FL TAX ALERT – GRAND JURY PROPOSAL TO INVESTIGATE CPA's AS SALES TAX CHEATS
Given the multi-billion dollar shortfall of the Florida's budget in 2009, an 11th Judicial Circuit Court Grand Jury in Miami-Dade County Florida was given the
task of investigating the effectiveness of the Florida Department of Revenue ("FL DOR") in the spring of 2010. The final Grand Jury Report submitted to the Florida Legislature in the spring of 2011 (and available to download at the end of this article) provided many recommendations. [I only stumbled across the report a few days before publishing this article, or you would have heard about this much sooner]. Below is a summary of each of the recommendations provided by the Grand Jury, some of which are intriguing. However, the last two are the focus of this article and they, in my humble opinion,
a shot across the bow of the CPA profession.
(1) the FL DOR should not be subject to the same budget cuts as other governmental agencies because the FL DOR is the primary state agency tasked with raising revenue for the state,
(2) reinstate the community awareness programs to educate business owners of state tax compliance obligations,
(3) implement state taxes at the wholesale level instead of retail level for certain industries (e.g. prepaid calling cards) to increase compliance,
(4) incomplete sales and use tax returns should be rejected (such as a convenience store reporting only taxable sales),
(5) increase criminal investigations and prosecutions of tax cheats to make the various industries wary of not complying with the law,
(6) increase the FL DOR's budget to hire more forensic investigators to increase criminal investigations,
(7) require counties to show proof of sales and use tax dealer registration prior to issuing occupational or business licenses as the local level,
(8) increase number of random audits and funding for such auditors,
(9) further promote the moneys captured through audits and criminal investigations to encourage others to comply,
(10) increase the verification process to register as a dealer for Florida sales and use tax purposes to deter state and federal fraud by people that use the state registration to commit the fraud (e.g. Medicare fraud requires state tax registration),
(11) require new dealer registration to be paid for with credit card or check that can traced to the individual registering the business (as opposed to accepting $5 dollars in cash),
(12) provide stickers for business owners to display in their window stating that the business proudly complies with Florida sales and use tax laws,
(13) encourage citizens to report businesses that do not comply with Florida's sales and use tax laws via the FL DOR's Reward Program,
(14) encourage Florida citizens to not do business with companies that do not comply with Florida sales and use tax laws,
(15) market the state's reward program for turning in tax cheats,
(16) use available resources (and additional state funding) to focus criminal investigative efforts on the accounts and CPAs who are assisting their clients in stealing money from Florida taxpayers, and
(17) seek prison sentences, full restitution, interest, and fines for all accountants and CPAs and tax cheats charged under deliberate schemes to defraud Florida of sales tax collected but not remitted.
Discussions about the viability of items 1 through 15 above are welcomed, but the focus of this article is the shot across the bow of Florida CPA's in items 16 and 17. The Certified Public Accounting profession, as a whole, is one of the most trusted professions in this country. Financial markets rely on CPA's to accurately (within the realm of materiality) opine on the financial wellbeing of practically every financially viable (and not so viable) company in this country. CPA's are also responsible for signing off on the vast majority of taxes reported to the IRS in this country. So how could this "Grand Jury" give such a scathing accusation of CPA's in Florida? The report mentions that "accountants" are potentially involved also, but the report primarily mentions CPA's as being the culprits of fraud on behalf of their clients. Surely this can't be an accurate depiction of the state of the CPA profession. Hopefully, if there is any shred of truth to the report, then it is only a few bad apples. Let's explore the specifics of what I think of as "The Accusation."
First, the Grand Jury Report discusses how CPA's often prepare sales and use tax returns based on information given to them by their clients. The report uses an example of how the CPA for a convenience store will report gross sales on the Form DR-15 of $100,000 for the month, $75,000 of exempt sales, and $25,000 of taxable sales. The report suggests that the CPA knows or "should know" that the historical statistics for convenience stores reflects that an overwhelming majority of items sold are cigarettes, beer, and other alcoholic beverages, all of which are subject to sales tax. The report suggests that this scenario reflects an intentional scheme to underreport and underpay sales tax and, more importantly, that the CPA is arguably in on the scheme.
Second, the Report discusses how some sales and use tax returns prepared by CPA's only reflect the taxable sales, leaving the gross sales and exemption sales information off the return entirely. The Report points out that these returns are incomplete, but that the FL DOR accepts the returns anyway. The Report suggests that the gross sale versus taxable sales information highly reflects on whether the company is correctly reporting sales based on industry averages. The Report suggests that DOR should reject these returns, make the CPA's fill in the forms completely, and, more importantly, suggests that the CPA's filling in these incomplete returns may be helping their clients to intentionally mask an underreporting of taxable sales.
