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Representing clients before the DOR and in state tax litigation.

Generally, tax disputes with the Department of Revenue (DOR) begin innocently enough with a Notice of Intent to Audit Books and Records. If, after audit, the DOR auditor determines that the tax liability for the audit period is different than what the taxpayer has reported, the DOR will issue a Notice of Intent to Make Audit Changes (NOI). If the taxpayer and the DOR auditor cannot agree on the amount of proposed liability reflected in the NOI, a Notice of Proposed Assessment (NOPA) will be issued. The taxpayer can challenge the proposed assessment by filing a protest with the DOR. If the taxpayer does not file a protest, the assessment reflected in the NOPA becomes final and the taxpayer may then file either a complaint in circuit court or a petition in the Division of Administrative Hearings (DOAH). If the taxpayer files a protest, the DOR will issue a Notice of Decision, which the taxpayer can accept or reject and file a Petition for Reconsideration, or litigate the issues in either circuit court or the DOAH. This article will flesh out the salient details of this thumbnail sketch of Florida state tax protest and litigation procedures.

Notice of Intent to Audit Books and Records

There are several ways taxpayers can find themselves on the receiving end of a Notice of Intent to Audit Books and Records from the DOR, including:

1) a DOR auditor can prepare an Audit Assignment Request form when the auditor thinks an entity or business is worthy of an audit (be nice to DOR auditors);

2) a DOR auditor can prepare an Information/Violation Report;

3) a DOR auditor may identify unregistered taxpayers by looking at the suppliers and customers of taxpayer under audit (including out-of-state suppliers who may have nexus wit Florida);

4) a DOR auditor is responsible for reviewing the taxpayer's total organization, including related entities an other locations;

5) if the audit period includes a period when a prior owner was responsible for remitting the tax, an audit ca be assigned to the prior owner.'

The DOR must issue the Notice o Intent to Audit Books and Records in manner which will enable it to comply with time limitations contained in YE [sections]95.091. This provision limits the time within which the DOR can make a assessment to five years after the late of the date the tax is due or the return is filed.[2] This period is extended to six years where the taxpayer has made either a substantial underpayment of tax or has filed a substantially incorrect return.[3] Furthermore, the period for assessment remains open indefinitely where the taxpayer has failed to make any required payment of tax, has failed to file a required return, or has filed a grossly false or fraudulent return.[4] With the issuance of the DOR's Notice of Intent to Audit Books and Records, the foregoing described limitations periods are, tolled for two years.[5] However, the DOR must begin the audit within 120 days after it issues the notice, unless the taxpayer requests a delay.[6] If the taxpayer does not request a delay and the department does not begin the audit within 120 days after issuing the notice, the tolling period terminates.[7] As a matter of audit policy, therefore, the DOR will not issue its Notice of Intent to Audit Books and Records later than the date that is four months prior to the date the statute expires for assessment.[8] After the Notice of Intent to Audit Books and Records is issued, there is a 60-day period that must pass h before the audit can begin unless the taxpayer waives the 60-day period so that the audit can begin sooner.[9]

In the Notice of Intent to Audit Books and Records, the auditor will request that the taxpayer make available certain books and records. The DOR's authority to request such books and records is found in F.S. [sections] 213.35, which requires taxpayers to keep suitable books and records relating to taxes they are responsible for remitting until the time for assessment specified in F.S. [sections] 95.091(3) has expired. Furthermore, certain taxes, such as intangible, sales and use, and corporate income tax, have their own specific requirements to retain books and records in addition to the general requirements of F.S. [sections] 213.35.[10]

Failure to provide the DOR auditor with the requested books and records can result in the DOR making an assessment from an estimate based upon the best information available to it.[11] Furthermore, for sales and use tax purposes, if a dealer does not have adequate records of his or her retail sales or purchases, the DOR may make an assessment using a test or sample of the dealer's available records.[12] And, if the dealer's records are adequate but voluminous, the DOR may statistically sample such records.[13] Interestingly, although the DOR has attempted to draft sampling rules, to date none have been finalized. Therefore, the DOR has no rules concerning how sampling is to be conducted and what constitutes a .statistical" sample. Consequently, it is not uncommon for taxpayers to challenge the DOR's sampling methodology when protesting or litigating a tax assessment.

Notice of Intent to Make Audit Changes

A Notice of Intent to Make Audit Changes (NOI) is used to close an audit. This notice is presented or mailed to the taxpayer along with the auditor's workpapers that support the figures reflected in the NOI Generally, the taxpayer's file will remain in the DOR office from which the audit was conducted for 30 days from the date of the NOL The 30-day period provides an opportunity for a post-audit conference between the DOR and the taxpayer to attempt to resolve any issues before issuance of the Notice of Proposed Assessment (NOPA).

