Florida Tax Audits: Guide for Business Taxpayers
The Florida Department of Revenue (FL DOR) has the right to audit your sales tax, option tax, corporate income tax, and other state tax returns. The basic premise of an audit is simple — the FL DOR wants to see proof of the information you reported on your tax returns. Although this sounds simple, a Florida audit can be a stressful and time-consuming process.
This guide provides an overview of the Florida Department of Revenue audit process, what to expect if you're being audited, and how to get through an audit with as little stress as possible. It also explains how an IRS audit can affect your Florida tax returns.
What to Expect With a Florida Tax Audit
During a Florida sales tax audit or an audit of any other Florida tax, the auditor will examine your records to verify the information on your tax returns. The department may audit just a few details from your return. Or it may conduct a major tax audit that looks at your sales and use tax, corporate income tax, local option taxes, and any other taxes your business pays to the FL DOR.
There are desk audits and field audits. During a desk audit, the auditor stays in their office, and you send them the information they request. In contrast, if the auditor does a field audit, they will come to your place of business.
If your returns are incorrect, the auditor will adjust them. Depending on the changes, you may end up owing additional tax or receiving a refund. The following sections outline more about what to expect during a Florida tax or accounting audit.
The FL DOR claims that its audits aren't just for tax compliance. The department says that audits can also be educational for taxpayers. For instance, the department says that it might show you how to improve your bookkeeping so that your returns are more accurate.
However, you don't necessarily want to give a FL DOR auditor free rein over your bookkeeping records. To protect yourself and your business, you should work with a tax pro experienced with Florida tax audits. A Florida tax professional can ensure that you provide the auditor with the required information without giving them extra details that they don't have a right to see.
How the Florida DOR Selects Accounts for Audits
The FL DOR randomly selects some businesses for audits. In other cases, the agency audits businesses because of discrepancies with information from the IRS or tax agencies in other states. The agency also analyzes Florida tax returns, and if it sees signs of a potential issue, it may decide to do an audit.
The Florida DOR pays extra attention to Florida restaurants, which means they are often subject to audits more often than other Florida businesses. A possible reason for this is that many restaurant transactions are cash-based. One of the most common types of tax audits for restaurants is the sales tax audit. Practically every sale and transaction that takes place at a Florida restaurant could be subject to the sales tax unless an exception applies. Florida restaurants could also be subject to audits concerning other taxes, like the use tax. To protect your business, be aware of these common restaurant sales tax mistakes.
Types of Records You Need for a Florida Tax Audit
The types of records you need for a Florida tax audit vary depending on the type of audit. For instance, if the auditor is doing a Florida sales tax audit, you will need to provide records about your sales and the sales tax collected. Similarly, if you're undergoing a Florida Corporate Income Tax audit, you will need to provide records about your business's revenue and expenses.
Here are some of the records the auditor may request:
- Florida income tax returns
- Florida sales and use tax returns
- Other Florida tax returns
- Federal tax returns
- Depreciation schedules
- Sales records
- Invoices — especially if you run a car repair business
- Purchase records
- Property records
- Check registers
- Canceled checks
- General accounting ledgers and journals
- Cash receipt journals
- Purchase and sales journals
- Sales tax exemption or resale certificates
- Corporate charters
- Any other documents that support details reported on tax returns.
You can supply your records in paper or digital format, but sometimes, you may be required to provide digital documents. At the beginning of the audit, the DOR will send you a questionnaire to determine if you can complete the audit electronically.
What Happens If You Don't Have the Records for a Florida Sales Tax Audit or Other Florida Tax Audit?
Florida law says that you must keep your records for at least three years after the due date of your tax return. Generally, the FL DOR only goes back three years or less during an audit. However, there are exceptions to this rule. If you didn't file a return or if you filed a return with substantial errors, the department can go back further than three years.
If you don't have records because it's past the three-year mark or for any other reason, the auditor will estimate your tax liability based on the available information. This can often lead to unnecessarily high tax liabilities. Ideally, you should keep your records, but if you're going through an audit and you don't have all of your records, you should get help from a tax lawyer, enrolled agent, or accountant with FL audit experience.
