Taxpayer reliance on prior audit results - analysis  
Taxpayers frequently offer as proof of the invalidity of a proposed assessment the fact that similar transactions went untaxed in one or more prior audits. The argument effectively suggests that the state is estopped to take a position in the current audit inconsistent with that in the prior audit and it is generally unavailing. Typical of decisions which spell out the requirements for an estoppel is Anderson v. State Dept. Of Revenue, 380 So.2d 1083 (Fla. 3d DCA 1980), corrected 403 So.2d 397, on remand 405 So.2d 242.

In that case the Florida Supreme Court took note of the general rule that “equitable estoppel will be applied against the state only in rare instances and under exceptional circumstances.” It recited a second general rule to the effect that “the state cannot be estopped through mistaken statements of the law.” In order to establish an estoppel, the taxpayer must show “1) a representation as to a material fact that is contrary to a later-asserted position; 2) reliance on that representation; and 3) a change in position detrimental to the party claiming estoppel, caused by the representation and reliance thereon. An auditor’s failure to insist on tax on a given transaction or transactions subsequently deemed taxable would thus ordinarily be treated as a mistake in the application of the law by an agency employee and would not estop the state from asserting the taxability of such transactions in subsequent audits. Note that the stated requirement for a material misrepresentation of fact is problematical in this context--the problem is not typically any misstatement of fact by the auditor, but a claimed misapplication of some tax statute or regulation.

During the 2000 Regular Session, the Florida Legislature extended estoppel-like protections to taxpayers with respect to prior audit determinations where the favorable determination is reflected in the audit workpapers. HB 2433 (Ch. 2000-355, Laws of Florida) adds additional circumstances under which “doubt as to liability” exists. Doubt as to liability is the statutory prerequisite to a compromise of taxes and interest pursuant to Fla. Stat. s. 213.21(3). The new law specifies that doubt as to liability exists “if the taxpayer demonstrates that he or she reasonably relied on a written determination of the department” in specified circumstances. The first situation in which the taxpayer may claim such reliance is as follows: “the audit workpapers clearly show that the same issue was considered in a prior audit of the taxpayer conducted by or on behalf of the department and,after consideration of the issue, the department’s auditor determined that no assessment was appropriate in regard to that issue.” A second reliance scenario obtains when “the same issue was raised in a prior audit of the taxpayer and during the informal protest of the proposed assessment the department issued a notice of decision withdrawing the issue from the assessment.” The specified circumstances are not intended to be an exhaustive list of reliance fact-patterns. The new provisions are applicable to audits noticed on or after October 1, 2000.

The taxpayer’s claimed reliance is negated by any misrepresentation or non-disclosure of material facts. A material change in facts and circumstances will also preclude a reliance claim as will a change in the statutes or regulations underlying the prior determination. Further, the reliance claim will be defeated if the prior Department determination has been “overruled” in a “published judicial opinion constituting precedent in the taxpayer’s jurisdiction.” Finally, a taxpayer may not rely on the prior determination if the Department has informed the taxpayer in writing that such prior determination has been revised and may no longer be relied on.

Florida Statutes s. 213,21(3)(b) invites a few observations and poses some new questions. First, the legislation still casts a compromise of taxes and interest in permissive terms. That is, even if a taxpayer shows that it has reasonably relied on a prior written audit determination so that doubt as to liability exists, the Department may attempt to deny any relief or may offer some partial relief. The Department maintains that whether to compromise, and if so to what extent, is entirely within its discretion. Unhappily, the Department has no published standards or criteria for deciding, once doubt as to liability is found, whether to compromise the entire amount at issue, half of the subject amount, ten percent of it, or some other amount. Since taxes are to be collected only when they are clearly and definitively imposed by the Legislature, a finding of doubt as to liability should result in the elimination of the subject portion of the proposed assessment. A full compromise is especially important when the taxes at issue are sales taxes which the taxpayer under audit would have collected from its customers but for its reliance on the Department’s prior audit determination.

Secondly, the new law requires that the “audit workpapers” show that the issue was previously considered. The term “audit workpapers” is not defined by statute. Is correspondence from a taxpayer to the auditor (or to another Department official) concerning the audit part of the audit workpapers? If so, taxpayers will find themselves facing a dilemma at times--whether to reveal an issue hoping for a favorable result so that reliance on that determination can be claimed in subsequent audits. If a set of transactions simply goes untaxed, for example, without any written evidence that the issue presented by the transactions has been considered by the Department, the reliance provisions of this statute would not be available. What of notes made by the auditor to himself, notes of telephone conversations with Department attorneys, or other “internal” documents not presented to the taxpayer? For that matter, how will a taxpayer know what issues the audit workpapers reflect consideration of unless the taxpayer is given a copy of all documents comprising the audit workpapers?

Thirdly, the workpapers must “clearly” show that the “same issue” was “considered” and that after such consideration, the auditor “determined” that no assessment was appropriate. How clearly the workpapers show anything will in large measure be a function of the auditor’s diligence in documenting the transactions she reviews and the “issues” which she sees in them. If an auditor specifically reviews a set of transactions for Chapter 212 sales and use tax purposes but does not record which specific provisions the transactions have been considered under, it may be impossible to say what issue or issues have been considered. And while the requirement for the “same issue” is certainly understandable, it will surely give rise to arguments under this statute. Even testing a specific transaction against a single statutory levy may entail the consideration of multiple “issues;” if having done so the auditor fails to assess that transaction, have all of the “issues” which might be raised under that one statutory provision been “considered” and “determined?” For these statutory reliance rights to be meaningful to taxpayers, auditors must do a thorough job of documenting every issue which they have considered in the course of the audit and share with the taxpayer everything in writing which reflects the issues considered and the determinations made.

Next, the same “taxpayer” must be involved. It is not clear whether a successor business which inherits tax exposures under transferee liability provisions would be deemed “the taxpayer” which received the prior audit determination. Nor is it clear whether the Department would allow one subsidiary on a consolidated Florida income tax return previously audited to rely on an audit determination with respect to an identical issue pertaining to another subsidiary which was included in that return. It should do so since the affected liability is that of the group, i.e., consolidated taxable income apportioned to Florida, but the statutory provisions refer both to the individual corporations and to the affiliated group as the “taxpayer.”

Finally, the bill includes a provision intended to preserve the State’s “ability to construct a remedy to cure a judicially determined constitutional defect in a tax law.” This last regrettable provision is plainly included for the purpose of allowing the Department to collect an unconstitutionally assessed tax by structuring some alternative “remedy” such as the assessment of taxpayers that benefitted from a discriminatory exemption.

As noted, the most difficult feature of this legislation is that of context--the described reliance scenarios are part of a statutory scheme authorizing the Department to exercise discretion in compromising taxes, interest and penalties. The tenor of the bill suggests that the Legislature envisioned the creation of new rights on the part of taxpayers--taxpayers have a right to see tax laws administered consistently through time and to rely on no-tax determinations made in prior audits. The new law is intended to bring a greater balance and sense of fair play to the relationship between taxpayers and the Florida Department of Revenue. Properly administered, it should do just that.

Posted: 2000-08-08 00:00:00.0

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