Opening the Books
On The Web
Florida Department of Revenue
U.S. Internal Revenue Service
irs.gov/businesses/small/Handling An Audit
Whether your company is subject to a Florida Department of Revenue audit or one from the Internal Revenue Service, there are a few things to keep in mind.
Keep good records. For both IRS and Florida DOR audits, business owners should have records for at least three years. If some of the records aren't available, DOR tax compliance manager Peter Steffens says that estimates will be used. In that case, an error -- and the subsequent tax liability -- could be multiplied.
Let your accountant do the talking. When possible, arrange for the audit to be in an accountant's office rather than company offices. "It's often disruptive to the business," explains Alan Kirzner, a tax partner with Goldstein Schechter Price Lucas Horwitz in Coral Gables.
Do your own research. If the auditor identifies a problem, don't just take it at face value, says Janet Rapp, a CPA and tax partner with Geller, Ragans, James, Oppenheimer & Creel in Orlando. Work with your accountant to do independent research on the tax issue before agreeing that you made an error.
Negotiate. Before you pay up, try to negotiate the tax, penalty or both.Rene Fernandez admits he was a bit shocked when the Florida Department of Revenue notified him that his Orlando business would be audited. But it didn't take Fernandez long to settle down and put a plan of action in place. "We are a very organized company," he says.
What the DOR was looking for in the 2003 state sales tax audit was verification that the business had up-to-date tax-exempt cards for every tax-exempt customer. That's a common request from the DOR, which does about 6,500 sales tax compliance audits each year. But the request was quite a task for Fernandez's business. Webb Bolt & Nut, a distributor of bolts, nuts and screws, makes approximately $4 million in annual revenue but writes most sales tickets for $100 or less. In an average month, says Fernandez, there could be 3,000 invoices.
The DOR wanted to see one month's worth of sales in each of five years. (Audits are now limited to three years.) That added up to nearly 15,000 invoices. Before the audit, Fernandez's employees worked through the invoices, matching them with the tax-exempt cards. He says 99.9% of the information was retrieved. The company then filled in the gaps and presented the complete package to the auditor when he arrived.
The audit took about five months and, at the suggestion of Webb Bolt & Nut's outside CPA, Janet Rapp, the auditor went over the records in the offices of Geller, Ragans, James, Oppenheimer & Creel, the Orlando CPA firm that Fernandez has used for years.
Although the DOR found fault with Fernandez on one count -- his company's failure to pay sales tax on items purchased from out of state -- there were no fines or penalties. The company did, however, have to pay the tax and interest on the out-of-state purchases.
Fernandez was impressed that the DOR wanted to help, not catch the company in an error. "They were a pleasure. They were not a problem," he enthuses.
Florida ranks 35th in total tax revenue per capita, according to 2004 numbers from the U.S. Census Bureau and the Bureau of Economic Analysis. On average, Floridians pay $1,769 in state taxes (including property, sales, luxury and fuel taxes, among others). The No. 1 state in per capita taxes is Hawaii, with $3,048. The lowest tax state is Texas, with $1,367 per capita.