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When a Closed Business Isn't Closed to the DOR

According to the Small Business Administration, about 50% of businesses close within 5 years of starting. This means that a significant number of company close every year, but most business owners do not realize that they must take almost as much care in closing the business as they did in opening the business, particularly when it comes to taxes. Think about it – if you don't properly close out ALL your tax accounts, then the taxing authorities will have every reason to think you are still in business, but ignoring your tax responsibilities. You can imagine that the taxing authorities to not take kindly to being ignored, and the consequences can be very severe.

Once a business closes, the business owner often does not get mail at the location any more. So even if the Florida Department of Revenue (FL DOR) tries to contact the former business to see what is happening, there is no one to answer the phone or mail. The FL DOR is forced to presume the worst, and they have a wide variety of weapons at their disposal to come after those that are perceived to be let's say "misbehaving."

In more positive but also common situations, a business temporarily closes for remodeling or because it is in a seasonal industry. For whatever reason, an entity's operations and will temporarily cease. Or, it can be as simple as relocating a business to a new address within a particular county. In all of these situations, the entity's tax registrations require attention. This article will address the procedures for dealing with tax registrations and the potential impacts and benefits available to taxpayers.

Previously, the DOR utilized forms that needed to be sent in to adjust a taxpayer's account information. But, over the last few years the DOR has steadily moved towards handling as much activity as possible through its website. My review of the DOR site resulted in very few "printable" forms being offered to adjust account information. About the only form I could find was Form RTS-3 which is the Employer Account Change Form (relating to Reemployment Tax). In place of using paper forms to send in, the DOR has created a webpage to singularly handle changes in address and/or account status, which is available at the bottom of this article.

This webpage requires basic account information and beneficially lets the taxpayer change the information for multiple tax types offering and easier and time-saving way as compared to the prior form filing methods. It has to be noted that the status change only allows one choice at a time. So, if you are addressing different status changes (generally uncommon but still possible) you will have to handle the changes separately. The webpage is straightforward and generally user friendly so that any taxpayers who need to make changes should be able to quickly address their needs here. But, if computers aren't the taxpayer's best friend, most changes (including account closings and inactivations) can be taken over the phone. But note, this is only possible if there is an effective date for cancellations, inactivations, or reactivations.

Though the system for handling these necessary changes is simple, the importance of taking care of these apparently trivial tasks is potentially significant. Cancelling a tax registration is permanent. This means a taxpayer who cancels their tax registration will have to re-register if they re-open or otherwise again become responsible for reporting and remitting tax. Inactivations, as the word implies, are temporary. An account inactivation stays the obligation to file tax reports and remit the corresponding tax. A reactivation is the other side of that coin and resumes the taxpayer's obligation to file tax returns and remit the reported tax.

As noted above, there can be any number of "random" situations where there is a benefit to inactivating a registration. As noted above remodeling or seasonal activity are obvious cases. Inactivating an account during the remodeling or seasonal closing removes the need to file returns which saves the time and headache associated with filing returns – even zero returns. More importantly, it removes the possibility of penalties and/or fees associated with late or unfiled returns. And, those can occur even with zero returns. And, during a period of inactivity, unfiled returns will prompt the DOR's system to "estimate" return amounts for unfiled periods. If left unmonitored, those can grow significantly through associated penalties, interest and fees that result in liens or bank freezes. Even if the "estimated" tax is shown to have been zero, the associated costs might not be waived and could grow to significant amounts despite the absence of any uncollected or unremitted tax.

But, the more common and unfortunate situation is with businesses that close. This takes me back to the recent taxpayer's call to our firm and shows the importance for any business that could not sustain its operations. A business that closes but fails to notify the DOR by cancelling its registration(s) is still open in the DOR's eyes. Unless it knows otherwise, the DOR system will operate as noted above. As time passes, the system will identify "missed" returns and then begin estimating tax due for those "unfiled" returns. As more time passes, the reports change the tax due from the "estimated" column to the "tax" column for the taxpayer's list of amounts outstanding report (ZT09). When this happens, it can become difficult for collectors to identify this if/when a taxpayer calls about a notice they received. The taxpayer might have gotten to this point because winding down a business involves sadness and unpleasant priorities associated with closing a location. During this time of deciding who does or doesn't get paid, it is easy to put the DOR at the end of the list. Closing while owing tax is a risk that can be addressed in its own article but I assume all debts owed to the State have been paid.

So, at this point, the taxpayer can easily assume that I am not selling anything and my entity is no longer active (dissolution with the Florida Division of Corporations isn't subsequent proof of closing in most cases with the DOR) so what can they do to me. This line of reasoning/thinking leads to ignoring any notices the State might send for the now defunct entity. Why open it if it is going to be bad news for a former business? And this presupposes that your mail is being forwarded which is a big assumption because that too is a simple task that can be accidentally or intentionally overlooked.

Granted, the entity is closed along with their bank accounts and there are no assets to pay any system generated obligations the DOR might want to create. So, the State can go fly a kite, right? The current DOR doesn't give up that quickly. All too often recently, and in the case of the taxpayer who called our firm, they go after the closed business's directors or responsible person. Going into a responsible person would lengthen this article significantly. But, suffice it to say, DOR procedures suggest many options to identify a responsible person. When the State pursues this basis for liability, they utilize section 213.29, Florida Statutes ("F.S."), and are seeking to impose a 200% of tax penalty – personally against the responsible person. Imagine the officer or responsible person of the closed business has moved around and hasn't received notices for a while. They have to do something to afford to survive so they have pursued other opportunities. Also assume the State finally makes contact some months (or years) down the road. As is generally the case with the DOR, you are guilty until you prove yourself innocent. But, do you have the records to prove you closed when you said you did? Can you prove you didn't have any uncollected and unremitted tax? If you're an officer, can you contact or otherwise rely on information from the former employees who oversaw or handled the sales tax collection and reporting process?

In the case of the taxpayer who called, they are faced with this situation. It has been years since closing. They were a small business with a single officer listed on Sunbiz. The State has now come after that lone officer under the guise of section 213.29, F.S. That officer now has to try and find records that support that personal liability does not apply. It is not an enviable position. The only current bright spot is that this officer's situation might keep others from falling into the same "trap".

If a business is closing, it is imperative that they contact the DOR and cancel, or at the very least inactivate, their accounts. It would make sense to use a closing or inactivation date at the end of the month. But, if not, remember that the closing date will require a final return for the period that includes the closing date. So, that period's returns are due which will include sales and use or reemployment tax returns.

I hope you or your clients never have to face this situation. But, please make sure that the difficulty from an unpleasant situation doesn't come back to rear its ugly head with but with the threat of a 200% penalty.

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About the author: Mr. Parker is a sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., based in the firm's Tampa office. Mr. Parker's practice includes state tax audits and controversies involving sales and use tax and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Parker received his law degree and L.L.M. in Taxation from the University of Florida. To learn more about Mr. Parker, please visit his firm bio.


Florida Department of Revenue Web Site for Closing the Business Tax Account

WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA, published May 1, 2012, By James Sutton, CPA, Esq.

JAILED FOR MERE $1,500 IN FL SALES TAX - ORLANDO SIGN COMPANY OWNER, published July 6, 2014, by Matthew Paker, Esq.

7,000 FL TAX WARRANTS ISSUED IN ERROR - GOV SCOTT TOO, published May 23, 2014, by James Sutton, CPA, Esq.