Sometimes the conference may result in the issuance of a revised NOL Typically, the revision will result in a reduced proposed assessment although revised proposed assessments which increase the liability are possible. A revision is generally made when the taxpayer provides additional information that supports the revision or where the auditor has applied the law incorrectly.

If the taxpayer does not agree with the deficiency reflected in the NOI (or revised NOI), the audit file will be sent to the Audit Procedures and Review Section in Tallahassee. After final review a NOPA is issued to the taxpayer.

Protesting the Proposed Assessment

Informal protest procedures within the DOR are authorized by F.S. [sections] 213.21, and specifically addressed by Rule 12-6, Florida Administrative Code. Furthermore, Rule 12-13, Florida Administrative Code, addresses compromise and settlement procedures for resolving assessments of tax, penalty, and interest based on doubt as to liability, doubt as to collectibility, and reasonable cause.

After issuance of the NOPA, the taxpayer has 60 days to pursue an informal protest of the assessment pursuant to F.S. [sections] 213.21 and Rule 12-6, Florida Administrative Code. If the taxpayer does not protest the assessment using the DOR's informal protest procedures, the assessment becomes final 60 days after issuance of the NOPA and the taxpayer then has 60 days either to file a complaint in circuit court or a petition in the DOAH. If the taxpayer fails to file either a complaint or a DOAH petition within 60 days after the assessment becomes final, the taxpayer loses the right to protest or litigate the assessment. However, the DOR does have a procedure for addressing requests for relief even when the taxpayer has lost the right to protest or litigate the assessment. This discretionary authority to grant relief is also provided by F.S. [sections] 213.21. However, rather than issuing a Notice of Decision or Notice of Reconsideration under this discretionary authority, the DOR will issue a Notice Of Other Disposition. The taxpayer has no appeal rights after receiving the Notice Of Other Disposition.

Although this article does not explore in detail the viability of using the DOR's informal protest procedures, practitioners representing clients should be cognizant of the opportunities and limitations of the process. Practitioners should be aware that the DOR can compromise proposed assessments using three distinct theories or methodologies: 1) doubt as to liability regarding tax, penalty, and interest assessments; 2) doubt as to collectibility regarding tax, penalty, and interest assessments; and 3) reasonable cause regarding penalty assessments. Each of these methodologies could provide the subject matter of a separate article. However, the following succinct summaries of all three methodologies should, hopefully, provide the interested reader with a background sufficient to independently explore further.

Generally, doubt as to liability has historically been resolved in favor of the assessment by the DOR's informal protest procedures. However, recent developments indicate that the DOR has become more flexible in its settlement policy within its dispute resolution process. Notwithstanding this increasing flexibility, there appear to be several constraining forces that may still work to limit the opportunities for taxpayers to obtain doubt as to liability compromises within the DOR's informal protest procedure. One constraining force is, in the author's opinion, an institutional bias to support the auditor's assessment (i.e., being a part of the DOR team). Many of the conferees involved in making determinations of doubt as to liability in the DOR's informal protest procedure are former auditors who empathize with auditors. Furthermore, the DOR is constrained by dollar compromise limitations placed on conferees and their supervisors. For example, the DOR is limited in informal proceedings to compromising $100,000 in tax without approval of the Governor and Cabinet. This limitation on compromise authority is delegated, in diminishing amounts, down to conferees. However, the conferee can recommend a compromise that exceeds his or her authority and obtain approval from the appropriate level of compromise authority within the DOR. Rule 12-13.004, Florida Administrative Code, delegates the compromise authority by job description within the DOR.

Notwithstanding these constraining forces, in some cases, conferees involved in the dispute resolution process may have received direction from the DOR's general counsel regarding the manner of resolving specific issues where doubt as to liability is recognized. For example, based on the general counsel's assessment of litigation risk, the conferees may be directed to compromise a particular issue by a certain percentage (e.g., 50 percent) in order to avoid having to litigate the issue in circuit court or DOAH. Such a compromise policy may be the consequence of the settlement of a particular issue in litigation which issue is also being protested by other taxpayers in the DOR's dispute resolution process under F.S. [sections] 213.21. Also, the DOR's Rule 12-13.005, "Grounds for Finding Doubt as to Liability," articulates its doubt as to liability policy as follows:

(1) The Executive Director or the Executive Director's designee, as enumerated in Rule 12-13.004, F.A.C., shall make a determination of whether there is doubt as to liability for tax or interest based on the facts and circumstances of the specific case. Doubt as to liability is indicated when there is reasonable doubt as to whether an action is required in view of conflicting rulings, decisions, or ambiguities in the law, and the taxpayer has exercised ordinary care and prudence in attempting to comply with the revenue laws of this state.

