Records, Estimates, and Sampling, Oh My! Understanding the Limits of Statutory Authority for Florida Tax Audit Estimates and Sampling

A tax audit by the Florida Department of Revenue can be scary. They have the power to estimate how much tax you owe, even if it’s not accurate, and they can sample your records instead of looking at all of them. It’s important that they use these powers correctly so you don’t get stuck with a huge tax bill that’s not fair. It’s also important that they sample your records in a way that makes sense for your business. The Department of Revenue has the power to audit people and businesses to make sure they are following tax laws. They can look at their records to check if they are doing things right. But the department’s authority to estimate or use a sampling process depends on the records the taxpayer keeps. It’s important for the taxpayer to know what records they need to keep to meet their obligations. How they handle these issues can make a big difference in an audit. As a taxpayer, it’s your job to keep good records of your taxes and make them available if the tax department wants to check them. The law says you have to keep these records for at least three years. The tax department also has specific rules about what kind of records you need to keep. Adequate records mean having accurate, inclusive, authentic, and systematic books and accounts for tax purposes. Voluminous records are so extensive that it’s impractical to review them all. Taxpayers can keep records in hard copy or electronic form, and they don’t have to create electronic records if they don’t already exist. Auditors must review both hard copy and electronic records if they both exist. It’s important to make sure auditors don’t discount physical records in favor of electronic ones. When the tax department doesn’t have access to a taxpayer’s records, they can make an estimate of how much tax the taxpayer owes. But they can only do this if the taxpayer has done something wrong or obstructive, like not providing their records or filing a return. It’s important for the taxpayer to document their efforts to make records available for audit, and to respond to requests for information in writing. This can help the taxpayer contest the estimated tax amount later on. The tax department can use a sampling method to check a taxpayer’s records if the records are not good enough or if there are just too many of them. This is allowed by law. The taxpayer is not necessarily doing anything wrong if their records are not good enough. For example, a natural disaster might have destroyed their records. In that case, using a sampling method to check their records is okay. If a business has a lot of sales and the tax department doesn’t want to look at every single transaction, they can use a sample to figure out how much tax is owed. The tax department has to work with the business to agree on how to do the sample. If they can’t agree, the business can ask for a review. It’s important to consider the time of year when doing the sample, because errors during busy times might not be typical of the business overall. In an audit, it’s important for the taxpayer and the state to communicate properly. The taxpayer should keep good records, and the state can’t just guess at how much tax is owed. If the taxpayer has a problem with their taxes, they should talk to their representative before the audit starts. It’s also important for the auditor to understand how the taxpayer’s business works and use the right method to figure out the tax owed. This law (Fla. Stat. §213.35) says that taxpayers have to keep records of their taxes. The Florida Department of Revenue has rules (F.A.C.R. 12-24.021) about how taxpayers should keep and store their records, especially when it comes to electronic records. The rules say that the taxpayer’s business, industry, and other evidence will determine if their records are good enough. The department can also ask for a sample of the records if there are too many. Even though we use computers a lot, there’s no rule that says records have to be electronic. These are rules and laws about how taxpayers should keep their records and what the Department of Revenue can do if they want to check the records. Sometimes the Department estimates how much tax a taxpayer owes, but the taxpayer can challenge the estimate if they have evidence to show it’s wrong. It’s important for taxpayers to keep good records and to have a lawyer help them if the Department asks for information. This information talks about cases where taxpayers challenged tax estimates, and also mentions the Florida Statutes related to tax estimates. It also mentions that the Department of Revenue has literature available that explains their methods in detail. The author is a tax attorney and thanks a law clerk for their assistance with the article.

Source: https://www.floridabar.org/the-florida-bar-journal/records-estimates-and-sampling-oh-my-understanding-the-limits-of-statutory-authority-for-florida-tax-audit-estimates-and-sampling/