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

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5. Similarities and Differences The books and records are different from dealership to dealership, but given the control imposed by the factory manual, any dissimilarities are made to conform to the same final form. As such, it is important to determine those characteristics which account for differences between dealership entities as tax consequences may relate to the different methods. 6. Traditional Books An automobile dealership has all the traditional books with significant detail as well as a large set of subsidiary ledgers. a. General Ledger b. Journals – The traditional books 1) Sales 2) Purchases 3) Cash Disbursements Journal 4) Cash Receipts Journal 5) Payroll Journal Sources: <strong>Auto</strong> dealerships journalize these five traditional books into many sub-journals using source codes to identify a particular transaction and the particular source book it is journalized to. These sub-journals, which include the traditional books, may number as many as 15. c. Subsidiary Ledgers 7. Starting the examination The audit should start and proceed from the accountant's (preparer's) work papers and the general ledger in order to determine focus and familiarize the agent with the specifics of the books. A recommended process is: a. Reconcile (1): General Ledger to working papers. b. Group: Use accountant's papers to group accounts into return items. 4-2
c. Reconcile (2): Beginning Trial Balance and Adjusting Journal Entries to the tax return. d. Reconcile (3): Beginning Trial Balance to General Ledger. 8. Structure of the General Ledger The General Ledger (GL) is prepared monthly and is cumulative, summarizing entries made to each account by the journals. Being computerized, source codes are used to post summaries of monthly journal entries to the General Ledger accounts. Without a key of the source codes, one does not know from where an amount originated. Journal Voucher Entries The Journal Voucher book contains items which alter the General Ledger to correct errors, account for standard recurring items and to make tax adjustments. 1. Standard Entries Items such as Amortization and Prepaid expenses which are periodically being adjusted are done through Journal Voucher entries. 2. Errors The correction of errors which posted to the General Ledger, the Journals, or the subsidiary ledgers are also done through the Journal Voucher. 3. 13th Month Entries At the end of the taxable year, and prior to the preparation of the Trial Balance, several entries are made which constitute corrections to previously recorded errors and adjustments in yearend account balances for federal tax purposes. These 13th month entries generally address accruals, writedowns, the LIFO reserve and elimination of book reserves to name a few. These entries are prevalent in the auto industry and are usually identifiable by a unique source code in the General Ledger. Sub-Journals Although dealerships do vary from one another on the complete structure of books and records, they usually vary along similar lines. 1. Schedules In addition to the typical books and records, auto dealers also maintain a number of various subsidiary ledgers that may assist in the examination. Examples of such subsidiaries include: 4-3
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 and 10: Part 1 General Focus and Procedure
Page 11 and 12: 1. Type A Return Information Schedu
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: Chapter 4 Books and Records Charact
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
Page 61 and 62: The current-year costs that can be
Page 63 and 64: Assuming the dealership elects LIFO
Page 65 and 66: matching of revenues and costs. Thu
Page 67 and 68: section 1.471-9. Both of these regu
Page 69 and 70: providing to the credit subsidiary
Page 71 and 72: Under elections made prior to Decem
Page 73 and 74: Base Year Cost 9112 $224,000 You ha
Page 75 and 76: BLS Sanity Check A simpler means to
Page 77 and 78: CYC = Current Year Cost. This is th
Page 79 and 80: 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
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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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