(2) Reliance upon the express terms of written advice given by the Department may be the basis for doubt as to liability. Consideration will be given to the complexity of the facts and the difficulty of the tax law and the issue involved, and also to the existence or lack of clear rules or instructions covering the taxpayer's situation. The taxpayer must show that the advice was timely sought from a departmental employee and that all material facts were disclosed, and that the express terms of the advice were actually followed. Advice issued by the Department informally, or in response to a hypothetical situation, will not be a basis for doubt as to liability. Advice issued in response to a taxpayer's request containing a misrepresentation of material facts is not a basis for a finding of doubt as to liability.

Any doubt as to liability compromise request made in the DOR's informal protest procedure should incorporate within it one or more of the bases provided by this rule as evidence of doubt as to liability.

Also, if the assessment is clearly wrong as a matter of law, the assessment can (and should) be revised to eliminate the portion that is not supportable by law. Revisions can and do occur after a protest has been filed (generally in coordination with the auditor). Therefore, the taxpayer's representative should be alert for possible reductions in the assessment where doubt as to liability is not the issue so that a revision rather than a compromise is appropriate. The distinction here is that the proposed assessment (or a portion of it) is not being compromised because of doubt as to liability, rather it is being reduced or eliminated because it is clearly incorrect. For example, perhaps a recent court decision that has become final has caused the DOR to retreat from its historical position on an issue and it must now concede the issue to taxpayer. Because the revision is not a compromise, the dollar compromise limits are not applicable.

While the dispute resolution process may not always provide the best opportunity for doubt as to liability compromises (although it can help to crystalize the issues for subsequent litigation), this forum can be a viable means for resolving assessments based on doubt as to collectibility and penalty assessments based on reasonable cause. The DOR can compromise any assessment based on doubt as to collectibility. Such authority comes, again, from F.S. [sections]213.21 and is further detailed in DOR's Rule 12-13.006, "Grounds for Finding Doubt as to Collectibility," which states:

Tax or interest may be compromised or settled on the grounds of "doubt as to collectibility" when it is determined that the financial status of the taxpayer is such that it is in the best interests of the State to settle or compromise the matter because full payment of the tax obligation is highly doubtful and there appears to be an advantage in having the case permanently and conclusively closed. The discretion to make this determination is delegated to those persons enumerated in Rule 12-13.004, F.A.C.

While serving as an assistant general counsel for the DOR, the author was involved in the DOR's efforts to craft a coherent methodology for ascertaining the amount of an assessment that the DOR could compromise based on doubt as to collectibility. Assuming that the taxpayer comes with "clean hands" and cooperates with the DOR's doubt as to collectibility evaluation, the process of determining whether a taxpayer is eligible for a doubt as to collectibility compromise begins with an evaluation of the taxpayer's financial position. Generally, if the evaluation determines that the taxpayer has sufficient assets to liquidate the assessment without adversely affecting its long term viability, no doubt as to collectibility compromise will be offered. Furthermore, if the evaluation determines that the taxpayer can pay the full assessment of tax and interest by a stipulated payment arrangement pursuant Rule 12-17, Florida Administrative Code, no doubt as to collectibility compromise will be offered.

When the doubt as to collectibility

evaluation indicates that the taxpayer cannot pay the full assessment either immediately or by stipulated payment arrangement, a doubt as to collectibility compromise will usually be offered. Often this compromise will be offered in conjunction with a stipulated payment arrangement.

There are several approaches which can be taken by the DOR in determining how an assessment will be resolved when there is doubt as to collectibility. Generally, the conferee involved in the evaluation will determine the maximum amount the taxpayer can afford to pay--lump sum amount paid up-front and/or monthly payments under a stipulated payment arrangement. For example, the conferee may determine that the best method of resolving the assessment is to compromise a portion of the assessment if the taxpayer immediately pays the remaining portion of the assessment. This method of resolving the matter may be prudent if the taxpayer's long term prospects for survival are bleak. This compromise offer by the DOR may encourage the taxpayer to seek outside sources of capital (often from friends and relatives) with which to bring closure to the matter and allow the taxpayer to continue operations unencumbered with the weight of the tax assessment (although often encumbered with debts owed to others who have become creditors in place of the DOR).

