Navigating a FL Sales Tax Audit as a Business Owner

If you file sales tax returns in Florida, there’s always a chance that you could be selected for a sales tax audit. The better you understand how the audit process works, the better prepared you can be. This understanding can also help reduce your audit risk. That’s where this blog post comes in – to provide a greater level of understanding about the Florida sales tax audit process and the best ways to navigate it.

If you’d like to learn more about Florida sales tax audits, feel free to contact the tax professionals from Nashville Tax Solutions.

Key Takeaways

• Selection process – random selection or focus high-risk industries, missing or late returns or payments, discrepancies between returns, or sudden changes in report sales.
• Audit stages – pre-audit, entrance interview, audit, audit conclusion, and post-audit.
• Common sales tax return problems – misapplied exemptions or tax rates, invalid resale or exemption certificates, failure to pay use taxes, or missing records.
• Changes to tax liability – auditor adjustments can lead to tax liability plus interest and penalties.
• Representation – work with an experienced attorney to get through the process.

How Does the DOR Select Businesses for Sales Tax Audits?

Your business increases its chances of getting audited by the Florida Department of Revenue (FL DOR) if one or more of the following factors exist:

• Your sales and use tax returns are constantly filed late.
• Your sales and use tax payments are constantly paid late.
• There are discrepancies in your state and federal tax filings.
• There are significant changes in sales or business activities.
• Your tax filings reflect financial information that stands out from other businesses in your industry.
• A whistleblower reported your business to the FL DOR or other Florida government agency.
• Your business operates in a high-risk industry.

A high-risk industry is one that is known for significant cash transactions, frequent use of sales tax exemptions, complicated accounting for managing inventory and sales, or intricate resale operations. Examples of high-risk industries include:

• Food service
• Hospitality
• Convenience stores
• Car dealerships
• Online resellers

Don’t forget that some audits are the result of pure chance. This is why just because you were audited, that doesn’t automatically mean the FL DOR thinks you did anything wrong. Nevertheless, going through the audit process can be painful, even if you know you have nothing to hide.

The Florida Sales and Use Tax Audit Process

Most Florida sales tax audits will consist of the following five stages:

• Pre-Audit
• Entrance Interview
• Audit
• Audit Conclusion
• Post-Audit

The Pre-Audit Stage

The FL DOR sends the taxpayer a Notice of Intent to Audit Books and Records (Form DR-840), which starts the 60-day notice period. During this time, the taxpayer can prepare for the audit (by gathering documents listed on the DR-840 form) and contact the auditor to discuss general questions about the audit process.

If the taxpayer would like to be represented by a tax professional, this is the time to formalize that arrangement by completing a Power of Attorney (Form DR-835).

If the taxpayer (or their representative) would like to discuss case specifics with the auditor during the pre-audit phase, they can. However, doing so will end the 60-day notice period and immediately start the audit entrance interview.

The Entrance Interview

The entrance interview process begins when the taxpayer wishes to discuss case specifics with the auditor or:

• The FL DOR contacts the taxpayer to discuss a specific audit plan or provide an overview of the taxpayer’s business operations.
• The FL DOR asks the taxpayer to provide business records or other documents identified in Form DR-840; or
• The FL DOR actually begins its review of the taxpayer’s financial and business records.

During the entrance interview, the auditor will ask for information about the business, including its organizational structure, accounting and bookkeeping methods, business record procedures, and operations. The taxpayer may also use this time to discuss other aspects of the case.

One thing to understand about the entrance interview is that this is where the auditor can “get a feel” of what’s going on and what they can expect to find during the audit process. Therefore, what the taxpayer reveals during this time can have a substantial effect on what the auditor decides to request and review. This is one major reason why it’s crucial for the taxpayer to have a tax pro with experience handling Florida sales tax audits to represent them.

The Audit

Based on what they learned during the entrance interview, the auditor will request additional documents and records. Given how many businesses create and store business records electronically, the auditor may send the taxpayer a questionnaire to decide if part (or all) of the audit should be conducted electronically.

After receiving the documents, the auditor will conduct a careful review. For most audits, the lookback period for documents is three years. This lookback period can be extended if the taxpayer filed a substantially incorrect tax return (or didn’t file one at all) or didn’t make one or more tax payments during the three years.

Generally speaking, the auditor is required to complete the audit and their assessment within 305 days of the FL DOR sending Form DR-840 to the taxpayer.

