As the case below will illustrate, making an agreement with the Florida Department of Revenue is about as dangerous as trying to hold an angry scorpion in the palm of your hand, which reminds me of a very old story.
A scorpion desperately needed to cross a river. The problem was, scorpions cannot swim. Just then a frog came hopping up and was about to jump into the river. The scorpion said "wait please, I need to cross the river, but I cannot swim. Can you help me?" The frog looked skeptically at the scorpion and said, "If I help you, then you will just sting me." The scorpion argues that if he stung the frog, then the frog and the scorpion would both drown. The frog could not find a hole in the scorpion's logic, so the frog reluctantly agreed to take the scorpion across the river. Halfway across the river, the frog felt a sharp pain in the back of his head. As the frog was about to drown, he croaked a final word ... "why?" The scorpion responded simply that it was in his nature and drowned as well.
The story dating back to the 3rd century B.C. has been used for over 2,000 years to illustrate that the behavior of some creatures, or some people, is irrepressible no matter how they are treated and no matter what the consequences. When dealing with the Florida Department of Revenue, remember that no matter how much a taxpayer tries to do the right thing, it is in the Florida Department of Revenue's nature to sting taxpayers. A recent case before the Division of Administrative Hearings ("DOAH") is a perfect example of just such unavoidable tendencies of the Florida Department of Revenue ("DOR").
In a court opinion finalized on March 7, 2013, the honorable Cathy M. Sellers, Administrative Law Judge for the Division of Administrative Hearings, held that a 200% penalty imposed on a taxpayer for violating a stipulated payment plan was valid. The egregious nature of the case revolves around the fact that the taxpayer paid all but $1,388 of the tax before the penalty was assessed. Then the penalty of over $18,000 was upheld through strong arming the president of the company into signing away his personal rights then legal trickery to torture a business owner that was doing everything she could to pay back the funds owed - while paying 12% interest in the process. Below is a discussion of the facts of the case, to add more context to this appalling true story.
Astrid Sarmentero was the president of Bella Donna Couture, Inc., a clothing store Miami-Dade County, Florida. At some point, the company got behind in remitting sales taxes due to several factors including the down economy and an employee inadvertently using sales tax trust funds to pay for company inventory. The local office of the DOR issued a tax warrant against the business in January 2007 claiming that $11,471 of tax and $3,702 in fees, penalties, and interest were due, totaling $15,174. During March 2007, an employee of the local DOR office called the company threatening to close the business within 48 hours if the taxes were not paid. The taxpayer approached the Department of Revenue to request a payment plan for the taxes due. The parties agreed that the FL DOR's tax amounts due in the warrant were erroneous and the amounts for the agreement were corrected to be $9,078 of tax and $4,448 of fees, penalties and interest.
As a condition for allowing the taxpayer to pay over time and not close the business down, the company had to sacrifice its rights to challenge any amounts due and the president of the company had to agree to be personally subject to a 200% penalty if the agreement was violated. You read that right. Even though section 213.21, Florida statutes ("F.S."), gives taxpayers the right to procedures for retirement of tax obligations by installment payment agreements which recognize the taxpayer's financial condition, the president of the company was still required to agree to completely unreasonable 200% penalty on her personally in order to receive a payment plan. To make the situation even more egregious, the company told the DOR during the stipulation agreement negotiations that the fixed monthly payments would be very hard to make due to the seasonal nature of the business. Finally, the FL DOR employees apparently agreed to apply the payments first to tax and then to penalties/interest, then ignored the agreement.
After paying $2,000 down and $1,350 in monthly payments, the taxpayer subsequently missed a payment because of the already mentioned seasonal nature of the business. The DOR then froze the taxpayer's bank account twice, taking $4,000 the first time and $434 the second time. At this point, the taxpayer paid what it was led to believe was $7,784 towards the tax obligations, leaving $1,388 in tax plus penalties, interest, and fees. Ignoring the agreements made by the DOR employees to apply the payments first to tax, the $7,784 previously paid was conveniently allocated in the DOR's favor towards recording costs, collection fees, interest, penalty, as well as a new warrant based on over estimated amounts. Therefore, the taxpayer still owed the full $9,172 in tax, which was burdened by a "reasonable" 12% interest rate instead of only $1,388 plus interest and fees.
If this is not enough to turn your stomach, then imagine you are the owner of this business and you receive a letter at your home with the title:
FLORIDA DEPARTMENT OF REVENUE
NOTICE OF ASSESSMENT
OFFICER/DIRECTOR PERSONAL LIABILITY
So, by failing to meet all the terms the payment plan, the president of the company subjected herself to a penalty equal to 200% of the alleged tax due, $18,345. Can this be fair? Instead of owing approximately $13,000 in tax penalties and interest, the taxpayer, by entering into an agreement the taxpayer now owes $9,000 in tax and $18,000 in penalties after paying more than $7,000 in other costs. It seems egregious by the Florida Department of Revenue, to say the least.
