A finding from a few weeks or months of transactions can be projected across an entire audit period, turning a limited set of errors into a much larger proposed liability. But projections in a Florida sales tax audit don’t all arise from the same legal authority. The records available to the auditor determine which rules apply.
For Florida businesses and the CPAs advising them, the first question is whether the Department is sampling complete but extensive records, using a representative period because records are inadequate, or estimating an assessment from the best information available. That distinction affects which documents to produce and which objections to raise. We have focused on Florida tax controversy since 1991 and represent taxpayers from the initial audit notice through litigation.
Three Legal Paths Depend on the Records
Florida law provides different paths based on the condition of a business’s records. A projection isn’t automatically an estimated assessment simply because an auditor didn’t review every invoice or sale.
Adequate but Voluminous Records
Section 212.12(6)(c), Florida Statutes, permits the Florida Department of Revenue to sample records that are adequate but too voluminous for a full review. The Department may project the sample findings over the audit period to determine the ratio of taxable retail sales to total retail sales or taxable purchases to total purchases.
Inadequate Records
Section 212.12(6)(b), Florida Statutes, applies when a dealer lacks adequate sales or purchase records. The Department may use available records or other information from a representative period to determine the taxable-to-total ratio and project a deficiency.
Best-Information Estimates
Under Section 212.12(5)(b), Florida Statutes, the Department can estimate an assessment from the best information available when a dealer fails or refuses to provide records, fails to register or file a required report, or files a grossly incorrect or fraudulent report. This differs from sampling complete records. The response should address why the information used doesn’t reflect the business’s actual activity.
Ask the auditor to identify the statutory basis for the projection and the records considered available. The answer establishes whether the central issue is sample design, missing documentation, or the assumptions behind an estimate.
How Statistical & Non-Statistical Samples Differ
The Department uses statistical and non-statistical methods. The data format and transaction population often determine which approach is practical.
Stratified Statistical Sampling
Stratified sampling divides a transaction population into groups, called strata, before selecting transactions for review. The Department’s methodology typically uses seven strata and permits calculation of sample precision at a 95% confidence level. Transactions must be available electronically for this approach.
Non-Statistical Sampling
When electronic records are unavailable or unsuitable, the Department may use random or judgmental selection. This approach doesn’t calculate precision or sampling risk, making the selection process and the representativeness of the period particularly important to examine.
A business should request enough information to understand the sampled population, selection method, and treatment of errors. A period affected by unusual sales, a system conversion, or changed purchasing practices may not represent the rest of the review period.
How a Small Test Period Produces a Large Assessment
Audit extrapolation applies a calculated error ratio beyond the transactions actually reviewed. When records are adequate but voluminous, the statute allows the Department to project the sampled proportion of taxable sales or purchases across the full review period.
Consider a purchase sample in which the audit file lacks invoices supporting exemptions or resale treatment. If the sample treats those purchases as taxable, the resulting taxable-purchases-to-total-purchases ratio can be applied to all purchases in the population. The concern isn’t only which invoices were selected, but also which figures created the numerator and denominator.
Records supporting exempt sales and resale transactions can change that calculation. So can documentation of use tax accruals and purchase classifications. Businesses generally should maintain suitable books and records for the normal three-year limitations period because an audit often requires documents beyond the transactions initially selected for testing.
When reviewing Florida sales tax audit sampling and estimates, trace each proposed error from the source document to the extrapolation worksheet. A small error in a sample can become material when projected over years of sales or purchases.
When to Challenge the Audit Methodology
Methodology should usually be addressed before the proposed assessment becomes final. A well-organized response focuses on the audit file, supporting records, and procedural stage rather than waiting to dispute a final number.
Before the Department samples adequate but voluminous records, it must make a good-faith effort to reach a sampling agreement with the dealer. If no agreement is reached, the dealer has a right to review by the Department’s executive director. Subsection (6) also permits a taxpayer with records in that condition to use statistical sampling, or another method agreed upon with the Department, to establish a refund or deficiency amount.
The DR-1215 Notice of Intent to Make Audit Changes marks the preliminary findings stage. It provides an opportunity to address sample periods, extrapolations, transaction classifications, and records that correct proposed errors before the matter enters formal protest.
Once the Department issues a Notice of Proposed Assessment, a written protest generally must be postmarked or faxed within 60 consecutive calendar days of the notice’s issuance date. Missing that deadline can allow the proposed assessment to become final.
Before responding, review these components of the audit workpapers:
- The sales or purchase population selected for review.
- The test period and transaction selection method.
- The error treatment and extrapolation calculation.
- The invoices, exemption documents, and accounting records that may correct proposed errors.
Reviewing Sampling-Based Assessments with Florida Tax Counsel
A methodology review is warranted when the sample period doesn’t reflect ordinary operations or the population appears incomplete. It is also important when records were overlooked or the Department has characterized a sampling projection as an estimate without identifying the governing authority. Identifying these issues early creates more opportunity to address them during the audit rather than after a formal assessment.
We work with businesses and their CPA and accounting advisers on Florida Department of Revenue matters, reviewing the DR-1215, sampling workpapers, available source records, and protest options.
Start by preserving the underlying electronic data and documents, identifying the legal basis for the projection, and checking the audit timeline before a proposed assessment becomes final. Our Florida Sales Tax Audit Defense practice can review the methodology and response options: contact Law Offices of Moffa, Sutton, & Donnini, P.A. at (888) 444-9568.