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

losing their franchise rights and the manufacturer audits the dealerships frequently. For this
reason, manufacturer’s statements can be utilized to establish confidence in the taxpayer’s books
early and quickly in the examination process. The tax return filed by the dealership should be
similar to the manufacturer’s statements. For example, gross receipts should tie in to the tax
return and any differences scrutinized. Any differences between the manufacturer’s statements
and the tax return that are large or unusual should be questioned. The use of different documents
to verify return items, given this reliable resource, is inefficient and should be avoided where
circumstances warrant.
Regarding the initial interview, our objective is to acquire up-front information about the
dealership’s normal operations and dealings with all other entities, shareholders and customers.
Traditionally, the best way to do this was to require that the shareholder be present at the
interview. However, the dealer may not be "available" during the time frame designated by the
agent to begin the examination. It is not uncommon for a representative to recommend that the
dealer stay visible to discourage compensation related issues, but out of direct access of the agent.
Additionally, and to that end, a liaison will typically exist that will "aid" the examiner in securing
answers and documents.
Regardless of the availability of the principal shareholder, the agent should not delay the start of
these examinations due to the unavailability of any party. The agent can begin the examination
and interview the designated representative. If the agent feels the questioning is not productive,
schedule an interview with the dealer as soon as possible, but continue with the examination. The
designated representative can give the agent sufficient information and documents to begin, and in
many cases get deep into, the examination.
If it becomes apparent the shareholder’s unavailability is not in good faith or the designated
representative is attempting to serve as a courier by responding to every question with, "I will get
that for you," the agent needs to let them know this is not acceptable. Where appropriate, the
agent should take affirmative steps to curtail such activity. The resolution of this matter will be
determined on a case by case basis.
Requests for information work best when a separate Information Document Request (IDR) is
issued for each item requested. This is especially true if many items have been requested. When a
specific request is not timely filled, reissue the original request.
Some representatives wish to test the examiner early on in the audit process to determine not only
the technical aptitude of a particular agent, but also his or her resolve to do the job. The
representative will form his or her strategy in dealing with this agent and the audit accordingly.
The sample initial interview questions are included in the appendix and may prove to be of benefit
for some agents.
The most crucial source of information the agent could garner at the onset of the examination
regarding financial status concerns related entities. The financial status analysis, as previously
discussed, cannot be made without full knowledge of all related entities. This point cannot be
stressed enough. The agents’ IDR should ask the dealership to list all related entities. The IDR
should go one step further and ask the dealership to prepare a flow chart laying out all related
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