Help! The Florida DOR Is Auditing My Restaurant!

Restaurateurs Guide to Florida Restaurant Sales Tax Audits

Owning and running a restaurant is a challenging and often rewarding way to earn a living. One of the challenges is keeping up with state tax requirements. One such example is Florida sales and use taxes.

With so many transactions taking place in the front house and back house, it’s easy to see how you as a restaurant owner and/or operator could make a mistake or get confused with reporting and paying sales tax. If this happens, you could find yourself learning that the Florida Department of Revenue (DOR) wants to audit your business records to see if the prior sales tax filings for your restaurant are correct.

Being audited can be a scary experience, but understanding the process can help. The purpose of this guide is to provide a comprehensive overview of sales tax audits in Florida. It starts with an overview of the Florida sales tax, and then shifts to the sales tax audit process. This includes what happens during a restaurant sales tax audit, how to prepare for the audit, what happens after the audit is complete, and when and why you might want the help of a tax professional. 

Understanding the Florida Sales Tax 

As a general rule, restaurants must collect and pay sales taxes on the sale of food products that are prepared, served, and sold on their premises. Similar businesses, such as caterers, cafeterias, hotels, and taverns must also collect and pay sales taxes on their eligible food sales. Note that food sold on a “to go” or “take out” basis will usually be subject to sales tax.

The sales tax rate applicable to restaurants is the general Florida sales tax rate of 6%. However, there could be an applicable discretionary sales surtax charged by a local taxing authority (usually at the county level) that is applied on top of the 6% general sales tax rate.

Keep in mind that Florida recently changed how it calculates sales tax and discretionary sales surtax in Florida. Instead of using a special bracket system, Florida businesses must now use a rounding algorithm.

What about use tax?

Florida sales tax is the tax paid on the sale of goods or services in Florida. In contrast, a use tax is a tax paid on a taxable good or service that wasn’t subject to a sales tax during its purchase. 

Use tax issues often come up with restaurants when they give away free food.

In many cases, no sales tax collection is required for free food to customers, as it’s usually part of a promotion, like free breadsticks with the purchase of a main course. Here, the main course would be subject to the sales tax, but the breadsticks would not. The breadsticks would also not be subject to a use tax in this situation.

However, imagine if the breadsticks were given away for free with no purchase or other conditions required to receive them. In this second situation, the restaurant would have to pay a use tax on the cost of the breadsticks because they were not considered part of the taxable meal. 

Here's why: When the restaurant buys food from its vendors, it does not pay sales tax. However, it charges sales tax to its customers when it sells the food. If the restaurant buys food and ends up giving it away, it must pay use tax on that food. Basically, someone needs to pay sales/use tax at some point for the purchase. Usually, that's the customer of the restaurant, but in some situations, it ends up being the restaurant. 

An Overview of Florida Sales Tax Audits

The Florida DOR will conduct a sales tax audit if it believes the information you provided in your restaurant’s sales tax returns is incorrect. The DOR uses an audit to confirm if its suspicions are correct by reviewing your business records.

Florida sales tax audits are inherently limited to reviewing information related to sales tax. Yet the DOR can conduct a full audit to review all of your restaurant’s taxes. So in addition to filings and records relating to sales tax, the DOR may also audit your returns relating to local option taxes and the corporate income tax.

After you file a sales tax return, the FL DOR has three years to audit the return. However, the DOR may ask for an audit involving older tax returns if you file a “substantially incorrect” return, substantially underpay any sales taxes owed, or don’t file a sales tax return. 

