DR-405: Opportunities and Perspectives

Trey Bruce Headshot Across broad and diverse swathes of Florida, within densely and sparsely populated counties, and among vastly disparate personality and work ethic types, many Florida CPAs react with curiously similar levels of annoyance and heartburn to their Form DR-405 engagements. Well, at least this is my unofficial conclusion, based on anecdotal accounts. Frequently, at gatherings and networking events, I’ll seek out feedback from other CPAs concerning their approaches toward, as well as processes performed within, these engagements.  (That I am routinely met with eye-rolls or variations thereof informs me that I have room for improvement in my networking/schmoozing skills.) My curiosity stems from a disconnect that I’ve observed between the nuanced and fact-sensitive nature of judgments required in these filings, on the one hand, and the cursory, overly hurried processes that are apparently applied by many Florida CPAs in these engagements, on the other.

 

Equally curious to me, the narrow class of exceptions to my generalized observation has overwhelming arisen from the ranks of CPAs in the millennial generation. For whatever reasons, of which I will not speculate here (another day, another topic), these young professionals seem to express greater concern for the completeness and accuracy of these returns. That these engagements are often deprioritized and disproportionately relegated to younger CPA associates, incidentally, may present opportunities for them to shine and become “rock stars” of TPP.

 

The list below provides some basic steps and considerations that, based on generalizations I’ve inferred from discussions with peers, I suspect are overlooked by too many Florida CPAs. These considerations do not require extensive knowledge or technical skill sets, and they address some of the most routine circumstances that have been described to me. Beyond these tips, though, it’s essential to acknowledge that the young CPA will often have considerable knowledge of her client, such as unique facts and circumstances related to its property use, including information acquired from other engagements. In addition, she will often either maintain (or at least have access to) the client’s fixed assets subsidiary ledger. If there is one overriding theme, therefore, it is the following:

 

Realistically, if information related to “facts on the ground” on the assessment date, or other relevant dates, is to reliably flow into the assessment roll, the burden is on the CPA to communicate this information. In my experience, county property appraisers are refreshingly thoughtful, practically minded, knowledgeable, and well versed in which areas they may exercise latitude under applicable statutory and regulatory frameworks (and conversely in which areas they lack discretion). Nonetheless, they are not mind readers and cannot be expected to draw inferences or detect assertions intended but not clearly communicated. Resolution of numerous fact-sensitive matters occurs, if at all, between the practitioner and the property appraiser in the first half of the calendar year subsequent to the assessment date, whether by means of the filed DR-405 or otherwise. Needless to say, for most Florida CPAs, involvement in petitions to a county’s value adjustment board does not represent a cornerstone of their practices. Further, the range of controversies ultimately litigated in this area is relatively limited, such that numerous issues may arise, often with substantial taxable value at stake, in which informed and well-reasoned judgments may be required of the CPA. Fluid communication among the young professional, the client, and the property appraiser may prove essential to achieving the client’s objectives for the engagement.

 

Let’s cover some of the most frequent and basic issues:

 

  1. County Reconciliation Matters: At the outset, review the county’s full listing of property relative to the client’s TPP ledger. The pre-printed returns mailed to your client should generally suffice for this purpose. Ideally, no variance will exist, but don’t bank on this. Isolate and document, property-by-property, any variances in a spreadsheet with columns for “per county” and “per client.” Because these differences may represent either over-assessed or under-assessed property value from prior years, you should promptly resolve these issues for the current year’s engagement at a minimum. Conspicuously denote your reconciling items in a supporting schedule or in a separate attachment so that your reasoning and assumptions are clear (e.g., for a 1/1/20X5 assessment date, you may include a note that “Asset was scrapped in 20X2. Please remove from ABC County’s listing.”). Whatever you do, don’t needlessly perpetuate oversights from prior years. Whether previously over or under-taxed, most clients will be understanding of the circumstances and grateful for the correction. And for instances involving previously unlisted property, fears of penalties are often overblown. If you transparently disclose the circumstances related to the property and show good faith, there is a reasonable likelihood that the property appraiser will apply discretion to reduce or waive penalties.