Often the taxpayer's evaluation of its prospects for survival are more optimistic than those (i.e., DOR conferees) unhindered by emotion. Alternatively, the DOR may offer an immediate up-front compromise in conjunction with a stipulated payment arrangement that will allow the taxpayer to amortize the uncompromised portion of the assessment without undermining its long term financial survival.

From the taxpayer's perspective' it is important that its representative present a complete picture of the taxpayer's financial condition. For example, the taxpayer's financial statements without explanation may overstate its ability to liquidate a DOR assessment. Some assets may be unproductive or illiquid while others may simply be worth far less than their book value (e.g., obsolete inventory or undeveloped land). It is also important for the taxpayer to justify its expenditures. It is difficult for a DOR conferee making between $30,000 to $40,000 a year to empathize with a closely-held tax-payer that pays its sole shareholder $100,000 to $200,000 a year. However, if such a salary is consistent within the industry average then the taxpayer's representative should present such evidence. After all, the sole shareholder is not obligated to continue a failing business venture if he or she could earn the same compensation working for a competitor (without the headaches of ownership).

Obviously, expenditures by the tax-payer will be scrutinized closely by the DOR. Therefore, the representative should closely examine the taxpayer's expenditures before submitting the doubt as to collectibility compromise request to the DOR. Sometimes the tax-payer may not be aware of the questionable expenses; other times the tax-payer may be hiding them from the representative. Virtually all of the DOR conferees involved in doubt as to collectibility compromises are certified public accountants with specialized training in financial statement analyses. Given the conferee's completely legitimate concern to protect and preserve the state tax collections, representatives should expect questions about all aspects of the financial information provided to the DOR.

Perhaps the taxpayer's best opportunity for compromise of a portion of the assessment is penalty compromise based on "reasonable cause" pursuant to Rule 12-13.007, Florida Administrative Code, which provides in part:

(1)(a) The Executive Director or the Executive Director's designee, as enumerated in Rule 12-13.004, F.A.C., will make a determination of whether the taxpayer's noncompliance was due to reasonable cause and not to willful negligence, willful neglect, or fraud based on the facts and circumstances of the specific case. The standard used in this determination shall be whether the tax-payer exercised ordinary care and prudence and was nevertheless unable to comply.

(b) The exercise of ordinary care and prudence may be demonstrated by facts and circumstances as stated in writing by the taxpayer. Additionally, in those cases when a Department employee has information or knowledge supporting the taxpayer's assertion of ordinary care and prudence, a finding of reasonable cause may be based upon such additional information or knowledge, provided the finding of reasonable cause is documented to reflect such information or knowledge.

The rule also lists the facts and circumstances that the DOR will consider when deciding if compromise of penalties is appropriate such as whether the taxpayer has been audited previously and the materiality of the tax deficiency when considered within the context of taxes correctly reported and timely remitted. Additionally, Rule 12-13.007, Florida Administrative Code, enumerates 12 indications of reasonable cause which may support a compromise of penalty. These should be reviewed by the taxpayer's representative and incorporated as required into any request for penalty compromise based on reasonable cause. For example Rule 12-13.007(9), Florida Administrative Code, provides that:

Reasonable cause shall be presumed to exist whenever a taxpayer voluntarily self-discloses liability for tax, interest, or penalty by contacting the Department in writing to disclose and pay tax and interest due prior to any contact by the Department concerning such liability. The presumption does not apply when the taxpayer is registered with the Department or has routinely filed returns with the Department and the taxpayer's self-disclosure relates to a delinquency or deficiency that is obvious and would routinely generate a billing if not otherwise self-disclosed.

Furthermore, the taxpayer's representative should be cognizant of Rule 12-13.0075, Florida Administrative Code, "Guidelines for Determining Amount of Compromise" when presenting the taxpayer's compromise request whether based on doubt as to liability, doubt as to collectibility or reasonable cause. This rule lists the specific factors which the DOR is required to consider when determining the amount of tax, penalty or interest to compromise. For example, Rule 12-13.0075(2), Florida Administrative Code, provides in part:

Penalty. When determining the amount of a compromise of penalty based upon a finding of reasonable cause, the following factors shall be considered by the Department:

(a) Factors that weigh against reduction of penalty include:

1. The tax deficiency assessed as a result of an audit exceed 5% of the total liability for the same tax for the audit period.

2. Taxpayer has been audited previously and the current tax deficiency resulted from specific issue-related error(s) identified in previous audit(s). It is not the intent of this subparagraph to apply to infrequent occurrences of human error.

