Multi-State Tax Law Blog
It’s a grim and nerve-racking day for many when they receive the infamous DR-840, Notice of Intent to Audit Books and Records, from our friends at the Florida Department of Revenue. Many Florida taxpayers often ask themselves, “Why me?” Or, “What did my company do wrong in order to receive this notice?” The answer to both of these questions is obtainable from the Florida sales and use tax auditor by simply asking them. In many situations, the company is audited because its exempt sales ratio is out of the average range for similar companies in its industry. Other companies are flagged for audit because the sales reported on their 12 monthly sales and use tax returns do not correspond to the gross sales reported on their federal income tax return. Many other companies are flagged purely at random.
While the reason may be for a variety of reasons, once the notice is received, the reason for its reception is virtually irrelevant. The more relevant inquiry should be, what should we do next? Ideally, it makes sense for many Florida businesses to hire a law firm or a CPA firm versed in Florida sales and use taxes. This is true even if the company has immaculate records and nothing to hide in connection with a Florida sales and use tax audit. Hiring a professional that is experienced in handling a Florida Sales and Use tax audit is an excellent way to walk you or your client through the audit process. In addition, having a Florida sales and use tax professional is invaluable in helping your company or your client’s company organize the information in a presentable manner that will help keep a sales tax assessment to a minimum.
Florida law and the verbiage on the DR-840 clearly states that the FL DOR cannot start the audit for 60 days and it must start the audit within 120 days. The 60 days is waive-able and the auditor will push for a waiver in order to get the audit moving. We generally recommend that the 60 days not be waived, but instead be used as a period in which to get all of your information organized for presentation. We call this the homework period in which the Taxpayer, if they elect to hire us, is given a checklist of homework to complete within the 60 day period.
The obvious next question is, what should I be organizing?
Every audit starts the same way. The auditor starts by comparing the annual federal tax return to the 12 monthly DR-15, sales and use tax returns. If the federal return has sales in excess of the sales and use tax returns, the auditor is trained to take the position that all of the sales are taxable and it will write up all of those sales on an audit report. If there is a discrepancy, the Taxpayer will find it helpful to reconcile the amounts and show the excess reported sales are either exempt sales or not sales at all. In addition, the auditor will test to make sure that all fixed asset purchases during the audit period included sales tax. Because these items are generally big ticket items, it will be useful to locate the invoices relating to these purchases to be sure tax was paid. Further, the auditor will always test commercial rent. Commercial rent is subject to sales tax in Florida and the Taxpayer should obtain a copy of its lease and a handful of invoices that correspond to the lease, and hopefully both the lease and the invoices show sales tax was paid. It is also wise to pull the expense accounts on your federal tax return that relate to purchases of tangible personal property to determine if tax was paid on the applicable purchases.
During the homework period, we also ask the taxpayer to pull a month during the audit period at random and gather all of the invoices relating to that period. In a perfect world, the invoices should add up to the gross sales reported on the DR-15, sales and use tax return. In addition, the Taxpayer should provide all of the exempt sales documentation (resale certificates, bills of lading, etc) to show the exempt nature of its sales during that period. Using a sample month is often effective to troubleshoot the problem areas for a particular taxpayer. Generally, if a taxpayer makes an error in a particular month, the same error resurfaces month after month.
On or around the 60th day, the unfortunate soul under audit will receive a phone call, email, and/or letter from our friends at the FL DOR. It will say something to the effect of the following:
Good Afternoon Taxpayer. Please provide us with every document of a financial nature that relates to your company.
Very Truly Yours,
Your Friends at the FL DOR
If you or your client is unable to participate in this simplistic request, then the FL DOR will settle for a copy of your QuickBooks file or other accounting software. This is a dangerous piece of information to send to the FL DOR. While the FL DOR believes it is entitled to this, Florida law requires that the Taxpayer provides the books and records of the company. While many companies use QuickBooks to generate invoices, receive payments, or write checks, it is our position that using QuickBooks for a limited purpose is not the books and records of a company. If that is the case, we strongly advise to not turn over the QuickBooks file. What should be turned over, after thorough review, is the books and records of the taxpayer. In addition, the Taxpayer will be asked to turn over the items mentioned above that can be found on the federal return. As stated above, the automatic items include a sales report or GL, a detail of the fixed asset account, proof of tax on commercial rent, and selected expense accounts. This model is slightly tweaked depending on the nature of the particular taxpayer’s business.
After several months of receiving the initial documentation, the audit will eventually ask for sample months. The purpose of the sample months is to test the exempt sales of the taxpayer’s business. Depending on the size of the Taxpayer, the sample months are generally 2-6 months of information. The months are selected at random by the FL DOR’s Wins Samp program.
After reviewing the records, the auditor will issue the infamous DR-1215, Notice of Intent to Make Audit Changes. This document is also referred to as the audit report. For many, this first report often results in shock if not temporary cardiac arrest for the Taxpayer. There are almost always issues on this report and for that reason the Taxpayer has 30 days to request a conference to discuss the laughably high numbers computed by the FL DOR. We often recommend setting up this conference because there is nothing to lose by doing so. Many times, the auditors need an explanation on an issue or are awaiting specific pieces of information. Upon presentation of the missing piece of the puzzle, the auditors will often accept and resolve this at the local level. However, in many other situations, the issue is outside of the auditor’s authority to resolve, or the auditor does not agree with the Taxpayer. If either of those are the case, we often suggest the file be sent to Tallahassee . For another great article by James Sutton, please visit our firms website.
About the author: Jerry Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, native American taxation, federal estate planning, and Florida probate. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390.