Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

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of a deduction (Treas. Reg. section 1.446-1(e)(2)(ii) and Rev. Proc. 91-31, 1991-1 C.B. 566). Rev. Proc. 97-27 provides a definition of "method of accounting." It states: "* * * the relevant question is generally whether the practice permanently changes the amount of taxable income * * *." Consistent treatment is established by using an improper method for 2 or more tax years (Rev. Proc. 97-27 and Rev. Rul. 90-38, 1990-1 C.B. 57) and a proper method for 1 year (Treas. Reg. section 1.446-1(e)(1)). Under the method of accounting employed by most dealerships, only a "net" amount of the retail sale price of a mechanical breakdown contract is reported in the taxable year of the sale of the contract. This "net" represents the amount by which the sales price exceeds the insurance and administrative expenses. This method results in the exclusion from income, or early deduction of, expense items that properly should either be amortized over the life of the mechanical breakdown contract, or be deducted as economic performance occurs. Requiring the dealer to change from expensing insurance premiums to amortizing them is a change in accounting method. This change affects the timing of the deduction of a material item. A new dealership filing its first return has not established an accounting method where it erroneously deducted in 1 year the entire premium for a multi-year period. Under IRC section 481(a), when computing taxable income for any taxable year, "* * * (1) if such computation is under a method of accounting different from the method under which the taxpayer’s taxable income for the preceding year was computed then (2) there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted * * *." Treas. Reg. section 1.481-1(a)(1), provides that a change in method of accounting to which IRC section 481 applies includes a change in the over-all method of accounting for gross income or deductions, or a change in the treatment of a material item. IRC section 481(b) provides for a limitation on tax where the change in method of accounting is substantial. This section allows for a computation of tax over 3 years if the method of accounting changed was used in 2 preceding tax years and the increase to taxable income for the year of change exceeds $3,000. When adjustments are made under IRC section 481(a), the statute of limitations is not an issue. IRC section 481 provides that taxable income for the year of change must be computed by taking into account all adjustments necessary to prevent items from being duplicated or omitted. This includes amounts that would otherwise be barred by the statute of limitations. Graff Chevrolet Company v. Ellis Campbell, Jr., 343 F.2d 568 (5th Cir. 1965). A second adjustment under IRC section 446(b) accounts for the difference in taxable income determined under the new method of accounting for the year of change as compared to the old method. 11-7
Rev. Proc. 97-27 provides the administrative procedures applicable to changes in methods of accounting. It applies a gradation of incentives to encourage voluntary compliance with proper tax accounting principles, and to discourage taxpayers from delaying the filing of applications for permission to change an improper accounting method. 11-8
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Internal Revenue Service Market Seg
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Preface One of the goals envisioned
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Table of Contents Preface .........
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The Reinsurance Transaction .......
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Part 1 General Focus and Procedure
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1. Type A Return Information Schedu
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Percentage has gone down. The incre
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the principal shareholders to finan
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Rents $ 500,000 Interest $ 50,000 C
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Conclusion "Financial status" is on
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Chapter 2 Getting Started The key t
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entities and their purpose and rela
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It is recommended that officer comp
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Chapter 3 Standard Audit Index Numb
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Chapter 4 Books and Records Charact
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c. Reconcile (2): Beginning Trial B
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3 Repair Order Sales 4 Parts Sales
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Conclusion Although intimidating at
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Chapter 5 Balance Sheet Why do we c
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When an adjustment to a balance she
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Part 2 Inventory Chapter 6 General
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. Purchasing c. Handling, processin
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dealerships use specific identifica
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Chapter 7 LIFO Background Overview
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A Short History of LIFO Application
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improper inflation through unwarran
Page 53 and 54: Introduction Chapter 8 Computing LI
Page 55 and 56: The double extension index formula
Page 57 and 58: as one item, there would probably n
Page 59 and 60: (existing items) and non-comparable
Page 61 and 62: The current-year costs that can be
Page 63 and 64: Assuming the dealership elects LIFO
Page 65 and 66: matching of revenues and costs. Thu
Page 67 and 68: section 1.471-9. Both of these regu
Page 69 and 70: providing to the credit subsidiary
Page 71 and 72: Under elections made prior to Decem
Page 73 and 74: Base Year Cost 9112 $224,000 You ha
Page 75 and 76: BLS Sanity Check A simpler means to
Page 77 and 78: CYC = Current Year Cost. This is th
Page 79 and 80: Computation of 1993 Increment and R
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Page 83 and 84: Specific Identification Increment M
Page 85 and 86: which may be identified by a unique
Page 87 and 88: Step # 3 For each item category, ad
Page 89 and 90: Step # 10 Compute the total cost of
Page 91 and 92: 1991 Inventory Value at Current Yea
Page 95 and 96: Dealers may offer the contracts as
Page 99 and 100: 2. Principal/Obligor A principal is
Page 101 and 102: Rev. Proc. 97-38 provided for an al
Page 103: Contract Construction Generally, a
Page 107 and 108: The Court ruled that when the deale
Page 109 and 110: Considerations for Forming a Produc
Page 111 and 112: The Reinsurance Transaction To illu
Page 113 and 114: insurance contract reinsured throug
Page 115 and 116: (1979). The Service’s position is
Page 117 and 118: While not all captive situations in
Page 119 and 120: 3. IRC section 845 tax avoidance 4.
Page 121 and 122: section, seemingly compliant arrang
Page 123 and 124: 2. By owner A dealer may own dealer
Page 125 and 126: Rules and Regulations Many rules re
Page 129 and 130: One of the assets specifically iden
Page 131 and 132: Where a covenant may be enforced it
Page 135 and 136: 1. Spread income over a number of y
Page 137 and 138: RELATED FINANCE COMPANY CHECKSHEET
Page 141 and 142: 3. Question the taxpayer directly w
Page 145 and 146: Technicalities Under the provisions
Page 149 and 150: Cash 300 Accounts Receivable 300 2.
Page 151 and 152: The dealer sells the note to a fina
Page 153 and 154: For purposes of this rule, an "empl
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10) relationship of stockholder-off
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purely for services. See Treas. Reg
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Howard Sole, Inc. v. Commissioner,
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Milford Motor Co. v. United States,
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new pool for additional, subsequent
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6. The finance company is entitled
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when the back-end distributions are
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The transfer of the installment con
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Report as a Loan or an Assignment
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Reported as a Sale… (How it Shoul
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Other Sources of Information IRC se
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Part 4 Appendices Appendix A Initia
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2) Adjusting Journal Entries 3) Tax
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k. Do you receive rebates from anyo
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f. Employee Benefits 1) Form 5500?
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Appendix B Balance Sheet Section -
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. Dealership financing If the deale
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f. Dealer Reserve Holdbacks 3. Inve
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Once the existence of a shareholder
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Despite the fact the computation ma
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corporate minutes if material. d. L
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Appendix C Definition of an Item Co
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two cars of the same model can vary
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Appendix D An Analysis of the Wrigh
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(D) also moved (DLRS) income to be
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The court did not allow (D)’s cla
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Appendix E Glossary The following t
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FIFO: An inventory cost flow assump
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PLATFORM: A vehicle platform is the
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