3. Taxpayer has been repeatedly delinquent in remitting the tax.

4. Taxpayer failed to promptly remit tax and interest upon receipt of a billing or notice.

5. Tax was collected but not remitted to the state by the taxpayer.


If the DOR's dispute resolution process yields less compromise than the taxpayer and the taxpayer's representative believe to be fair, litigation in circuit court or the DOAH may be appropriate. Litigation may yield results beneficial to the taxpayer which justify its added cost. As discussed above, the DOR's dispute resolution process can be expected to resolve tax disputes with taxpayers in favor of the assessment if a reasonable" basis can be articulated by the DOR's conferee to support sustaining the assessment. However, the dynamics may change when an issue is litigated. When a complaint is filed in circuit court or a petition is filed in DOAH, the DOR generally refers the matter over to the tax section of the Attorney General's Office for litigation support.

When an issue reaches the litigation stage some additional considerations may be folded into the DOR's settlement decisions which may have been given less weight when the matter was being addressed within the DOR's dispute resolution process. For example, the assistant attorney general who has been assigned a particular case may determine that the DOR's position on a particular issue will be more difficult to defend in litigation than the DOR believes. Also, once an assessment is in litigation, the DOR's compromise authority is unlimited, which tends to make the DOR more amenable to larger compromises in litigation than informal protest.

With a limited supply of litigation resources, the DOR generally chooses its battles carefully. Presently, the DOR refers approximately 10 cases a month to the Attorney General's tax section for litigation support. Cases can often take two or three years to settle or go to judgment after they have been filed so that at any given time the DOR may have 200 to 300 cases in various stages of litigation. The Attorney General's tax section has approximately 12 attorneys handling these cases. Furthermore, the DOR has approximately 10 attorneys who monitor the cases in litigation and consult with the assistant attorney generals assigned to the cases. It is, therefore, important th*4 the DOR focus its limited resources on those issues that will have the greatest impact on its administration of the tax laws.

Reflecting this limitation is the fact that roughly 30 percent or more of the cases in litigation are settled without the rendering of a decision or order by the circuit court judge or DOAH hearing officer. It appears that this percentage of cases settled in litigation has declined in recent years because of an increasing percentage of cases that have been settled within the DOR's dispute resolution process.


While the process of representing clients with state tax issues before the DOR and in litigation may appear simple in concept, in application the process contains traps and opportunities for the representative. Competent representation requires complete familiarity with the procedural aspects of the case, and a thorough grasp of the substantive issues being protested or litigated. Furthermore, the representative should also be aware of how the DOR has been resolving the same or similar issues and when an issue is one of first impression. Such knowledge is required to provide the best representation possible for the client. For example, sometimes a representative's knowledge of how an issue is being resolved in the DOR's dispute resolution process may lead the representative to recommend to the client that they go immediately to litigation upon issuance of the DOWs Notice of Proposed Assessment. However, the judgment to confidently make such a recommendation (and live with the consequences) flows from a deep reservoir of substantive and procedural knowledge in state taxation. For those committed to venturing forth into this challenging area of practice, proceed cautiously.

[1] See Florida Sales and Use Tax Issues, p. 3-4 by the Florida Institute of Certified Public Accountants in conjunction with the Florida Department of Revenue, [C]1997.

[2] Fla. Stat. [sections] 95.091(3)(a)1.(1995).

[3] Id.

[4] Id.

[5] Id.

[6] Fla. Stat. [sections] 95.091(3)(b).

[7] Id.

[8] Florida Sales and Use Tax Issues, supra note 1, at p.3-5.

[9] Id.

[10] See Fla. Stat. [subsections] 199.218, 212.13, and 220.21.

[11] See Fla. Stat. [sections] 212.12(5)(b).

[12] Fla. Stat. [sections] 212.12(6)(b).

[13] Fla. Stat. [sections] 212.12(6)(c).

John Timothy Leadbeater practices with the Tallahassee law firm of Pennington, Moore, Wilkinson & Dunbar, PA. From 1991-96 he was assistant general counsel for the Florida Department of Revenue. He received his J.D. and LL.M. in taxation degrees from the University of Florida and is a board certified tax lawyer

This column is submitted on behalf of the Tax Law Section, Lauren Young Detzel, chair, and Michael D. Miller, David C. Lanagan, and Lester B. Law, editors.
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Title Annotation:Florida
Author:Leadbeater, John Timothy
Publication:Florida Bar Journal
Date:Nov 1, 1997
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