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

Part 1
General Focus and Procedure
Chapter 1
Financial Status
Introduction
Many of us attended financial status training. The analysis suggested in these classes concentrated
on cash as it affected the ultimate earner and end user of that cash. Irregularities discovered
concerning this cash flow may lead to a finding that financial status does not exist. The scope of
the audit would focus in this direction.
Financial Status Analysis
Note: The IRS Restructuring and Reform Act of 1998, Section 3412, prohibits the use of
financial status examination techniques to determine the existence of unreported income unless the
IRS has a reasonable indication that there is a likelihood of unreported income.
The financial status analysis applied to auto dealership examinations, though seemingly more
complex, is in reality the same analysis. Complexities in this analysis arise when multiple related
entities, common in the auto dealership context, are discovered.
If the dealership is owned or controlled by one or a few shareholders, one can classify dealerships
into three categories for purposes of determining financial status. The three categories
determined are:
Type A:
Type B:
Type C:
Schedule C Used Cars
Single/Smaller Dealers of New Cars
Large Multi-Entity Concern.
The analysis presented may be diluted if the dealership has many holders of equity interest, but
should be applied to large holders. A "large holder" is a question of fact. The MSSP Auto
Dealership Study defined a large holder as one holding 50 percent. For example, if a dealership
had five shareholders:
1-1