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

improper inflation through unwarranted "reconstructions" of supposed like kind vehicles. In some
cases, there was no vehicle that previously existed which could be compared to a new vehicle.
Recall the Suzuki Samurai as an example where no vehicle which preceded it could be compared.
Such improper comparisons known as "reconstructions" would produce unwarranted higher
indices, thus a higher unwarranted deferral in the reserve and an unwarranted increased annual
cost of goods sold deduction.
There were other problems. The one concerned a lack of adequate record retention. Some
dealers were not maintaining records, as mandated by the regulations, which would enable the
Service to determine the level of dealership compliance.
An additional problem concerning the computation of option indices was encountered. The Link
Chain Method envisions accounting for each item in ending inventory. Once the items in ending
inventory are determined, each item needs to be priced and inflation assigned to it. LIFO
contemplates two methods of costing or pricing items in ending inventory. One of these pricing
methods would be elected on the dealers Form 970. Pricing entails going back 1 year under the
Latest Acquisitions Method or 2 years under the Earliest Acquisitions Method.
Application of these methods of costing encompasses the following analysis. If there were 300
vehicles in ending inventory for a particular year, those invoices needed to be secured. It is not
uncommon for a midsized dealership to have this volume in ending inventory. Then the invoices
were scheduled and a determination was made they represent the items in ending inventory. Once
this was done, each vehicle was listed showing the current year price and the price for this same
item in the preceding year or years, if it was in existence. Doing this with 300 vehicles was
cumbersome, but workable. Such was not the case concerning options.
Some domestic vehicles listed almost everything as an option. It was not uncommon for the
invoices associated with these domestic vehicles to have 10, or more, options per vehicle. Each
option needed specific pricing for the necessary measuring years, just as the vehicles did. Foreign
vehicles were better, but not much. Invoices utilized for a particular manufacturer at this time
showed about 5 options per vehicle.
The domestic vehicles and associated options for the ending inventory cited above would require
individualized accounting and pricing for approximately 3,300 items for each year of the LIFO
election using the Latest Acquisitions Method. The number of accounting and pricing
requirements would double if the Earliest Acquisitions Method was used. The foreign vehicles
cited above would require pricing for approximately 1,800 items under the Latest Acquisitions
Method and 3,600 under the Earliest Acquisitions Method for each year of the LIFO election.
Some of the cases being worked at this time had 10 years or more of LIFO indices that required
individualized accounting and pricing of each item in those ending inventories.
Statistical sampling was contemplated, but deemed not appropriate for two reasons. First, the
pure Link Chain Method contemplated actual pricing of each item in ending inventory. Second,
the dealers would not allow the Service to perform a statistical sample, although many used one
themselves. They wanted the Service to price every item if their indices were going to be
challenged knowing this was very difficult, if not impractical.
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