A Florida tax pro can help you reconstruct your records. They can also ensure that your rights are protected during the audit.
Types of Florida Tax Audits
The Florida DOR administers 36 different taxes, and it has the right to audit information for any of these taxes. Here are some of the most common types of Florida tax audits.
Florida Sales Tax Audits
A sales tax audit is one of the most common audits for Florida businesses. If you receive a notice of a Florida sales tax audit, you have 60 days to prepare, and the audit must start within 120 days. During the sales tax audit, the auditor will look at copies of your Florida sales tax returns, and they will request records from you to verify the information on your returns.
For instance, if the FL DOR is auditing all of your 2021 sales tax returns, the auditor will likely request to see copies of the sales reports from your point of sale (POS) system for the entire year. If you don't run all of your sales through a POS, the auditor may ask to see other records.
The auditor may also request to see bank statements. For instance, if you have a lot of unexplained deposits, the auditor may have reason to believe that you're making sales that you're not reporting.
Sometimes, a Florida sales tax auditor may discover that you have overpaid sales tax. For instance, imagine that your bookkeeper accidentally classified a business loan as revenue, and when they filed the sales tax report, they paid sales tax on the amount of the loan in addition to your sales. If the auditor sees this type of mistake, they will adjust your sales tax returns and issue you a refund.
Use Tax Audits During a Florida Sales Tax Return
During a sales tax audit, the auditor may also look for signs that your business owes use tax. For instance, if your business purchased a vehicle in another state and never paid Florida use tax, the auditor will note that fact. Then, they will go through the process of assessing the use tax against you.
Many business owners overlook the use tax portion of their Florida sales tax returns. But if you purchase items online or out of state and don't pay tax, you are supposed to report these purchases and pay use tax. Taxable purchases go on line B of your Sales and Use Tax Return.
FL Sales Tax Audit for Remote Businesses With Florida Nexus
If you have nexus in Florida, you are required to collect and remit sales tax on taxable goods and services. Which businesses have nexus in Florida? Businesses that are based in Florida have nexus in the state, and remote businesses have nexus if they have taxable Florida sales of more than $100,000 in a year.
For instance, if you run an eCommerce business and sell $50,000 in goods to Florida residents, you don't have nexus in the state unless you meet the location requirements. So, you don't have to register or collect sales tax. However, if you sell $200,000 in taxable goods or services to customers in Florida, you are over the nexus threshold and must pay Florida sales tax.
In addition to auditing businesses that are based in Florida, the FL DOR may do sales tax audits on remote businesses. The audit will focus on your sales tax returns if you have filed sales tax returns. If you have not filed, the audit may focus on whether or not you have nexus in the state, and if so, they will start the audit process into the returns you should have filed.
Florida Corporate Income Tax Audits
A Florida corporate income tax audit follows the same initial timelines as a Florida sales tax audit. After you receive the notice, you have 60 days to prepare, and the audit must start in at least 120 days. Take your time to prepare. A Florida corporate income tax audit can be a very lengthy process, and you want to ensure that you have everything ready before you start the audit.
During a corporate income tax audit in Florida, the auditor will look at the majority of your business records. They want to ensure that you have reported all of your business revenue correctly and haven't overstated any of your business expenses. They will also look at any property you've purchased, depreciation schedules, bank records, and a variety of other business records.
Florida Reemployment Tax Audit
Every year, the FL DOR audits 1% of all businesses that pay reemployment tax into the Unemployment Compensation Trust Fund. For reemployment tax audits, the FL DOR selects some accounts at random. The department also looks for anomalies on your return based on statical data for your industry, business size, location, or aberrations between your return and federal or third-party data. The department also audits some employers that are dealing with reemployment assistance claims and collection items.
During this audit, the auditor will look at earnings and tax documents related to your employees. This may include your Form 940 (Employer's Annual Federal Unemployment Tax (FUTA)) returns and other employment tax returns such as Forms 941, 943, or 944. The auditor will also want to see your W-2 and W-3 tax forms as well as individual earnings records.