It is worthy to take a minute to understand that the FL DOR did not merely pull a 200% penalty out of thin air to use against this taxpayer. There is statutory authority to impose such a penalty even if the taxpayer did not agree in the stipulated time payment agreement. Section 213.29, F.S., provides as follows:
Failure to collect and pay over tax or attempt to evade or defeat tax.—Any person who is required to collect, truthfully account for, and pay over any tax enumerated in chapter 201, chapter 206, or chapter 212 and who willfully fails to collect such tax or truthfully account for and pay over such tax or willfully attempts in any manner to evade or defeat such tax or the payment thereof; or any officer or director of a corporation who has administrative control over the collection and payment of such tax and who willfully directs any employee of the corporation to fail to collect or pay over, evade, defeat, or truthfully account for such tax shall, in addition to other penalties provided by law, be liable to a penalty equal to twice the total amount of the tax evaded or not accounted for or paid over. The filing of a protest based upon doubt as to liability or collection of a tax shall not be determined to be an attempt to evade tax under this section. The penalty imposed hereunder shall be in addition to any other penalty imposed or that should have been imposed under the revenue laws of this state, but shall be abated to the extent that the tax is paid. Any penalty may be compromised by the executive director of the Department of Revenue as set forth in s. 213.21. An assessment of penalty made pursuant to this section shall be deemed prima facie correct in any judicial or quasi-judicial proceeding brought to collect this penalty.
So the penalty imposed by section 213.29, F.S., is like a giant hammer that they can slam down on the taxpayer to get owners, director, and any other responsible party to cough up the money so the business can pay back the tax liability. Pursuant the statute, every dollar of tax remitted reduces the penalty two dollars. Therefore, if the company pays the tax, then the penalty on the owner is becomes non-enforceable. However, if the DOR extorts money for the penalty out of the business owner before the company pays the tax liability, then there is very serious questionable authority whether the business owner can ever get the penalty back even after the company pays the tax. So you can see why the order of how the payments are allocated can make a big difference in the amount of penalty imposed under this statute.
After having no success with the Department in an administrative protest, the Taxpayer exercised its right to challenge the assessment in the administrative court, known as the Division of Administrative Hearings, under Chapter 120, F.S. Represented by the company's outside CPA firm, they took the issue to court presumably in an attempt to get a more rational audience and a much more fair result.
The DOAH court set forth its conclusions of law and fact (copies of the original company and finding opinion can be downloaded at the end of this article). It then cited to rule 12-17.008, Florida Administrative Code ("F.A.C."), which sets forth how payments in a stipulated time payment agreement ("STPA") are to be applied. According to the Department, the STPA must adhere to rule 12-17.008, F.A.C. and allocate payments to reduce the amount of interest, penalties, fees, then tax as provided in section 213.75, F.S. It is true that the statute provides that the payments are allocated in the order described above, which makes allocation to tax last in time. However, unfortunately the taxpayer did not point out that Section 213.75(1), F.S., provides:
Except . . . as otherwise specified by the taxpayer at the time he or she makes a payment, if payment is made to the department with respect to any of the revenue laws of this state, such payment shall be applied in priority order as follows...[interest, penalty, fees, then tax]
Furthermore, rule 12-17.008(1)(e), FAC, provides that the STPA agreement shall provide:
How the Department will allocate each payment to reduce the outstanding debt of tax, penalty, or interest as provided by Section 213.75, F.S.
So, unlike what was argued by the attorney general's office on behalf of the FL DOR, neither the statute nor administrative rule require all payments under a stipulated agreement be applied to interest, penalties, and fees before being applied to the tax. The statute and rule merely provide that this will be the order of the payments IF the parties do not agree otherwise. In this case, the taxpayer is claiming that the parties agreed otherwise at the time the STPA was negotiated, but the fact that this alters the allocation of the payments was apparently not argued to the court. Without having the a viable argument presented in favor of the taxpayer, the DOAH court was forced to uphold the 200% penalty of over $18,000 as imposed personally on the president of the company.
What is almost unforgivable to me is that the state would "go for the jugular" of the president of the company personally instead of pointing out that the payment could have been applied to the tax first, as agreed. Given that the state was already making 12% on the money, does the state really need to make another 200%? Perhaps the local DOR office was just fed up with the taxpayer missing payments and decided to teach it a lesson? Either way, the temperament of a local office or official should not determine whether an agreed upon payment allocation method is ignored.
What is by far the most outrageous part in this case is that the statute imposing the 200% penalty, as discussed above, is merely the legislature's means to get the responsible parties back to the table so the company can pay the tax liabilities of the company. Under section 213.29, F.S., when the company pays back the tax, the penalty is reduced $2 for every $1 of tax paid. The Florida Department of Revenue, showing its true scorpion like nature, is trying to apply all payments to the penalties first before the tax can be paid, effectively thwarting the legislative intent of section 213.29, F.S., to merely force the owners to pay the company's liabilities. Let's hope the taxpayer appeals this case before the precedence of this trial court opinion begins to affect other taxpayers. The taxpayer only has 30 days from when the DOAH opinion becomes final. The clock is ticking.
It is noteworthy to point out that if you or your client is presented with a STPA and the company has no choice but to make payments over time, then you really, really need to be sure what you are getting yourself into. No matter how cooperative the individual agent you are dealing with might be, you are still dealing with the totality of the Florida Department of Revenue, whose nature is to "sting" taxpayers. It is advisable to seek the help of a state and local tax professional to review your overall situation to help keep your company and its owners from getting into more trouble down the road.
About the author: Mr. Sutton is a Florida licensed CPA and attorney as well as a partner in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Sutton is in charge of the Tampa office for the firm and his primary practice area 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 Taxation. Mr. Sutton is a frequent lecturer on the topic of Florida sales and use tax for the Florida Institute of Certified Public Accountants, Florida Society of Accountants, & Lorman Education. Mr. Sutton is also a co-author of CCH's Sales and Use Tax Treatise. You can learn more about Mr. Sutton at his firm bio
HERE.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., 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, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. 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 or phone listed on this page.
AUTHORITY
§ 213.75, F.S. (Stipulated time payment agreement)
§ 213.29, F.S. (200% Penalty on owners)
Rule 12-17.008, FAC, (Stipulated time payment agreement)
ADDITIONAL RESOURCES
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