Triggers for a Sales Tax Audit of a Restaurant in Florida 

What exactly triggers the Florida DOR to conduct a sales tax audit is not publicly known, although an audit could be the result of a computer randomly choosing your restaurant’s sales tax return. What’s more likely is that a review of one or more of your Florida tax returns turns up a potential issue that the DOR wants to review further. Examples of possible red flags could include:

• The sales tax collected and paid to the Florida DOR is higher or lower than the DOR expects given the restaurant’s reported income and expenses.
• The restaurant’s sales figures are much higher or lower than similar restaurants in the area.
• The state of Florida or the county where the restaurant is located has enacted new laws relating to sales tax.
• The restaurant underwent a major business change, such as filing bankruptcy or closing a location.
• The restaurant is consistently late when filing its sales tax returns.
• The restaurant is part of another business, like a hotel or grocery store.
• The restaurant receives a portion of its employees’ tips.
• The restaurant offers free or discounted food to its employees.
• A significant portion of business includes sales to tax-exempt organizations.
• Part of the restaurant’s business includes food that’s delivered to customers away from the restaurant’s premises.
• One of the restaurant’s vendors got audited and problems were found.

Understand that many of the above “red flags” aren’t necessarily red flags in the traditional sense. In other words, a restaurant that offers free food as a perk to its employees won’t necessarily be automatically subject to a sales tax audit. Rather, the above list represents business operations and arrangements that are common with restaurants and often lead to taxpayers making mistakes on their sales tax returns.

How to Prepare for a Florida Tax Audit

The audit process begins when the FL DOR sends you a Notice of Intent to Audit Books and Records (Form DR-840). In the past, the DOR used to send Form DR-846, Notice of Intent to Conduct a Limited Scope Audit or Self-Audit to notify taxpayers of a sales tax audit. In recent years, Form DR-840 seems to be more common or used interchangeably with DR-846.

After sending Form DR-840, the 60-day notice period begins. During these 60 days, you can:

• Ask the Florida DOR any general questions about the audit.
• Ask your assigned auditor listed on Form DR-840 for general information about the audit process.
• Start gathering financial records that you can use during the audit or that were listed on the tax records guide attached to Form DR-840.
• Look into hiring a tax professional to help you during the audit process.

If you want to discuss specific details about the audit with the DOR, you may. But to do so, you must first waive this 60-day notice period by signing Form DR-840 and returning it to the auditor. If you plan on hiring a tax attorney, accountant, tax preparer, or other tax pro, it’s probably best not to waive this notice period until after you consult with them about your situation.

The Florida Sales Tax Audit Process

The sales tax audit process begins with an audit entrance interview. The auditor typically contacts you to set it up, but you can contact the auditor to schedule the interview if you’d like. 

The Audit Entrance Interview 

During this interview, you and/or your representative discuss the next steps in the audit process with the auditor. The auditor will also request documents and ask questions relating to your restaurant’s operations, accounting methods, business structure, and other applicable information. If you want the auditor to discuss your audit with your representative, you will need to complete Form DR-835, Power of Attorney.

The interview is also your chance to ask specific questions about the audit and provide any information you feel is relevant to the audit. Because of the adversarial nature of audits (despite Florida’s claims that the audit process can be an educational experience), you should be careful as to what information you proactively disclose to the auditor without them first asking for it.

A good strategy is to have a tax professional communicate directly with the auditor and have them decide what information or documents to share without being asked. The last thing you want to do is try to explain what you feel is a mistake or omission and have the auditor respond with something like, “Oh, I wasn’t aware of that. Now that you mention it, I’d like to see the following documents…”

Types of Audits

 There are two main types of audits. First, there are desk audits where the auditor asks you for information and documents that you send them for review. Second, there are field audits where the auditor comes to your restaurant or business office to conduct the audit.

In addition to where the audit occurs, another variable is how you produce the requested documents. The auditor or DOR might send you a questionnaire asking you questions to see if they can request documents in electronic form. Note that you must submit documents electronically if you maintain them in electronic form.

The FL DOR prefers to conduct electronic audits (also known as eAuditing) where they receive the requested documentation electronically. This allows the auditor to use a computer to analyze your financial information in a more quick and effective manner. 