They may also request your payroll summaries, payroll ledgers, and individual earnings records. To ensure you are classifying your employees correctly and not paying people as independent contractors to avoid paying reemployment tax, the FL DOR auditor may request to see independent contractor agreements and 1099-NEC forms.
Florida Option Tax Audits
In most cases, when the Florida DOR does an extensive audit of sales tax or corporate income tax, the auditor will also do a smaller audit on a tax such as the option tax. Option taxes are local taxes such as discretionary sales surtaxes, local option fuel taxes, transient rental taxes, tourist development taxes, tourist impact taxes, convention development taxes, local option food and beverage taxes, or municipal resort tax. The documents you will be asked to provide may vary based on the type of option tax being audited.
Florida Self-Audit or Self-Analysis
A self-audit or self-analysis project is when the FL DOR has the taxpayer complete the audit process. Generally, Florida self-audits focus on a relatively narrow issue related to a specific type of tax. If you're selected for a self-audit, the DOR will send you information about the tax, instructions, and worksheets.
You will complete the worksheets independently and determine if you owe any additional tax. The auditor usually won't call you or come to your business. Generally, the FL DOR accepts the information taxpayers provide during a self-audit, but your account can still be selected for a convention audit. To ensure you provide the right details, you may want to hire a tax pro to help with your Florida self-audit.
What Is Notice DR-840?
To notify you that you have been selected for an audit, the FL DOR will send you Notice DR-840 (Notice of Intent to Audit Books and Records). Generally, Florida Notice DR-840 means that the department is doing a full audit. The notice will explain which taxes are being audited, the timeline for the audit, and the statutes relevant to the audit.
If you need help understanding Notice DR-840, contact a tax attorney, accountant, or enrolled agent. They can help you decipher the notice and prepare for your audit.
What Is Notice DR-846?
In the past, if the FL DOR selected you for a limited scope or self-audit, the department would send you Notice DR-846 (Notice of Intent to Conduct a Limited Scope Audit or Self-Audit). Typically, the department used this notice when it audited issues related to commercial rent or out-of-state purchases.
However, in recent years, the FL DOR often used Notice DR-846 and DR-840 interchangeably. As a result, you may receive Notice DR-846 if you're facing a full audit. In all cases, the notice should explain what is being audited, the audit deadlines, and your rights under the Florida state law. If you're not sure what Notice DR-846 means, contact a FL tax pro to help you.
What Is Notice DR-1212?
Generally, you receive FL DOR Notice DR-1212 (Notice of Intent to Make Audit Changes) after the audit is complete. This notice details the changes the auditor is proposing to your Florida tax returns. However, in some cases, businesses receive this notice before the above audit notices.
If you receive this notice and you have not gone through an audit, it means that the DOR is making changes to your account. Make sure that you contact the department as soon as possible if you disagree with the changes. If you don't reach out, the assessment may become final, and you may lose your chance to protest the tax.
What Is eAuditing in Florida?
If you are selected for a Florida sales tax or any other type of Florida tax audit, you may hear the phrase eAuditing. Also called electronic auditing, eAuditing simply refers to providing the requested documents electronically.
Generally, when the FL DOR notifies you about an audit, it will send you a questionnaire to determine if your business can do an e-audit. If so, you will send in your documents electronically, and the auditor will use computer programs to analyze the information.
In many cases, you can choose whether or not you want to do an eAudit. However, if you keep sales and use tax records in an electronic format, you must provide them to the department in an electronic format. This is a requirement.
Your Rights During a Florida Tax Audit
During a Florida tax audit, you have the following rights:
- To receive prompt and accurate responses to your questions and requests for help.
- To be represented by a tax lawyer or other qualified representatives such as a CPA or enrolled agent.
- To ask for help from a taxpayer's rights advocate if you can't resolve problems through the usual administrative channels or if you have received poor treatment from the auditor.
- To record interviews.
- To have penalties and interest removed when you have received incorrect advice from the FL DOR in response to an accurately written request for information.
- To have interest waived when it's due to errors or delays caused by an employee of the department.
