Florida’s DR-840 Notice of Intent to Audit Books and Records

Understanding the DR-840 Notice and Its Implications

The Florida Department of Revenue (DOR) issues Form DR-840, Notice of Intent to Audit Books and Records, as a formal notification to businesses that they have been selected for a sales and use tax audit. This document serves as the official commencement of the audit process, providing detailed information about the audit period, the specific taxes that will be examined, and the records that the business is expected to provide for review. Once a business receives this notice, they are granted a 60-day waiting period before the Department of Revenue can officially begin the audit, unless the business voluntarily chooses to waive this waiting period.

This 60-day preparatory period is a crucial window of time that businesses should utilize strategically to thoroughly evaluate their compliance with Florida’s sales and use tax laws, carefully gather all relevant financial documentation, and proactively identify any areas of potential tax exposure before the actual audit begins. Many business owners tend to underestimate the complexities involved in a sales tax audit, and failing to take full advantage of this preparatory phase can result in unexpected tax assessments, substantial financial penalties, and significant liabilities that could have been mitigated with proper planning, strategic documentation management, and early intervention.

Why Businesses Receive a DR-840 Notice

The Florida Department of Revenue selects businesses for sales tax audits for a variety of reasons. Some of the most common factors that may trigger an audit include:

• Random selection as part of the Department’s routine audit program, ensuring overall tax compliance across different industries.

• Discrepancies between reported sales tax figures and financial records, such as federal income tax returns, business bank statements, or third-party credit card transaction reports.

• Industry-wide compliance issues, where businesses within specific industries have shown a higher statistical likelihood of tax errors, miscalculations, or non-compliance.

• Previous audits revealing errors or non-compliance, leading to increased scrutiny and additional follow-up audits for future tax periods.

• Third-party data sources, such as 1099-K credit card sales reports, highlighting potential underreporting of taxable sales by businesses.

• Customer complaints or whistleblower reports alleging that the business is improperly handling its sales tax obligations or engaging in tax evasion.

• Large cash transactions or businesses with a high volume of tax-exempt sales, which may require additional verification to ensure tax compliance.

• Failure to file sales tax returns, late filings, or inconsistent reporting, which may raise red flags and prompt a closer review by the Department of Revenue.

What Happens After Receiving the DR-840?

Step 1: The 60-Day Waiting Period

• Once the DR-840 notice has been issued, the Florida Department of Revenue is legally prohibited from beginning the audit for a minimum of 60 days, unless the business voluntarily waives this right.

• Businesses should use this period to prepare their records, thoroughly review their past tax filings, and seek professional assistance if necessary to ensure accuracy and minimize potential tax liabilities.

• Conduct a self-audit to proactively identify potential problem areas, including discrepancies in sales tax reporting, missing exemption certificates, unreported taxable transactions, and potential inconsistencies in financial records.

• Review all past tax filings to ensure consistency with financial records such as business bank deposits, sales ledgers, and federal tax returns.

• If your business has any out-of-state sales, ensure that you have the necessary shipping documentation, buyer affidavits, and contracts to support tax-exempt treatment in accordance with Florida law.

Step 2: Preparing for the Audit

To ensure a smooth audit process, businesses should proactively gather all relevant tax and financial records that the auditor may request, including:

• Sales records and invoices, providing detailed documentation of all taxable and non-taxable transactions.

• Exemption certificates for tax-exempt sales, ensuring all forms are properly completed, signed, and valid for the audit period.

• Bank statements, credit card processing reports, and 1099-K forms to verify reported sales figures against financial transactions.

• Purchase records, including vendor invoices and receipts showing the payment of sales tax.

• Federal and state income tax returns to reconcile reported sales tax liability with declared income and deductions.

• Payroll records if labor charges are involved in taxable transactions, ensuring proper classification.

• General ledger reports, financial statements, and supporting accounting records, which should align with reported tax figures.

Businesses should also be aware of potential exposure areas, such as:

• Taxable sales mistakenly categorized as non-taxable, leading to underpayment of sales tax.

• Misapplied sales tax rates on transactions, especially for businesses operating in multiple counties with varying local surtax rates.

• Failure to self-assess and remit use tax on out-of-state purchases that were not taxed at the time of purchase.

• Miscalculations on taxable items such as shipping and handling fees, customer deposits, digital products, and lease agreements.

• Taxability of digital goods, software licenses, and other intangible services, which may be subject to Florida sales tax depending on usage.

Step 3: Strategizing for the Audit

• Do not waive the 60-day waiting period unless you are fully prepared for the audit and have thoroughly reviewed your records.

• Limit the scope of records provided to the auditor to only what is explicitly required under the DR-840 notice.

• Work with a tax professional who understands Florida sales tax law and can help you navigate the audit process effectively.

• Ensure that any discrepancies are addressed before presenting records to the auditor, as inconsistencies can trigger further investigation or expanded audits.

• Identify any missing documentation and attempt to obtain replacement records before the auditor reviews the data.

Common Pitfalls in Sales Tax Audits

Many businesses assume they are fully compliant, only to discover significant tax liabilities during an audit. Common mistakes include:

• Failure to obtain and maintain valid exemption certificates for tax-exempt sales, leading to tax assessments for missing documentation.

• Incorrect classification of taxable and non-taxable transactions, resulting in either underpayment or overpayment of sales tax.

• Not charging sales tax on required fees, add-ons, or additional services.

• Discrepancies between reported taxable sales and actual financial records, leading to presumed underreported revenue.

• Failure to self-assess and remit use tax on taxable purchases where sales tax was not originally collected.

• Underreporting of sales due to reliance on incorrect accounting methods or outdated tax software settings.

The Importance of a Proactive Response

By responding strategically to the DR-840 notice, businesses can significantly reduce potential audit liabilities. Steps to take include:

• Conducting an internal compliance review before the audit begins to identify and rectify potential issues.

• Addressing errors proactively rather than waiting for the auditor to uncover them, which can lead to harsher penalties.

• Consulting an experienced tax professional to develop an effective response strategy tailored to the business’s specific industry.

• Maintaining organized records and ensuring proper tax compliance moving forward to prevent future audits.

Conclusion

The DR-840 Notice of Intent to Audit Books and Records marks the beginning of Florida’s sales tax audit process. Businesses that take the right preparatory steps can significantly reduce their financial exposure, mitigate potential penalties, and ensure compliance with Florida tax laws. By using the 60-day period wisely, gathering necessary documentation, and engaging professional help when needed, businesses can make a substantial difference in the outcome of an audit and avoid unnecessary tax liabilities.