Sales and Use Tax Audits
NOTICE: The information below was obtained directly from the Florida Department of Revenue (DOR) website. Links are provided so you may access the content on the DOR website.
If you’ve never been audited by the Florida Department of Revenue for sales and use tax, you will want to read the information below. How are you selected for an audit?
The methods for selecting a business or individual to audit vary from tax to tax. Here are some examples of sources DOR uses to identify a potential audit candidate:
- Internal Revenue Service information.
- Information sharing programs with other states and state agencies.
- Computer-based random selection.
- Analysis of Florida tax return information.
- Business publications, periodicals, journals, and directories.
What types of records are requested?
The types of records may include, but are not limited to:
- General ledgers and journals
- Cash receipt and disbursement journals
- Purchase and sales journals
- Sales tax exemption or resale certificates
- Florida tax returns
- Federal tax returns
- Depreciation schedules
- Property records
- Other documentation to verify amounts entered on tax returns
You must keep your records for three years since an audit can extend back that far. The Department may audit for periods longer than three years if you did not file, or filed a substantially incorrect return or payment.
Read more about DOR audits by clicking here.
The Department of Revenue audits taxpayers to ensure that Florida tax laws are being uniformly enforced, deter tax evasion, promote voluntary compliance, and educate taxpayers. While most tax returns are accepted as filed, returns are audited to verify accuracy and evaluate compliance.
A tax audit should be an educational experience that provides an understanding of your responsibilities and rights under Florida tax laws. It should not be a frustrating, time-consuming experience. Although an audit is an enforcement tool to ensure tax compliance, it can also help businesses identify and correct bookkeeping problems that could cause additional tax liabilities. The Department of Revenue wants to help taxpayers avoid penalties and interest that can result when taxes are not paid correctly or on time.
During the course of a sales and use tax audit, auditors will:
• Verify gross sales by checking general ledgers, sales journals, federal income tax returns, bank records, and source documents.
• Determine all sales activity of the dealership, which typically includes new and/or used car sales, car rentals, repair shop, parts department, body shop, vending machine sales, and commercial rentals.
• Review all sales transactions to be sure the taxable base (net selling price) is calculated correctly, considering trade-ins, dealer prep fees, etc., included in the deal. Consideration is also given to the local option taxes, with the $5,000 cap applied to individual transactions.
• Determine if financing is done by the dealership, and check for documentary stamp tax issues. Verify where receivables are held by the dealership on financed vehicles. Also verify
that the amount of documentary stamp tax purchased is in agreement with the volume of financed sales.
• Verify documentation of exempt sales activities to verify accuracy of exempt sales status. Determine that exempt sales affidavits exist for all vehicles delivered out of state, or sold to exempt entities. Make sure all exempt sales are properly documented, including exemption certificates and exemption permits.
Consumable supplies used in repair and body shops can be a problem. In many cases these consumable supplies have been purchased tax-exempt and no use tax has been reported. These items are consumed, rather than being resold, and are subject to use tax.
Fixed asset purchases are looked at in detail to make sure the proper tax was paid at the time of purchase. General ledgers and federal tax returns are usually reviewed to determine the extent of these types of purchases. Problems usually occur from purchases that were shipped in from out-of-state untaxed, or exempted mistakenly for resale purposes, at the time they were purchased. Purchase invoices are reviewed to determine proof of tax paid.
Depending on the volume of transactions, expense purchases are usually sampled to determine the amount of additional tax liability. Operating expenses involving consumable tangible personal property are looked at to determine if they were properly taxed at the time of purchase, or, if use tax was properly accrued when consumed in the operation of the dealership. Invoices for all purchases will be reviewed to determine proof of tax paid. The volume of expense purchases will determine whether the auditor uses a “sampling” audit technique or all purchase invoices are reviewed.
Commercial Rental Issues
Commercial rental tax liabilities are common at automobile dealerships. There are issues involving:
• Taxable income from land subleased by the business.
• Land leased from the dealership owner to the dealership untaxed.
• Additional consideration for right-to-occupy the premises, such as real property taxes paid on behalf of the land owner.
• Any payments made on behalf of the land owner for the benefit of the land owner.
General ledgers, federal tax returns, and lease agreements are reviewed in detail to determine the taxable commercial realty rental transactions involving the dealership, both as a tenant and/or landlord.
The Department of Revenue investigates taxpayers to ensure that Florida tax laws are being uniformly enforced, deter tax evasion, and promote voluntary compliance.
During the last five years, the Florida Department of Revenue referred hundreds of automotive industry related cases for prosecution. Each case involved one or more defendants and collectively represented tens of millions of dollars in stolen tax, penalties, and interest. In addition to criminal charges, individual assessments were asserted against criminally responsible parties. Historical judicial dispositions include, but have not been limited to, incarceration, community control, house arrest, probation, pre-trial intervention, and court ordered restitution.
Some examples of sources used to identify potential investigations:
• Internal referrals from Department of Revenue processes such as Audit and Collections.
• External referrals from other local, state, and federal agencies.
• Complaints received from anonymous and confidential sources.
• Complaints received from the general public.
• Information received from other local, state, and federal agencies.
• Internal Department of Revenue information.
Reference: The above information was obtained directly from the Florida Department of Revenue “Tax Information for Motor Vehicle Dealers,” GT-400400, Revised 07/12, pages 45-46. You may view this Manual by clicking here.