Dear John (Business Owner):
I am writing this letter to you to follow up on your recent Florida Department of Revenue (DOR) sales and use tax audit. If you have already received the Notice of Intent to Make Audit Changes (DR-1215 or DR-1216), then I am sure you are shocked at what the auditor is alleging is due from you for the audit period. If you have not received it, please be prepared for a rude awakening as the DOR believes you owe a lot more tax than you believe you could possibly owe.
The good thing is that you now know what the Department thinks you didn’t properly tax or failed to prove you properly taxed and have protest rights to correct the proposed assessment. The deadline for exercising those protest rights will be determined from the Notice of Proposed Assessment (NOPA). You can look to that document to identify the filing deadlines for the informal or formal protest process. There are advantages and disadvantages to either option. I can discuss those options later. I mostly want to prepare you for moving from the audit to the protest phase “generally.”
Of primary importance is getting the proper mindset. I know you believe that the information you provided shows you were doing it right and/or that no additional tax is due. What you need to realize is that the DOR entered the audit looking to find what you did “wrong” based on your provided records. The DOR’s approach starts with the presumption that you are guilty until you prove yourself innocent (contrary to movies and TV shows and the judicial system principle there should be a presumption of innocence until proven guilty).
While you are familiar with your operations and general activity in running your business, the auditor enters the audit with little to know understanding of your operation. That level of “experience” is going to be limited to any pre-audit research conducted via the internet (typically). If the auditor conducted other audits of “your industry,” then those prior audit findings will rightly or wrongly impact the auditor’s initial perception of your operations and likely slant the review of your records and the associated findings towards that found in the auditor’s prior experience.
In proceeding to the protest process, the DOR will take the position that the audit findings are considered correct and the burden to show the findings are wrong is upon you, the dealer or seller. Do not get “distracted” that this provision comes from statutory language identifying a case where a “dealer fails or refuses to provide” records. The DOR will apply this presumption to your audit findings and simply could state “the Department is required to make an assessment based upon the best information then available.” Should this language be used, the DOR will be “estimating” on what it determines to be the “best” information available. You need to be aware that the DOR will read this presumption of audit correctness to require a very high burden for you to overcome.
So, in light of this presumption, you need to be prepared to provide “actual” documentation. This means you need to gather sales reports, invoices, and other forms of documentation emanating from transactions. The DOR likely will ignore spreadsheets and summaries – even if they are from an accounting or tax professional. The credibility of the tax professional apparently will not be considered as the DOR is prone to consider the spreadsheet and/or summary to be unreliable, self-serving documentation (again, even if prepared by reputable third parties). The informal protest process even generally ignores notarized affidavits regarding the accuracy and truthfulness of documentation provided during the audit or informal protest process.
Therefore, you will be entering the protest process on an uneven playing field. This does not mean the process of correcting the audit findings is impossible. Rather, it is unfortunately just very difficult. You will need to refer to the DR-1215/1216 to identify what the auditor alleges you did not provide or need to prove. Try not to get frustrated with the allegations in the Explanation of Items (EOI) for each exhibit. You need to remember that each EOI is solely drafted by the auditor to “justify” the exhibit and get the audit findings through a supervisor’s review. This arguably means the EOI may or will distort your documentation to support the audit findings and get the workpapers through review to proceed to the NOPA stage.
Now that you have received the bad news via the audit workpapers, and don’t agree with the findings, go gather “actual” documents to get ready to argue for corrections to the audit findings to truly identify the tax that ultimately is owed. If that documentation was already provided, then try to get more documentation to verify the previously provided information is accurate and complete. If not, you will have to get ready to head to litigation (in court or administratively) to try and get a reasonable audit result. While litigation may sound daunting, it is another opportunity to have information reviewed while providing the opportunity to have additional evidence considered as corroboration for previously provided documents and information. Knowing where you can go in the process allows you the ability to prepare productions to try and get the fairest possible outcome.
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. You can learn more about Matthew in his firm bio.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended clients against Florida sales and use taxes for more than 25 years with over 100 years of cumulative experience working for our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire State of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
ADDITIONAL ARTICLES TO READ
RESTAURANT FLORIDA SALES TAX HANDBOOK, published January 4, 2018, by Moffa, Sutton, & Donnini, P.A.
Florida Sales Tax Audit: What to Really Expect - Part 1, published October 11, 2016, by Steve Middel.
Florida Sales Tax Audit - What to Really Expect - Part 2, published October 26, 2016, by Steve Middel.
FLORIDA SALES TAX AUDIT HELP, published July 14, 2013, by James Sutton, CPA, Esq.
FLORIDA SALES & USE TAX AUDITS: DUELING PERSPECTIVES, published April 6, 2014, by Matthew Parker, Esq.