What is a Tax Clearance Letter & what is the Purpose?

Why Should a Buyer Obtain a Clearance Letter?

When preparing to purchase a business, a buyer will conduct various due diligence such as analyzing financial statements, inspecting real property, and calculating future projections. However, one important aspect may be overlooked: unpaid taxes. Specifically, a potential buyer should obtain a businesses’ tax clearance letter. If a buyer fails to conduct its due diligence on the tax side of the business, he or she could be on the hook for any taxes owed by the seller. This may include sales & use tax, reemployment tax, and tangible property tax.

What is a Clearance Letter?

To protect business purchasers from being held accountable for a seller’s unpaid taxes, the Florida Department of Revenue allows buyers to request two types of documents to verify the standing of the business. The first document, a Tax Clearance Letter, is used when a business is applying for grants or loans. This letter gives the status of a particular account of the company but does not state if the account is subject to any future audits. Therefore, for individuals interested in buying a business he or she will want to request the second type of document, a Certificate of Compliance. Like a Tax Clearance Letter, a Certificate of Compliance gives the current standing of the business such as whether there are any outstanding tax liabilities. However, the Certificate of Compliance will also confirm that the Department of Revenue has no plans to conduct future audits of the business.

Who can Apply for Tax Clearance Certificates?

To receive a copy of the certificate, the requester must be associated with the company as either a corporate officer or a registered agent. If the requester does not fall into either of these categories, then he or she must submit a Power of Attorney with the Department of Revenue.

How do I get a Tax Clearance Letter in Florida?

To obtain either a Tax Clearance Letter or a Certificate of Compliance, an individual can submit an online request with the Florida Department of Revenue on their website under heading “information for business and employers.” The requester must input the name of the business, address of the business, phone number, email address, and a copy of the requester’s license or other photo identification. Once the information is submitted, the Department of Revenue will typically release the clearance letter within seven to ten days.

Investigating a business’ tax history ensures that you are conducting all your due diligence and allows you to protect yourself before a purchase of a business. If the Department of Revenue discloses a delinquency in the business’ taxes, a purchaser can withhold the amount of the delinquency when negotiating the purchase price.

EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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