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

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10% Holder A 50% Holder B 10% Holder C 10% Holder D 20% Holder E Then, the agent would be required to apply some financial status tools to Holder B, and would have the option of analyzing holders A, C, D, and E. Remember that when dealing with multiple entities, indirect ownership may exist where grouping may be necessary. To illustrate, suppose A, C, D, and E were all owned by separate corporations who were all owned by some sixth party, F, then F would be considered a mandatory financial status focus individual. Of the examinations conducted by the project group in Los Angeles, examiners did not encounter automobile dealerships having a large number of independent stakeholders, but the possibility does exist. Type A Analysis A Cash T performed with the help of Bureau of Labor Statistics (BLS) information can show an apparent initial understatement which may act as a flag that one should more fully develop the income issue. Used car dealers may not have all the controls the new dealers have and tend to use currency quite a bit in their business operations. Accordingly, income is a potential issue. A comparative analysis can yield paradoxical information that signals either an understating of receipts, or an overstatement of expenses OR BOTH. In the scenario on the following pages, Gross Receipts rise rapidly but Gross Profit percentages decline. The two would appear to be inversely related, or negatively correlated. The paradox is that the taxpayer continues to grow when it does not seem in his best financial interests to do so. A used car dealer’s revenues and expenses are usually tightly and positively correlated. With this in mind it is important to look at the Gross Profit Percentage (GP%) as an indicator considering such market fluctuations. 1-2
1. Type A Return Information Schedule C Used <strong>Auto</strong> Sales Gross Receipts $ 5,000,000 Cost of Goods Sold $ 4,900,000 Gross Profit $ 100,000 Expenses: Bad Debts $ 10,000 Car and Truck $ 10,000 Insurance $ 5,000 Interest $ 5,000 Office Exp. $ 15,000 Supplies $ 15,000 Travel $ 5,000 M and E $ 5,000 Utilities $ 5,000 Other $ 20,000 Total Expenses $ 95,000 Net Profit $ 5,000 1-3
Page 1 and 2: Internal Revenue Service Market Seg
Page 3 and 4: Preface One of the goals envisioned
Page 5 and 6: Table of Contents Preface .........
Page 7 and 8: The Reinsurance Transaction .......
Page 9: Part 1 General Focus and Procedure
Page 13 and 14: Percentage has gone down. The incre
Page 15 and 16: the principal shareholders to finan
Page 17 and 18: Rents $ 500,000 Interest $ 50,000 C
Page 19 and 20: Conclusion "Financial status" is on
Page 21 and 22: Chapter 2 Getting Started The key t
Page 23 and 24: entities and their purpose and rela
Page 25 and 26: It is recommended that officer comp
Page 27 and 28: Chapter 3 Standard Audit Index Numb
Page 29 and 30: Chapter 4 Books and Records Charact
Page 31 and 32: c. Reconcile (2): Beginning Trial B
Page 33 and 34: 3 Repair Order Sales 4 Parts Sales
Page 35 and 36: Conclusion Although intimidating at
Page 37 and 38: Chapter 5 Balance Sheet Why do we c
Page 39 and 40: When an adjustment to a balance she
Page 41 and 42: Part 2 Inventory Chapter 6 General
Page 43 and 44: . Purchasing c. Handling, processin
Page 45 and 46: dealerships use specific identifica
Page 47 and 48: Chapter 7 LIFO Background Overview
Page 49 and 50: A Short History of LIFO Application
Page 51 and 52: 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
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The current-year costs that can be
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Assuming the dealership elects LIFO
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matching of revenues and costs. Thu
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section 1.471-9. Both of these regu
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providing to the credit subsidiary
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Under elections made prior to Decem
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Base Year Cost 9112 $224,000 You ha
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BLS Sanity Check A simpler means to
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CYC = Current Year Cost. This is th
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Computation of 1993 Increment and R
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This page intentionally left blank.
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Specific Identification Increment M
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which may be identified by a unique
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Step # 3 For each item category, ad
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Step # 10 Compute the total cost of
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1991 Inventory Value at Current Yea
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Dealers may offer the contracts as
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2. Principal/Obligor A principal is
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Rev. Proc. 97-38 provided for an al
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Contract Construction Generally, a
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Rev. Proc. 97-27 provides the admin
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The Court ruled that when the deale
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Considerations for Forming a Produc
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The Reinsurance Transaction To illu
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insurance contract reinsured throug
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(1979). The Service’s position is
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While not all captive situations in
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3. IRC section 845 tax avoidance 4.
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section, seemingly compliant arrang
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2. By owner A dealer may own dealer
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Rules and Regulations Many rules re
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One of the assets specifically iden
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Where a covenant may be enforced it
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1. Spread income over a number of y
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RELATED FINANCE COMPANY CHECKSHEET
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3. Question the taxpayer directly w
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Technicalities Under the provisions
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Cash 300 Accounts Receivable 300 2.
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The dealer sells the note to a fina
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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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Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

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