- To obtain straightforward and nontechnical statements about why you were selected for an audit.
- To be informed of collection actions related to property seizures or asset freezes (except in cases of jeopardy assessment).
- To request an immediate review of a jeopardy assessment.
- To have your information kept confidential.
- To recover damages when the DOR causes injury through wrongful or negligent acts or omissions.
- To recover legal costs if you're the prevailing party in a judicial or administrative action brought forward without justiciable issues of fact or law. Note that the department has the right to recover legal costs if it is the prevailing party in the same situation.
- To have the audit completed in a timely manner.
- To participate in free educational activities that help you comply with Florida state tax laws.
These are only some of your rights. Florida taxpayers have even more rights during an audit. To ensure your rights are protected, you should work with a tax professional experienced with Florida tax audits. They will be able to answer your questions and ensure that the tax auditor respects your rights while conducting the audit.
Are Florida Tax Audits Educational?
The FL DOR says that audits should be educational, and it gives you the right to get prompt and easy-to-understand answers to your questions. While this is true in theory, it doesn't always happen in practice. By law, auditors are not allowed to receive any bonuses or commissions based on the amount of tax they assess, but they are often "graded" on how quickly they complete audits. If you have an auditor who is trying to speed through the process, your legal rights and the accuracy of the audit may get lost along the way.
For instance, some auditors push taxpayers to provide information before the 60-day time limit is up. You are never required to provide information to an auditor until 60 days after you receive the audit notice. But many taxpayers are intimidated by auditors. They comply with requests that aren't necessarily in their best interest. A tax professional can help to protect you. They ensure that you don't have to deal with unnecessary demands that infringe on your rights. They also ensure that the audit is done fairly and accurately.
Timeline for a Florida Tax Audit
When you receive the audit notice, you have 60 days before the audit starts. In some cases, auditors may request information early, but once you start providing information, the audit starts. You lose the 60-day window. To ensure you have everything you need to complete the audit, you should take full advantage of this time period.
The audit must start within 120 days of when the audit notice was issued. Generally, that means the audit should start between two and four months after you receive the notice of audit.
In Florida, audits are supposed to be wrapped up within a year. To ensure you have time to contest the audit if you disagree, most auditors try to complete the process in nine months. However, some Florida tax accountants report that audits can take over a year.
What Is the Statute of Limitations on a Florida Sales Tax Audit?
Once a sales tax return has been filed, the FL DOR has three years to audit it. However, if you don't file a sales tax return, the department can go back any amount of time. Additionally, the three-year statute of limitations doesn't apply if your sales tax return had substantial errors.
Statute of Limitations on Florida Corporate Income Tax Audit
The FL DOR observes the same time limit for corporate income tax audits as it does for sales tax audits and all other types of Florida tax audits. Generally, the department can only go back for three years. But again, if you haven't filed a return or if you filed a substantially incorrect return, the department can go back more than three years.
How an Active Florida Tax Audit Affects the Statute of Limitations
Notice DR-840 pauses the statute of limitations. The statute of limitations stays paused until the audit is complete. How does a toll on the statute of limitations work? Check out this example.
Imagine that you receive Notice DR-840 on January 2, 2022, and the FL DOR says that it is going to audit your annual sales tax returns for tax years 2020, 2019, and 2018. Your 2018 annual sales tax return was due on January 20th, 2019. As a result, the statute of limitations to audit this return normally expires on January 20th, 2022. However, the DR-840 notice paused the clock on January 2nd, 2022. As a result, the department can still audit your return.
How to Pay Your Florida Audit Assessment
If you owe additional tax after the completion of the audit, it is due immediately. You can pay the tax by mailing a check or money order to the Florida Department of Revenue. Send the payment to the following address:
Florida Department of Revenue
PO Box 5139
Tallahassee, FL 32314-5139
To ensure your account gets credited correctly, write the audit number and the tax type on your check or money order. Don't send the payment with your other FL DOR payments, or it may be credited to the wrong account. You may also incur additional penalties/interest or face collection actions.
