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

Part 2
Inventory
Chapter 6
General – Non LIFO
Automobile dealerships have a great deal of discretion in what accounting methods they will
employ for various classes of their inventoried items. Whatever method the taxpayer chooses, it
must clearly reflect income. If there exists confidence in the taxpayer’s books and records, the
verification of Cost of Sales can be modified. The scope of the inquiry can be narrowed allowing
the agent to dedicate audit resources to specific examination techniques:
1. Make sure everything that should be inventoried is included in an inventory account.
2. Verify that an allowable method is being used.
3. Scrutinize any adjustments made to inventory accounts.
Auto dealerships typically maintain distinct inventories and tend to account for them differently.
Among the types of inventoried items are:
1. New vehicles
2. Used vehicles
3. Parts and Accessories
The methods used for valuing and accounting for these classes of items do differ from dealership
to dealership but are generally directed by the size of the firm. By revisiting our classification
types from financial status, we can look at inventory issues as falling into one of three categories:
Type A – Schedule C Used Cars
The smaller "lots" usually do not wish to invest the time, energy, and financial resources into a
complex inventory system. They tend to use Lower of Cost or Market (LCM) to value vehicles
and do not maintain any other inventories. At yearend, a valuation guide may be used to value the
automobiles on an individual basis using 100 percent of the average wholesale valuation quote.
The dealership then determines a write down or may compute an ending inventory adjustment for
the year. (See RR 67-107 and Treas. Reg. section 1.471.4)
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