If your business has received notification of a sales and use tax audit from the Florida Department of Revenue (DOR), it’s crucial to understand the audit process and what to expect. This article will walk you through the key steps, common pitfalls, and strategies for managing a Florida sales tax audit successfully.

1. Preparing for Your Florida Sales and Use Tax Audit

One thing you should know upfront: very few businesses come out of a Florida sales and use tax audit without any tax liability. Even if you’ve been diligent in your tax practices, the audit process often reveals areas of concern that lead to additional taxes owed. In addition to scrutinizing your sales, the DOR will examine your purchases to ensure taxes have been properly paid.

The burden of proof lies with your company. It’s your responsibility to show that taxes were properly collected and remitted on time. This process can be costly and surprisingly complex for first-time audit participants, often resulting in unexpected assessments that can total over $100,000.

Isn’t it worth consulting with a tax professional who specializes in Florida sales tax audits, protests, and litigation to navigate this challenging process?

2. The Audit Notice

It all starts when you receive a Notice of Intent to Audit Books and Records, also known as Form DR-840. This notice marks the beginning of the audit process, identifying the audit period and the taxes under review. It will also request specific documents for the auditor’s review. After sending this notice, the DOR must wait 60 days before initiating the audit, unless you waive this waiting period. While you may be eager to start, it’s usually best to hold off on waiving the 60-day period to allow ample time to gather necessary records and evaluate your tax practices.

3. Reviewing Your Records

During the 60-day period, it’s essential to take a close look at your records and procedures. Many business owners assume their processes are sound, but audits often reveal significant oversights. You should assess whether you’ve been properly handling sales tax, especially in the following areas:

Exempt Sales: Are you properly documenting exempt sales and ensuring the correct paperwork is in place?

Out-of-State Sales: Do you have the necessary shipping documents to prove sales outside Florida?

Deposits: Are you collecting the appropriate sales tax on non-refundable deposits?

Accrual Method: Are you reporting sales tax on the accrual basis, as required?

Sales Tax Rate: Are you charging the correct sales tax rate based on the destination of goods?

Remember, Florida auditors will also scrutinize your purchases. If you can’t prove that sales tax was paid on your company’s expenses, they may assess taxes on those purchases as well, potentially adding up to millions of dollars in liability.

4. What Auditors Review

In addition to sales, auditors will dive into your purchases, examining whether taxes were paid on expenses such as:

Rent and CAM (Common Area Maintenance) charges

Cleaning services, security services, and repairs

Assets purchased and depreciated over time

Real property improvements

A company with significant annual expenses could face millions in additional tax exposure if proper documentation isn’t provided. It’s important to keep detailed records for all of your purchases, as credit card statements alone won’t show sales tax details.

5. The Audit Process

Once the 60-day waiting period ends, the audit review begins in earnest. The first step is often an opening interview, where the auditor will meet with you or your Power of Attorney to discuss your records and begin the “discovery” phase of the audit. At this stage, it’s critical to be cautious about what you say, as even a seemingly harmless comment can lead the auditor down a problematic path.

During the audit, the DOR will provide a checklist of requested documents, including federal income tax returns, bank statements, and general ledgers. While you may feel pressured to provide everything requested, it’s vital to be strategic. Over-sharing documents can inadvertently lead to a higher assessment.

6. Estimating Techniques

Florida sales tax auditors often use estimating techniques to determine tax liabilities. For example:

Random Sampling: The auditor may select three random months for review and extrapolate the results to the entire audit period.

Bank Statements & Federal Income Tax Returns: If the auditor finds discrepancies between your bank deposits and reported sales, they may estimate unreported taxable sales.

1099-K Reports: The DOR now uses 1099-K data from credit card companies to identify discrepancies in reported sales.

If you don’t provide sufficient records, the auditor can rely on industry averages to estimate your sales. The burden then shifts to you to prove the actual numbers.

7. Managing Your Audit

If you disagree with the audit findings, you have the option to request an audit conference or respond in writing to address discrepancies. At this point, it’s crucial to present only the relevant documentation that supports your case. You cannot negotiate the tax assessment at this stage, but you may be able to reduce penalties, especially if the errors were unintentional.

If you need more time to gather records, you can request an extension of the statute of limitations, although this is at the discretion of the auditor’s supervisor.

8. Post-Audit: Notice of Proposed Assessment

Once the audit concludes, you will receive a Notice of Proposed Assessment, outlining the total amount of tax, penalties, and interest owed. You have 30 days to file a protest or accept the proposed assessment. If you disagree, you can file a formal protest, request a conference, or move the case to litigation.

Don’t Go Through This Alone

Dealing with a Florida sales tax audit is no small task, and the potential for large assessments is significant. It’s worth consulting with a Florida sales tax expert to help guide you through each stage of the audit, identify potential issues, and minimize your liabilities. If you’re facing a Florida sales and use tax audit, don’t wait—contact us today for a consultation. Let us help you navigate this complex process with confidence