I get contacted frequently by tax professionals and businesses about state tax matters and/or questions involving the Florida Department of Revenue (FDOR). Most frequently, these calls occur after the FDOR has issued its audit findings or the informal protest process is about to start with TADR (Technical Assistance and Dispute Resolution). Less frequently, I am contacted at some point during the informal protest process - when a protest has already been filed or, more often, when the Notice of Decision (NOD) has been issued. However, I do get a number of calls when a tax professional or business has been contacted by a FDOR auditor or received the DR-840 (Notice of Intent to Audit Books and Records). One of these latter calls recently happened.
When I got the call, I got some background on the business. I talked about the audit process, the issues the auditor would look into, likely information/records requests and possible auditor follow up. After going through that, the business owner indicated he wasn't confident that the audit would be a smooth process. I indicated that it usually isn't "smooth" from the business's/taxpayer's perspective. At this point, the business owner asked what the benefits of representation were. I noted a number of ways that representation can help the business. This went from easing the flow of the process to helping make sure there was as limited a misunderstanding of business operations and information as possible. Offhandedly, I commented that it would have been helpful if he had reached out a little bit sooner to allow more time to prepare for the audit process. That led me to the question: why don't businesses audit themselves prior to receiving an audit notice from the FDOR or another state government?
In these post-Wayfair days, the probability of a sales tax audit by some state government agency has never been higher. As such, it means that any sales tax errors or "irregularities" are more likely to create huge hindrances for businesses. More and more state governments appear willing to assess (and not compromise) penalties and interest under the apparent belief that any way to increase state revenue benefits the state (apparently never considering the cost to the state through the business it hurts). As a consequence, it makes much more sense for businesses to prepare for a sales tax audit for a number of reasons.
As a starting point and primary benefit, the business can learn about possible exposure. The business can learn if it is improperly taxing various transactions or activities. If so, then it can correct the situation to limit exposure going forward. This is very beneficial for certain businesses that can be very "complicated" with how the business operates. This can provide a significant financial benefit. This is possible as the business can plan or adjust operations to minimize the tax it is obligated for. This clearly would be a benefit for businesses that deal with competitive bidding scenarios or projects. I have heard repeatedly from businesses and professionals that other businesses are not properly taxing transactions which results in them being able to underbid other compliant companies. Removing an unnecessary (or avoidable) tax burden lowers the possible price to secure work. This could ensure the ability of the business to remain as a going concern - especially during tough difficult times like currently exist with inflationary pressures and staffing difficulties.
Being outside of the "formal" protest process, we can work with the business with an easier timeframe and less pressures from deadlines and production obligations. We can start at "high level" analysis and then work down through operations and possible changes or permutations. This is what allows for developing/changing business practices as noted above. Also, without the burden of encompassing production requests or records needs, we can more efficiently analyze - and improve - business operations.
While this will be most helpful for a noncompliant business, it can also help the business that is compliant. What many businesses don't understand about most sales tax audits is that the government proceeds under the approach that a business is guilty and it must proves itself innocent (tax compliant). Many businesses think they are properly reporting. Even if they are correct on this self assessment, the business usually is surprised at how an auditor can/will allege noncompliance via record keeping. Many businesses are unprepared for the record keeping burden an auditor will expect or require for validating exempt and/or nontaxable sales. Businesses seem to think auditors will be "reasonable" about these types of sales that should not have tax consequences. It is very eye opening to them when they get audit findings that allege the business failed to provide "adequate" records regarding exempt and/or nontaxable sales that has led to an audited tax assessment. This invariably will require se of the protest process to correct or otherwise resolve the audit process. A "self audit" before a formal audit notice can inform the business of what it should be done and the records it should be keeping.
When a company has this information, it can then decide how best to proceed. The business will most certainly adjust its operations and record keeping in real time on a prospective basis. It can then start going backwards from that point to correct deficient record keeping to be prepared for any audit notice that might come in the future to go back in time multiple years. For each month that is corrected now before an audit notice, that helps "drop off" a prior noncompliant month that will be out of the statute of limitations for the audit period that would be established by the audit notice (ignoring the possibility of unfiled returns and the open SOL that might be applicable, which would be its own topic).
Returning to the compliant business, it can identify its possible tax liability. If caution and certainty is valued by the business, then it could choose to apply for the Voluntary Disclosure Program. Most states, including Florida, offer this option to businesses. It is a great benefit and allows businesses to self-report violations. Doing this usually limits or can eliminate associated penalty for incorrect or under reporting. Interest usually is unavoidable. However, the self-reported violations generally work to limit audit exposure as most states will not audit a business when there is overlap with a period included in a voluntary disclosure. Many businesses are happy to reduce or eliminate the risk of a future audit through this process. Most states generally work with taxpayers in the voluntary disclosure program with payment plans to help it survive the tax benefit that must be paid to the state.
When I asked myself the question about why businesses didn't "self-audit' prior to an audit notice, I couldn't come up with a good answer other than thinking they couldn't afford to. However, my experience has shown that most businesses that get into an audit and learn that they have been noncompliant with respect to state taxes find out they "can't afford' the unknown noncompliance that they now are "forced" to deal with. I unfortunately have seen too many businesses that have had to close in response to a sales tax audit and the associated findings. As such, I think businesses and tax professionals for those businesses should consider engaging in a "self-audit" before it is too late and they find out how much more expensive a state sales tax audit cane be - especially when the audit is conducted and then has to be defended through the available protest process.
While my firm has handled thousands of audits and/or protests, we also frequently consult on tax issues for planning and preparation purposes. The end of the year is a good time to conduct a "self-audit" as most state governments slow down (officially or unofficially) with their operations in November and December - only to rapidly resume activity in the new year. The new year is a hard time to handle an audit as businesses are dealing with operational issues in the new year and tax professionals generally are getting very busy with federal tax filing deadlines. This stretches both very thin and sets up for disastrous audit findings with auditors who are unsympathetic to any reason why records are not provided. In any event, the FDOR audits usually conclude a lack of reasonable cause and institute 50% of tax penalties. A self-tax audit before any audit notice can go a long way to help avoiding this from happening to you or your client in the months or years to come. You can reach out to us for a free initial consultation to evaluate if a "self-audit" would be of benefit as an insurance policy for a future government audit - from Florida or any other state you or your client sells to or operates in.
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
From Audit Notice to NOPA, published September 17, 2023, by Matthew R. Parker, Esq.
A Case Study of Aggressive Sales Tax Audits, published October 9, 2023, by David Brennan, Esq.
Protest A FL Sales and Use Tax Audit, published August 8,m 2019, by Matthew R. Parker, Esq.
Voluntary Disclosure Can Be the Perfect Solution, published October 5, 2012, by Jerry Donnini, Esq.