Your Rights During a Restaurant Sales Tax Audit

The Florida Department of Revenue has a “Florida Taxpayer’s Bill of Rights” which outlines your rights, including those relating to protecting your assets and privacy. Some of these include the right to:

• Prompt and accurate responses to questions and requests for assistance.
• Ask for help from a taxpayers’ rights advocate.
• Hire a tax professional to represent you in a tax dispute with the DOR.
• Be free from any penalty that’s the result of you relying on written advice from the DOR that was given in response to a question where you provided complete information.
• Receive instructions and explanations that are written in a non-technical way.
• Have your tax information kept confidential.
• Have the DOR complete audits in a reasonable amount of time and place.
• The right to have any adverse findings from the auditor subject to formal or informal review. 

Audit Length 

Florida law requires that the auditor complete the audit within 305 days of sending Form DR-840. You usually don’t need to worry about audits taking longer than necessary because auditors want to complete audits as quickly as possible. As nice as it is to have an auditor who wants to finish things quickly, this desire for expediency could potentially hurt you if it means not having enough time to prepare your responses and gather the necessary documents.

For example, recall from earlier in this article that after the DOR sends you Form DR-840, you have 60 days to prepare for the audit. Many auditors will often try to persuade you to start the audit process sooner. If you have everything you need and are ready to go, there’s nothing wrong with starting before the 60 days is up.

But if you feel like you need more time to get ready, you can politely decline the auditor’s attempts to get you to start the audit process sooner than you have to. If you begin before you’re ready, it could potentially lead to complications during the sales tax audit.

Common Problems During a Restaurant Sales Tax Audit

One of the more common problems found by auditors during a restaurant sales tax audit is when the restaurant doesn’t properly account for the free food given to customers. This causes issues because not all free food is subject to the same sales or use tax treatment.

Refer back to the earlier breadstick example. Restaurants subject to a sales tax sometimes get into trouble for not paying the use tax when giving away free food that was purchased under a sales tax resale exemption.

Another potential audit problem is when the auditor uses sampling or estimating methods to speed up the audit timeline. 

Audit Sampling 

Sales tax audits for restaurants often involve large amounts of financial information. Depending on the time period in question, if an auditor needed to review several months’ worth of sales and purchases, they could be looking at thousands of transactions. So a shortcut they try to use is to look at just a small sample of the transactions in question, then expand on that information to estimate the tax liability.

For instance, let’s say you’re a restaurant next to a golf course and the auditor wants to review your sales tax records for an entire year. However, to avoid looking at 12 months’ worth of records, they only ask to look at a single month. The problem is that the month they choose to review is the month when the golf course holds a major tournament. In fact, it’s your busiest and most profitable month during the entire year.

If the auditor were to use this busy month as a basis to form an estimate of the sales taxes you are expected to collect and send to the DOR for the entire year, the auditor would probably conclude you didn’t collect or remit enough in sales tax to the state. The auditor would then impose penalties on you.

Sampling has its place to save everyone some time and effort (one month’s worth of records are easier for you to find and gather as opposed to a full year’s worth). However, this process can sometimes lead to unfair results.

Additionally, remember that you may be sending these records electronically, and the auditor will likely have software to comb through the data quickly. In this situation, there’s little reason for the auditor to review such a small sample size. Then there’s the fact that the auditor is usually only allowed to use this sampling method if the documents you provide are inadequate (for example, some documents are missing due to a fire loss) or there are too many documents for the auditor to reasonably review.

Finally, auditors should work with you (or your tax representative) to find a reasonable sampling method and time period to review. Using the earlier golf course restaurant example, perhaps it’s possible to reach an agreement with the auditor, so they review both your busiest and slowest months and then average the sales figures. 

Audit Estimates 

An auditor will estimate your restaurant’s sales tax liability if outside information is needed to complete your restaurant’s tax assessment. An auditor can only do this if you refuse to cooperate with the audit process. This means not providing the requested information when asked or not providing it in a timely fashion.

As long as you’re cooperating with the auditor, this shouldn’t be an issue. But if you need additional time and the auditor refuses to provide it, this could be an issue best handled by a tax professional. They will know the best arguments to obtain additional time as well as create a proper paper trail supporting your contention that you’ve cooperated with the auditor as much as reasonably possible. Therefore, the auditor does not have the authority to use the audit estimating method to assess your tax liability. 

