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

entities and their purpose and relationship to the principal shareholder.
Often the dealership will respond to this request as asked. Sometimes the dealership will make
this particular information gathering difficult. The agent must be persistent and repeatedly ask for
this information if they are not satisfied full disclosure has been made. Often the reconciliation
will reveal related entities to the agent through intercompany loans or transfers.
Relative to related entities, an agent should consider reviewing our IRS internal documentation in
the context of related return analysis. Initially, prior and subsequent return information should be
secured to determine if the taxpayer is:
1. Reporting losses every year,
2. Conforming to the market place (high profit in a recognized good year).
Review the taxpayer’s Forms 941 to see at what level dealership activity responded to the general
peaks and surges of the industry.
In addition, check filing documentations on the dealer, a process crucial to the beginning of future
pertinent questions. A search of IRS files for other businesses using a similar name or address of
the taxpayer may also reveal related entities.
Concurrent with the request for information regarding related entities, the agent should request
photocopies of all related returns for all years of relevance. If a related return cannot be provided
for a valid reason, e.g., nonmaterial participation in a limited partnership with a low percentage of
ownership, receipt of a Form K-1 may be appropriate. The key is to obtain verifiable information
regarding the shareholder’s equity interests in these related entities.
When the agent has this information in hand, a determination of whether there is financial status
can be made.
Dealerships currently may avail themselves of specific revenue procedures. Rev. Proc. 97-36
relates to the election to use the Alternative LIFO Method. Rev. Procs. 92-97 and 97-38 relate to
the amortization of related expense and deferral of mechanical breakdown service income. The
agent should determine if such elections have been made and request a photocopy of the
Form(s) 3115, Application for a Change in Accounting Method, or other statement or form used
to make the election. The inner working of these Revenue procedures and their application to a
particular dealership may take on significance as the examination proceeds. The effect of these
Revenue procedures is addressed later in this Guide.
The agent’s familiarity with Package Audit requirements and audit standards relative to these
requirements would make a detailed discussion redundant. We, therefore, would like to stress
certain points pertinent to auto dealerships.
When sending out the initial IDR, the agent should request information sufficient to complete the
Package Audit phase of the examination during the first few days at the audit site. As previously
2-3