At any time during the audit, the taxpayer can ask the FL DOR for its tax position concerning a particular transaction or issue from the audit. The taxpayer can do this by requesting a TAA, or Technical Assistance Advisement.

Concluding the Audit

After reviewing the taxpayer’s information, the auditor will provide their findings to the taxpayer. This will primarily be done with Form DR-1215, or a Notice of Intent to Make Audit Changes. These findings will fall into one of the following three categories:

• The taxpayer will be due a tax refund from the FL DOR.
• The audit finds that no refund is due and that the taxpayer doesn’t owe the FL DOR any additional taxes.
• An additional tax, plus penalties and interest, is due.

The taxpayer can respond to DR-1215 within 30 days by stating they either agree or disagree with the findings. If they disagree, the taxpayer has the option of requesting an audit conference with the auditor and/or the auditor’s supervisor.

If the taxpayer agrees with the findings, they can choose to sign the DR-1215 and make arrangements to pay the tax due, if any. By signing DR-1215, the taxpayer is waiving their right to an audit conference.

The Post-Audit Phase

Thirty days after issuing Form DR-1215, the FL DOR will send the taxpayer a Notice of Proposed Assessment. If the taxpayer owes additional tax, but hasn’t paid the tax (or made arrangements with the FL DOR to pay it over time), the Notice of Proposed Assessment will list the outstanding balance and provide instructions on how to officially protest the results of the audit.

If the taxpayer wants to file an informal protest, they have 60 days from the date of the Notice of Proposed Assessment to do so. If the taxpayer wants to file a formal protest, they have 120 days instead.

Typical Documents Requested During a FL Sales Tax Audit

The following is a list of documents the Florida DOR can potentially ask a taxpayer to produce during a sales tax audit:

• Florida state tax returns, such as DR-15, the Sales and Use Tax Return
• Federal income tax returns
• Sales transaction records, such as Point of Sale (POS) system reports and/or sales ledgers
• Bank statements
• Credit card statements
• Exemption certificates
• Resale certificates
• Purchase invoices
• Depreciation schedules
• Payroll records

Common Problems Found During FL Sales Tax Audits

If the audit results in a tax bill, it’s probably because one or more of the following problems were found by the auditor:

• Incorrect tax rates.
• Misclassifying taxable sales as tax-exempt.
• Improperly treating shipping and handling charges.
• Incorrectly handling out-of-state sales.
• Invalid resale or exemption certificates.
• Not reporting or paying use tax.
• Lack of records

Penalties for Failing a FL Tax Audit

The penalties can vary depending on what the auditor uncovers. If the taxpayer didn’t collect any Florida sales tax, then the loss of a business license is possible, in addition to paying the tax debt, plus monetary penalties and interest. If the failure to pay the sales tax was intentional and knowing, then criminal charges might be imposed.

In many cases, the taxpayer faces a penalty for filing or paying late, which is either the greater of $50.00 or 10% of the amount due on Line 10 of DR-15 (the sales tax return). The $50.00 penalty applies to late returns, even if no tax was due.

The taxpayer may also lose their collection allowance (taxpayers who file and pay electronically without being late are entitled to deduct a collection allowance of 2.5% of the first $1,200.00 from Line 10 of DR-15 (not to exceed $30.00)).

Additionally, any penalty or unpaid tax amount will be subject to interest. The exact interest rate changes every January 1 and July 1.

Tips for Getting Through a Sales Tax Audit in Florida

Here are some tips to get through the audit as quickly, painlessly, and cheaply as possible if you decide not to hire a tax professional:

• Maintain organized and complete business records.
• Respond promptly to the auditor and don’t ignore their requests.
• Don’t modify any existing documents being sent to the auditor.
• Don’t create a document to produce that didn’t exist before the audit.
• Communicate with the auditor in writing as much as possible, especially concerning document requests.
• Ask questions if you’re unsure about a process or what the auditor is asking of you.
• Don’t rush your response to an auditor’s request for information. You don’t want to overshare information or waste time gathering documents that the auditor didn’t ask for.

How a Tax Pro Can Help During a Tax Audit

Depending on the scope of the audit and issues you can anticipate, it’s probably worth your time to contact Nashville Tax Solutions to speak with a sales tax professional. We can also help with IRS audits or any other Florida tax issue.