WHEN SALES TAX AUDITORS MAY NOT PICK AND CHOOSE RECORDS TO USE
On April 17, 2015, an administrative law judge handed the Florida Department of Revenue a major setback when he ruled on what records should be analyzed in a sales tax audit when the books and records of the company are provided, but considered incomplete. In AMERICAN IMPORT CAR SALES, INC., V DOR (DOAH Case Number 14-3115), the Honorable Judge Resavage, from the Division of Administrative Hearings, issued his Recommended Order concluding that the DOR must actually follow the law when conducting an audit. Think about it, this is an incredible concept: the DOR must actually follow the law when conducting an audit. Who would have ever dreamed of such a concept?
One of the first things that sales tax auditors do when starting an audit is to review the books and records of the business to determine whether the records are adequate or not. Often the auditor determines that the records are inadequate and many times, to the frustration of many taxpayers, seem to pick and choose what records they will use in the audit while ignoring other records. To many taxpayers, it seems like some auditors pick and choose whatever records result in the highest audit assessment possible. All too often, the taxpayer's suspicions are right on point. DOR Auditors are well trained that taxpayers are "guilty until proven innocent" in sales and use tax audits. So which ever record results in the highest possible estimate of tax, the auditor will ignore everything else and attempt to place the burden on the taxpayer to prove the auditor wrong. At least that is what they have been doing until now.
The key issue in the American Import case was whether the DOR can use what they consider the best records available where the taxpayer had provided substantial records, however the records were deemed inadequate by the auditor. Florida Statute 212.12 has two different standards on the use of records, the first standard in 212.(05)(b) deals with the situation were the taxpayer does not have any records or refuses to turn the records over in the audit. In these cases, the DOR is authorized to use the best available records to conduct their audit.
The second standard for the use of records is in F.S. 212.12 (6)(b). This section addresses cases where records are available, however are deemed inadequate. In these cases, the DOR is authorized to do a sample of the records provided by the taxpayer and do a proration based on the sample.
We have found that the DOR regularly confuses these two standards contained in Florida Statute 212.12 and we argue this issue in many cases. This case just happened to be the first case that we took to a hearing resulting in a Recommended Order.
In this case, the DOR based their assessment only on the deposits listed on bank statements and ignored all of the other accounting records of the business. The DOR rational was that the bank statements were the "best available information" in this audit, in an attempt to use sec. 212.12(05)(b)., F.S. Judge Resavage correctly pointed out that the Florida Statutes only gives the DOR the right to use best available information as a basis of an audit assessment when the taxpayer does not have any records or refuses to provide the records to the auditor. Where records are available, but considered inadequate, the "best available records" approach of 212.12(5)(b), F.S., is not available to the auditor. Instead, the auditor is required by 212.12(6)(b), F.S., to determine the assessment based on a sample of the records and do a proration based on that sample. Therefore, we argued and Judge Resavage agreed, that the auditor has no authority to simply pick and choose which records to use. The auditor is statutorily required to take a sampling of the records available, presumably all records.
In this case, the auditor ignored the general ledger provided by the taxpayer that spelled out taxable transactions for the auditor. Instead, the auditor simply took gross deposits from bank statements and summarily claimed all deposits were taxable. Sure – a claim that all deposits were taxable sales would result in a higher assessment, but the statute rightly requires the DOR auditor to sample all available records. So, for example, the auditor might have reviewed the available Department of Motor Vehicle (DMV) report detailing each and every car sold by the taxpayer as well as the sales tax collected. Instead, the auditor took the "easy" approach by trying to tax all bank deposits – without ever actually auditing the records provided by the taxpayer.
Perhaps I am looking at this from the taxpayer's point of view, so you make your own determination of what is a better record of taxpayer sales – gross deposits or the taxpayer's general ledger listing all transactions combined with transaction by transaction records provided by the DMV? If the auditor is allowed to simply ignore on a whim any records they want, then sales tax audits can be rather draconian. Luckily – the law does NOT allow auditors to ignore records and an administrative law judge has ruled on the matter.
If this situation may apply to your business or your clients, or if you have any questions about taxes imposed by Florida's Department of Revenue, then please contact our office for a free initial consultation.
At the Law Office of the Law Offices of Moffa, Sutton, & Donnini, P.A., our primary practice area is Florida Tax Controversy. We represent taxpayers and business owners from the entire state of Florida, from Department of Revenue to the Department of Business and Professional Regulation. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
ABOUT THE AUTHOR: Joseph (Joe) C. Moffa is the founder and managing shareholder of the firm. Joe Moffa concentrates in the area of state taxation and has been a licensed Certified Public Accountant since 1982 and a licensed member of the Florida Bar since 1984. Prior to practicing law, Mr. Moffa worked with Deloitte and Touche for over 10 years, the last 4 years of which he led the firm's Florida State And Local Tax (SALT) practice. Since opening a law firm in 1991, Mr. Moffa has defended clients in almost every industry in Florida and has been a frequent lecturer and author on state tax topics for various professional groups and organizations. Mr. Moffa has been awarded the DISCUSSION LEADER OF THE YEAR AWARD for 2011 and 2012 by the Florida Institute of CPAs.
AUTHORITY
Sec. 212.12, F.S. (authority and limitations on auditors to estimate tax assessments)
Rule, 12-3.0013(3), F.A.C. (defines "adequate records")
American Import Car Sales Inc. vs. Department of Revenue, (DOAH Case No. 14-3115)(Recommended Order issued April 17, 2015)
ADDITIONAL RESOURCES
FLORIDA SALES TAX AUDITS OF CAR DEALERS ON THE RISE, published November 14, 2014, by James Sutton, CPA, Esq.
FL SALES TAX FRAUD – 12 USED CAR DEALERS ARRESTED, published July 12, 2014, by James Sutton, CPA, Esq.
7,000 FL TAX WARRANTS ISSUED IN ERROR – GOV SCOTT TOO, published May 23, 2014, by James Sutton, CPA, Esq.
TAXPAYER FORCED TO SIGN AWAY RIGHTS TO REMIT TAX?, published September 2, 2013, by James Sutton, CPA, Esq.
FL DOR USES "CALLZILLA" TO HARRASS TAXPAYERS, published July 28, 2013, by James Sutton, CPA, Esq.