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

A solution to this unseemly situation was developed. Working these cases, it was found that
options involved "about 10 percent of the dollar value and 90 percent of the work." It was found
that by determining the index on vehicles in ending inventory and applying this index to the dollar
value of the options, in ending inventory, the differences between the actual option calculation and
this simplified method was de minimis. If allowed to proceed with this method, 90 percent of the
work could be eliminated and an accurate LIFO index could be computed. This simplified
method proved to be quite effective where adequate records were maintained and workable where
there were few or no records.
The methodology this solution offered formed the basis of Rev. Proc. 97-36 which was a response
to the industry’s and the Service’s recognition there was a need to apply some practicality to
computing LIFO indices.
Rev. Proc. 97-36 allows the auto dealer to compute indices by using the simplified method
described above. The computations were to be arrived at using base to base pricing, comparing
vehicles to vehicles, and applying the resulting index to the dollar value of the full inventory.
There is no requirement to provide a separate accounting and pricing for options. More on Rev.
Proc. 97-36 later in this section.
The agent who is considering addressing auto dealership LIFO computations for dealers who have
not elected Rev. Proc. 97-36, must be cognizant of the "Definition of an Item" coordinated issue
which requires inflation analysis for specific components of manufacturers option packages. A
copy of this coordinated issue is included in the Appendix of this ATG.
Some dealerships may have filed a Form 3115 under Rev. Proc. 97-27 to take advantage of the
cut-off provisions and to change their computation method. Others may prefer to wait until they
are examined and file a Form 3115 in the first 90 days of the examination.
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