 

  1. Segregation Problems: The absence of meaningful descriptions (think e.g., “20X5 Additions”) or other property characteristics initially entered within, or at least incorporated by reference within, the client’s fixed asset ledger foreseeably creates headaches down the road, such as when a “bulk” asset requires segregation or other detail for regulatory or reporting requirements. In these circumstances, management may need to perform a physical inventory of tangible personal property as near to the assessment date as is feasible. If management groans at this prospect, you should apologize to the extent that your firm contributed to any initial asset-entry deficiencies. However, depending on the circumstances, you may rightfully suggest that any short-term costs required to perform such an inventory are greatly exceeded by the long-term benefits inuring to the client and its asset accountability control objectives. (This activity, if repeated, should generally become less agonizing in future years.) If this approach is employed, ensure that the full scope of the TPP tax base is included in the physical inventory, which may differ significantly from assumptions applied in the client’s financial reporting framework. For instance, in GAAP financial statements, if expenses were recorded in R&M accounts on the basis that they fell below the client’s capitalization policy, you may benefit by documenting all “TPP-book differences,” such as when the expensed TPP is not otherwise subsumed within the DR-405 line item for average cost of supplies that are on hand.

 

  1. Classification: Based on conversations with peers, my gut tells me that myriad returns are saturated with misclassifications. Many underlying causes and effects could be mentioned, for sure, but let’s home in on real property issues. Based on the above “segregation” considerations, substantial real property may lurk on a TPP ledger, perhaps obscured by bulk, non-descriptive assets comprising numerous units of both real and personal property. In this case, the previously referenced corrective responses may prove equally valuable.  For quicker fixes, though, the lower hanging fruit entails instances in which the practitioner has not previously applied her intimate knowledge of certain property’s characteristics, physical and otherwise, unique to her client’s acquisition and use. If she inadvertently included real property in a prior year as a result, she can generally include a short statement to that effect and request its removal in the current year. A good starting point to better understand the county’s perspective is the DOR-promulgated Standard Measures of Value: Tangible Personal Property Appraisal Guidelines, which includes Real and Personal Property Classification Guidelines designed to assist property appraisers. However, because these latter guidelines are not controlling in their determinations, your accumulated knowledge may permit you to overcome any presumptive classifications related to the property. Again, based on your experience with the client, you will generally have greater knowledge concerning the client’s degree or manner of an asset’s affixation to building structures, the approximate cost to remove it, your client’s use of the asset, and so forth.

 

More generally, adopting a problem-solving mindset to other classification issues, which are seemingly boundless and beyond the scope of this posting, can greatly enhance the accuracy of your clients’ returns. (I’ve often requested feedback from other CPAs regarding their approaches to CIRAs that transact limited post-turnover business with nonmembers, particularly when their listings of property with the county historically include significant non-commercial property. Significant diversity in practice appears to exist in these and similar circumstances concerning efforts to ensure that property effectively resembling pooled “household goods” is classified/removed as appropriate.) Practitioners should remain proactive and solution-oriented in addressing classification issues.

 

  1. Property Condition: Your discussions with management may unveil circumstances indicative of potential asset impairment, which for any number of reasons, may not have been recorded by the client under its financial reporting framework. You should communicate the effects on the property’s condition and attach substantiating documentation, if readily available, upon obtaining the client’s consent; even contemporaneous pictures are apparently accepted and reviewed by property appraisers. Such documentation may depict property’s condition more reliably than a mere indication of “poor” on the return. In taking these steps, you may give the property appraiser cause to adjust its depreciation assumptions to more accurately reflect the condition of the property. For example, if the “trended” historical cost (adjusted for inflationary considerations, etc.), termed the “Replacement Cost New,” is subjected to a floor below which it will not generally depreciate, your documentation may provide a basis to lower this threshold.

 

  1. Attitudes and Visceral Reactions: Tax policy views you may have regarding ad valorem taxation in Florida should generally not filter into your work. Your notions of fairness should only influence your work product insofar as they relate to bona fide issues of how the TPP tax applies to your client. Firmly reject any attitude to the contrary.

 

This posting was primarily an appeal to the younger generation because, based on my interactions with peers, these professionals seem especially receptive to this type of message. I sincerely believe a shift in attitudes can be spearheaded by young CPAs that can change perspectives, provide higher levels of TPP services to clients, and more faithfully honor the public trust. I hope you agree.

Trey Bruce, CPA

Mari Huff CPA, PA

 

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