the law 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 Reemployment tax Audits - The DOR is trying to raise your tax rate, published October 10, 2018, by Matthew R. Parker, Esq.
FL DOR RT Audits - Wage Reclassification is coming, published August 16, 2015, by Matthew R. Parker, Esq.
FL Reemployment tax audit: Independent Contractor vs Employee, published August 23, 2015, by James Sutton, CPA, Esq. & Paula Savchenko, Esq.
FL Reemployment Tax: An employer's perspective, part II, published April 5, 2018, by James F. McAuley, Esq., BCS.
FL Sales Tax Audits - Auditing yourself before a state does, published October 25, 2023, by Matthew R. Parker, Esq.