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

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If you interview the accountant or preparer, he/she may not be aware that the dealer is transferring any finance contracts since the audit plan may not include reviewing vehicle jackets or supporting documentation. It is imperative that the dealer is directly asked. 2. Records Ask the dealer to provide the vehicle jackets. These jackets are usually an envelope (or sometimes a file folder) for each vehicle, which includes all of the dealer’s documentation related to that vehicle such as the sales invoice, purchase invoice, copy of the title, and repair receipts. The outside of the jacket also lists detailed information about the vehicle’s purchase and sale, including the dates, amounts, and individuals or companies involved. These jackets also may contain the dealer’s records pertaining to the transfer of the installment contract to the finance company. Look through the jacket for a retail installment agreement specifying how the customer will pay for the vehicle. Sometimes the retail installment agreement specifically states that it will be transferred to a finance company. In addition, the dealer usually receives a payment voucher from the finance company that shows the customer’s name and amount received, and these vouchers may be in the vehicle jacket. The dealer also prepares other paperwork as required by the finance company, copies of which have been kept and retained in the jacket or a separate finance file. This includes the non-prime or sub-prime customer’s verification of employment and utility bills to show the home address, the computation of the advance to be received from the finance company, the insurance information form, and the notice of security interest. If it is determined that the dealer transferred finance contracts to an unrelated finance company, additional information will need to be requested for each company: a. Servicing Agreement – The Servicing Agreement defines the responsibilities of the dealer and the finance company. It provides definitions, explains the advances and how the collections will be applied, and shows how the agreement can be terminated. In addition, if the finance company changes the advance computation or other provisions of the agreement, an addendum or other notification of the changes may be provided to the dealer by the finance company. b. Dealer Manual and Other Literature – The dealer Manual may contain various items of information, including a sample of customer paperwork with detailed advance computations. The finance company may also send the dealer literature on new programs or new features such as pool capping. c. Monthly Statements – The finance company sends monthly statements to the dealer summarizing advances, collections, fees, and other pertinent information. The summary may also show detail by customer of the last payment date, amount of payment, and if the account was written off as a bad debt. Example of Accounting Entries 19-21
The transfer of the installment contract to the finance company may or may not be recorded in the dealer’s books. You should not rely on the presence or absence of accounting entries to determine if the transactions have been reported properly. The following provides representative examples of how you may find the transactions to be reported and how they should be reported: FACTS: Sales Price $5,000 Sale Price by Dealer to Purchaser Cash (Down Payment) $1,000 Down Payment from Purchaser to Dealer Accounts Receivable $4,000 Installment Contract Recorded on Dealer’s Books Cash (advance) $2,000 Advance to Dealer from Finance Company Cost of Goods $2,500 Dealer’s Cost of Vehicle Sold Monthly Payments $250 Monthly Payment per Contract Interest Rate 10% Rate of Interest Charged to Purchaser and by Finance Company to Dealer FMV of BE Distribution $450 Potential Max Back-End Distribution of $1200, Actual Distribution of $600 (recharacterized under IRC section 483 as Interest in part) Section 483 Interest $150 Estimated IRC section 600 Interest on FMV of BE Distribution 19-22
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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
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Introduction Chapter 8 Computing LI
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The double extension index formula
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as one item, there would probably n
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(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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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
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
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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
Page 155 and 156: 10) relationship of stockholder-off
Page 157 and 158: purely for services. See Treas. Reg
Page 159 and 160: Howard Sole, Inc. v. Commissioner,
Page 161 and 162: Milford Motor Co. v. United States,
Page 163 and 164: new pool for additional, subsequent
Page 165 and 166: 6. The finance company is entitled
Page 167: when the back-end distributions are
Page 171 and 172: Report as a Loan or an Assignment
Page 173 and 174: Reported as a Sale… (How it Shoul
Page 175 and 176: Other Sources of Information IRC se
Page 177 and 178: Part 4 Appendices Appendix A Initia
Page 179 and 180: 2) Adjusting Journal Entries 3) Tax
Page 181 and 182: k. Do you receive rebates from anyo
Page 183 and 184: f. Employee Benefits 1) Form 5500?
Page 185 and 186: Appendix B Balance Sheet Section -
Page 187 and 188: . Dealership financing If the deale
Page 189 and 190: f. Dealer Reserve Holdbacks 3. Inve
Page 191 and 192: Once the existence of a shareholder
Page 193 and 194: Despite the fact the computation ma
Page 195 and 196: corporate minutes if material. d. L
Page 197 and 198: Appendix C Definition of an Item Co
Page 199 and 200: two cars of the same model can vary
Page 201 and 202: Appendix D An Analysis of the Wrigh
Page 203 and 204: (D) also moved (DLRS) income to be
Page 205 and 206: The court did not allow (D)’s cla
Page 207 and 208: Appendix E Glossary The following t
Page 209 and 210: FIFO: An inventory cost flow assump
Page 211: PLATFORM: A vehicle platform is the
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Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

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