If you cannot afford to pay the audit assessment, contact the FL DOR to talk about payment options. The DOR may be willing to offer you payments on a case-by-case basis. Typically, the state applies a 10% penalty on all taxes once they are 90 days late. This penalty will apply to your account after your protest period has ended. Depending on the type of tax involved, you may occasionally even be able to settle for less than owed through an offer in compromise, but there are strict restrictions and requirements.
What to Do If You Disagree With the Outcome of a Florida Tax Audit
If you don't agree with the results of the audit, you have the right to protest. This applies to Florida sales tax audits as well as any other types of Florida audits.
You can make an informal protest in writing, but you must do so within 60 days of the date the DOR issues the Notice of Proposed Assessment (NOPA). Your informal protest should include your name, the tax type, the amount of tax protested, a schedule of the protested adjustments, and a statement of factual or legal grounds for the protest.
After the DOR reviews your protest, the department will issue a Notice of Decision (NOD). If you still disagree, you can file a petition for review by the Division of Administrative Hearings (DOAH), or you can file an action in the circuit court or in the relevant Florida District Court of Appeals.
Alternatively, if you disagree with the results of your Florida audit, you can make a formal protest. Before making a formal protest, you must pay any taxes that you agree with as well as the penalties and interest associated with those taxes. Then, you can file a protest through the DOAH or the circuit court.
You must make the formal protest within 120 days after the DOR issues the Notice of Proposed Assessment (NOPA). If you're pursuing a formal protest after making an informal protest, you must do so within 60 days of receiving the Notice of Decision. You cannot extend these deadlines.
Changes to Florida Corporate Income Tax After IRS Audit
If the IRS makes changes to your corporate income tax return during an audit, the changes are likely to affect your corporation's taxable income in Florida. Generally, you must submit an amended Florida corporate income tax return within 60 days after the IRS's adjustments are finalized. To amend your Florida return, use FL DOR Form F-1120X (Amended Florida Corporate Income/ Franchise Tax Return).
Note that you don't have to file an amended Florida return in the following situations:
- The IRS changes only involved a carryback of a net operating loss or a capital loss.
- The IRS audit only increased or decreased a net operating loss.
As you can see, neither of these changes increased your corporation's taxable income. As a result, you don't have to report the changes to the Florida DOR.
If the IRS audit changed your taxable income, you must report the changes to the FL DOR by filing an amended return. If you owe additional tax, you will need to pay the tax plus interest that has accrued from the original due date of the return. If the IRS audit lowered your taxable corporate income, you might be able to claim a refund from the FL DOR.
In some cases, you may need to file multiple amended Florida corporate income tax returns. This happens when there are disputes during the IRS audit. For instance, if you and the IRS agree on some changes, but others are still under debate, you will need to file an amended Florida corporate income tax return within 60 days of the agreed-upon changes. Then, when any other changes are agreed upon, you will need to file an additional amended return. Repeat this process as many times as necessary.
If you make a payment of disputed IRS tax amounts so that you have the right to contest a federal assessment, you don't have to submit the amended return for those changes. Those changes are still in dispute. By extension, the payment does not count as tax paid in relation to the 60-day filing requirement. However, once the dispute is resolved and the IRS or the courts issue a final decision, you will need to amend your corporate Florida return.
Get Help With a Florida Tax Audit
A tax audit can be an intimidating and scary process. It can also take a lot of time that you don't have when you're running a business. Additionally, tax audits can lead to assessments against you. If you don't have the right records or if you don't understand certain elements of the tax code, you may even end up facing a larger tax liability than you should.
Audits also have strict deadlines, and if you miss them, you may lose out on the opportunity to share your side of the story or contest the results of the audit.
Local Florida tax accountants, enrolled agents, and tax lawyers can help you deal with Florida sales tax audits and other state tax audits. Using TaxCure, you can search for Florida-based tax professionals who have experience helping clients with tax audits. Then, you can review their profiles and select the person who has the right experience for your situation.
Don't let a Florida tax audit stress you out or cause damage to your business. Instead, get help from a local Florida tax professional today.
