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Automotive Dealerships - IRS Audit Guide Part 1

IRS Audit Guide Table of Contents 

General Focus 

  • Pre-planning:
    • Review of tax return
    • Comparative income and deductions
    • Comparative balance sheet
    • Review of dealer website
     
  • Good Internal Controls
  • Sales properly booked – factory controls
  • Once booked, incorrect treatment…
    • shifting income to related entities
     

Getting Started on the Audit… 

  • Items always requested –
    • Unadjusted Trial Balance
    • Adjusting Journal Entries
    • Reconciliation to Tax Return
    • Tax Classification Workpapers
    • Manufacturer’s Statement
     

Lessons Here? 

Balance Sheet 

  • What is the agent looking for –
    • Material fluctuations – 3 year analysis
    • Tax classifications – proper recording of related party balances
    • Differences between book & tax (M-1 & M-2)
     
  • Cash Issues–
    1. IRS Form 8300 filed as required?
    2. All income reported?
     
  • Audit Techniques–
    1. Trace outstanding checks to determine payment of a liability
    2. Accounting for & questioning all material related company transfers
    3. Review AJE’s, standard entries & Journal Vouchers
     
  • Receivable Issues–
    1. Unreported sales
    2. Proper year of inclusion
    3. Related Party transactions arm’s length?
    4. Dealership financing of transactions – note terms reasonable?
     
  • Audit Techniques–
    1. Test sales in opening days of subsequent year
    2. Confirm tested sales against deal jackets and general ledger
    3. Scrutinize note transfers for related party or unrecorded transactions
     
  • Loans to/from Shareholders–
    1. Arms length transactions (length, rate, etc)?
    2. Properly documented?
    3. Interest deducted only when paid?
    4. Demand loans > $10,000 properly accounted for?
     
  • Property & Equipment–
    1. Fair Market Value Rent – constructive dividend
    2. Large, unusual or questionable items
    3. Personal items
    4. Image Payments – conclusion: taxable
     
  • Payables and Accrued Expenses–
    1. Liability exists
    2. Liability reasonably determinable?
    3. Has economic performance occurred?
    4. Is the expense ordinary & necessary?
    5. Is the expense directly related to the business?
     
  • Capital Stock–
    1. transfers between family members properly handled (i.e. gift tax returns filed when required)?
    2. Flow through entities compared to individual returns and passive/active treatment proper?
     

IRS Form 8300 

  • Audits are Resulting in Large Assessments:
    1. Penalties = $25,000 per missed 8300
    2. Many audits on East Coast resulting in six figure settlements – no negotiation
     
  • Ask yourself:
    1. Do I have a system in place to file all required forms on a timely basis?
    2. Have I trained all front-end and office employees to recognize the need to file?
    3. Have I performed a self-audit to ensure that procedures are followed in every case?
     
  • Cash Refresher :
    1. Cash = currency
    2. Cashiers checks, bank drafts, traveler’s checks and money orders less than $10,000
     
  • File 8300 for:
    1. One lump sum > $10,000
    2. Installment payments that cause cash received within one year of the initial payment to exceed $10,000
    3. Previously unreportable payments that cause total cash received in 12 month period to exceed $10,000
     

8300 questions?
email to: 8300QUESTIONS@IRS.GOV
 

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Contact 

Charles Diegel, CPA
215-881-8882

Tom Earley, CPA, MST
215-881-8883

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