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

Other Considerations
Discussion of other areas of pertinence regarding Alternative LIFO are summarized as follows:
1. Audit Protection
If an automobile dealer timely files a Form 3115, Application for Change in Accounting
Method, under the procedures provided in this revenue procedure and effects the change to
the Alternative LIFO Method in accordance with all of the requirements and conditions of this
revenue procedure, an examining agent may not propose that the automobile dealer change
the same method of accounting for a year prior to a year of change required under this
revenue procedure.
2. Conformity
Automobile dealers who elect the LIFO method of inventory valuation are required to meet
certain conformity requirements. See Chapter 8 for in-depth discussion. Financial statements
and reports issued by the automobile dealer must be issued on a LIFO basis. Alternative
LIFO does not provide audit protection for conformity violations.
3. Item Category Without Consideration of Model Year
New models are generally introduced in the fall of each year. An automobile dealer may have
2 model years of a single vehicle with the same model code. The revenue procedure does not
distinguish an item category by model year. Therefore, if an automobile dealer’s inventory
contains 2 model years of a single vehicle they will be included in one item category to arrive
at an average cost for this item category.
4. IPI Computation Method Changes
An automobile dealer that uses the IPI computation method must also change from the IPI
computation method to another acceptable method for its goods other than new automobiles
and new light duty trucks. For parts and accessories, the automobile dealer must change to
the dollar value, index method. For used vehicles, the automobile dealer must change to the
dollar value, link chain method.
5. Restating the Base Year
Section 9.02(8) of Rev. Proc. 92-79 and section 5.03(8) of Rev. Proc. 97-36 require that the
year of change become the new base year and that the cumulative index at the beginning of the
year of change must be restated to 1.0000. Prior years’ layer valuation indices are converted
to less than 1.0000, assuming a period of rising prices.
The mechanics of restating the base year are illustrated in the following example. In this
example, 1992, is the year of change.
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