Third, the Report strongly suggests that the following example is evidence of CPA involvement in assisting a client in the theft of state funds. The example given in the report provides that a company reports consecutive gross monthly sales of $100,000, $148,000, $200,000, and $176,000 and taxable sales of $25,000, $37,000, $50,000, and $44,000, respectively. Do the CPA's reading this article see the problem with this scenario? It should stand out like a sore thumb. The percentage of taxable sales is exactly 25% of gross sales each consecutive month. The statistical probability of this happening in almost any industry is astronomically high. Yet, the Report suggests, many CPA's are filling in and reporting similar consistent amounts for their clients. The Report suggests that the CPA either knew or should have known that these amounts were not accurate and that this is strong evidence of a scheme to defraud the state of sales tax funds.
Fourth, and the most troubling of the accusations, the Report suggests that many CPAs complete client's sales and use tax returns based on bank statement amounts only. According to the report, this allows the clients to skim much or all of the cash sales (plus related sales tax collections) and only report the credit card sales that must go through a bank account. The Report comes right and says the following:
the accountant knows (or should know) the data must be wrong. In either scenario, the accountant has committed a crime by knowingly submitting false information to DOR. If the accountant has knowledge that his client is cheating the state by stealing tax dollars, he may also be implicated as a principal and be subject to the same felony charges as his thieving clients. We view these CPAs as thieves and strongly support and encourage their prosecution for white collar crimes and any appropriate Racketeering Influenced Organized Crime (RICO) charges. We were informed that there are known CPAs who have been engaging in these practices on behalf of numerous clients and we are pleased to hear that [t]he first wave of them will soon be arrested.
This is a blatant accusation against some Florida CPA's as being thieves and the Report has already been submitted to the Florida Legislature. The Report itself infuriates me that such a blanket statement tarnishing the good name of Florida CPA's can so easily be made. I cannot say that there are not a few bad apples in any group, but I find it very hard to believe that there are many, if any, Florida licensed CPA's who would intentionally help clients commit sales tax criminal fraud.
My frustration aside, one of the main reasons why I'm writing this article is to caution CPA's and accountants alike to pay attention to the specifics of these accusations. The Report is actually accusing CPAs of committing fraud for simply relying on the information provided by their clients with no actual, direct knowledge of wrong doing. Take each of the scenarios listed above to heart. If your firm completes sales and use tax returns for clients, then please make sure that your procedures do not unintentionally fall into one of the scenarios described above. The small fee you might get for doing the returns blindly accepting what the client gives you is not worth the exposure to potential criminal liability.
If you've made it this far through this article, then you take this situation seriously. You should. Florida has already begun prosecution of multiple cases of Florida sales and use tax fraud cases under the RICO statutes. [article on the RICO sales tax case(s) to follow shortly] The RICO statutes were designed to combat the fact that it is easier to commit and conceal a crime if multiple people are involved. As such, a RICO charge is much easier for the state to prosecute under and the sentences are much tougher. Trust me, this is not something you want to take any chances with.
Each of the partners of our law firm is also a CPA and each us worked for CPA firms in the past. We take great pride in the CPA profession and will help in any way we can to stop something like this from tarnishing the reputation of the Florida CPA's. If you have any questions whether your sales and use tax return practice is potentially crossing one of these lines, then please do not hesitate to contact me to discuss the matter on a confidential, free consultation. Our firm represents clients in all areas of Florida sales tax from consulting, audits, protest, litigation, and criminal defense.
UPDATE: I've heard rumors from two sources now that this grand jury report was heavily supported if not actually partially drafted by someone from the Miami office of the Florida Department of Revenue. It was suggested to me that a specific CPA was being targeted but that the state's attorney chose not the prosecute.
ABOUT THE AUTHOR: MR. SUTTON IS A FLORIDA LICENSED CPA AND ATTORNEY AND A SHAREHOLDER IN THE LAW FIRM MOFFA, GAINOR, & SUTTON, PA. MR. SUTTON IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM AND HIS PRIMARY PRACTICE IS FLORIDA SALES AND USE TAX CONTROVERSY. MR. SUTTON WORKED FOR THE STATE AND LOCAL TAX DEPARTMENT OF A BIG FIVE ACCOUNTING FIRM FOR A NUMBER OF YEARS AND HAS BEEN AN ADJUNCT PROFESSOR OF LAW AT STETSON UNIVERSITY COLLEGE OF LAW SINCE 2002 TEACHING STATE AND LOCAL TAX, ACCOUNTING FOR LAWYERS, AND FEDERAL INCOME TAX I. YOU CAN READ MORE ABOUT MR. SUTTON IN HIS FIRM BIO.
MIAMI-DADE GRAND JURY REPORT ON FLORIDA DEPARTMENT OF REVENUE, filed February 7, 2011
© 2012 All rights reserved - James H Sutton Jr