Ask the CPAs: How to Survive a Sales and Use Tax Audit

The dreaded Form DR-840 Notice of Intent to Audit Books and Records for Sales and Use Tax from the Florida Department of Revenue– we’ve been seeing more and more of these lately. What can you do to prevent one? And what should you do if you receive one?

Just as in trying to avoid an individual federal audit, your best defense is doing things right in the first place. Yet, also like an individual audit, you may get chosen through sheer, blind luck (bad luck, a.k.a. “random selection”).

“So, What Should I Do If I Receive a Notice of Intent?”

If you receive one, you’ll notice there’s a questionnaire attached, along with a request to return that questionnaire within 15 days. Don’t stress out: That “15 days” is meaningless. Auditors are evaluated on number of audits fi nished in a year, so there’s an incentive for them to get you to move quickly. In fact, they may pressure you by phone. Be polite, but know your rights: You have a full 60 days to return that questionnaire. Don’t be intimidated by the questionnaire.

It will include a request for a TON of records– some of which you may never have heard of, much less kept. Our best advice is to give the auditors what they need; nothing more and nothing less. Too little, and they have every legal right to estimate it themselves; too much and you risk being taxed on errors in your record-keeping. Be selective, and make sure you know exactly what records you’re giving them as well any possible issues with those records.

“What Will the Audit Focus On?”

Almost every Florida sales and use tax audit will focus on the following:

Sales: Did you properly collect and remit sales tax? Is your exemption paperwork in order? Florida law requires you to file a tax return even if you do not owe sales and use tax, and you may incur penalties if you submit after the 20th of the month.

Real Estate Rental: Unless your lease specifies otherwise, tenants are obligated to pay the sales tax on commercial leases and lease-related items, and landlords are obligated to collect and remit that tax to the state. Even if no rent is technically paid, there could be implied rent, which can be subject to very real tax. On top of that, many counties impose an additional surtax (Alachua currently does not). “Fun” fact: Florida is the only state in the country that imposes a sales tax on the rental of real property.

Other Expenses: Many business owners are shocked to discover the auditor looking at more than just the taxes due on sales. For example, do you buy offi ce supplies online? Do you pay sales tax to the vendor or remit use tax to the state on these purchases? And do you keep records of same? It’s worth noting here that you will need actual invoices—credit card receipts are not enough. You may also have to show your depreciation schedules for big-ticket items bought online and claimed as deductions on your federal return.

“If I Did Everything Wrong, Should I Close My Business?”

In almost every case, the answer is “no”—walking away will not make the issue go away. If taxes were collected but not remitted, it could become a criminal case. Talk to a CPA or tax lawyer immediately.

0302Pam Burns (left) and Elizabeth Davies(right) are licensed as Certified Public Accountants in the State of Florida. Together, they own ProActive Tax and Accounting in Jonesville and enjoy educating the general public on accounting, taxes and QuickBooks.

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