What to Do After a Florida Restaurant Tax Audit 

After the audit, the auditor will provide the findings and legal basis for any changes. In some cases, the auditor will tell you these things during an audit conference, which gives you a chance to ask for clarification.

You should also receive a Notice of Intent to Make Audit Changes, Form DR-1215. This document summarizes the auditor’s findings and conclusions. If you disagree with these findings, you have 30 days from the date of this form to notify your auditor and request an audit conference with the auditor and/or the auditor’s supervisor.

30 days after sending you Form DR-1215, the FL DOR will send you a Notice of Proposed Assessment. This will list your tax liability, if you haven’t paid it already, and inform you of your formal and informal protest rights to the auditor’s conclusions.

If you want to file a formal protest, you have 120 days from the date of the Notice of Proposed Assessment to do so. If you want to file an informal protest, you’ll only have 60 days.

If you agree with the auditor’s sales tax assessment, you can pay the amount owed. If you can’t afford to do it with a single payment, you can discuss the possibility of other payment options with the auditor. The FL DOR offers payment plans for qualifying taxpayers.

Sales Tax Best Practices for Florida Restaurants

The best way to deal with sales tax audits is to prevent them from occurring. Here are a few things you can do to prevent a sales tax audit.

First, file and pay your sales taxes online and on time. It’s faster and reduces the chances of something getting lost in the mail. Electronic filing and payment also let you easily confirm that the FL DOR has received the money and/or filing.

Second, file your sales tax return even if no tax is due. Your return will need to indicate that you didn’t have sales activity that resulted in sales or use taxes. If you’re filing by mail and have no deductions or credits, you can telefile by calling 1-800-550-6713 and following the prompts to indicate you have no tax obligation for the given reporting period.

Third, if filing by mail with paper returns, use the correct returns from your coupon book. If you don’t have this book or need another copy, you can call Taxpayer Services at 1-850-488-6800.

Because there’s only so much you can do to avoid a sales tax audit, there are things you can do to prepare for an audit to make it go more smoothly and result in no additional tax owed or a tax assessment you agree with.

The single, most important thing you can do is create and maintain complete and accurate records of all purchases and sales. If some of your sales or purchases are tax-exempt, be sure to have easy access to your sales tax exemption certificates. You’ll also want to have your resale verification and authorization numbers and certificates available as well.

You should keep these records for a minimum of three years. However, given the DOR’s ability to look back further, it helps to keep older records as long as they don’t become too burdensome.

What If You Haven't Been Paying Sales Tax?

Are you worried about an audit because you haven't been paying sales tax? Then, you should look into Florida's voluntary disclosure program. To qualify, you must contact the DOR before they contact you. If you receive an audit notice, it's too late. A tax professional can help you look into the program to figure out if it's right for your situation. Generally, when you make a voluntary disclosure, the state limits penalties on the account, but you will need to find a way to pay the delinquent tax.

Find Help for a Florida Restaurant Sales Tax Audit 

If you’ve gotten this far in the article, you probably can see why and how hiring a tax professional for a sales tax audit will often be a good idea. Another advantage of having a tax pro on your side during the audit is to decide if and when to submit a request to the DOR for a Technical Assistance Advisement (TAA).

You can request a TAA any time during the audit and the goal of a TAA is to ask the FL DOR for clarification for situations where you and the auditor might agree on the facts, but disagree on how to apply the applicable tax law.

For instance, you and the auditor might agree that $10,000 worth of food was sold to a charitable organization. But there could be a disagreement as to whether the food you sold to that organization was subject to a sales tax because the auditor believes the organization didn’t have tax-exempt status recognized by the state of Florida. It is very helpful to have a tax professional not only help you decide if you should request a TAA, but also when to do so during the audit.

To get this assistance, you should find the right local Florida tax professional. TaxCure can help with this by providing a list of local Florida attorneys, enrolled agents, and tax accountants who have experience helping restaurants and other Florida businesses with sales tax audits.