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

The dealer sells the note to a finance company who agrees to pay the dealer a 20 percent
commission on the finance charge, or $180.
The correct way for the dealer to handle the transaction is as follows:
Debit Credit
Cash 9,000
Finance Charge Receivable 180
Customers’ account receivable 9,000
Finance Income 180
See current IRM.
2. Audit Techniques--Finance Income
a. Determine the presence of a "deferred income" account.
b. Inspect the monthly statements submitted to the dealer by the finance company(ies).
c. Probe into the possible existence of related corporations set up to handle the installment
notes. See also the chapter on Related Finance Companies in this Guide.
d. Sample selected transactions to verify that the accrual method was being used by the
taxpayer.
3. Law
In Commissioner v. Hansen, 360 U.S. 446 (1959), the Supreme Court held that the amount
held back or retained by the finance company is taxable to the dealership at the time the
installment note is sold and the dealership has a fixed right to the reserve account.
Dealers must include in income all amounts placed in the reserve all deposits into the account
regardless of use. See Resale Mobile Homes, Inc. v. Commissioner, 965 F.2d 818 (10th Cir.
1992).
Compensation Issues
In addition to the normal employment tax requirements applicable to auto dealerships, there have
traditionally been issues involving Form 941 and Form 940 that are unique to the auto industry.
Fringe Benefits
Determine whether the dealership permits its employees, shareholders, or directors to use its
automobiles or purchase them at a discount. If such a practice exists, the benefit is presumed to
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