Automotive Dealerships - IRS Audit Guide Part 1
IRS Audit Guide Table of Contents
- General Focus
- Books and Records
- Balance Sheet
- Extended Service Contractsand Aftermarket
- Producer Owned Reinsurance Company (PORC)
- Sales of Dealerships
- Compensation Issues
- Tool Reimbursement Programs
- Miscellaneous Provisions
- Items Not in the Guide
- Non-Qualified Deferred Compensation
- IRS Audit - Preparing
- Conducting an IRS Audit
- Top 5 Audit Mistakes
- Tax Deferral Opportunities
- Cash Benefits of Tax Deferrals
- Internal Gross Profit/Reconditioning
- Floorplan Credits
- Advertising Expense
- To LIFO or Not to LIFO?
- Cost Segregation
- Prepaid Expenses – 12-Month Rule
- Insurance Deductibility
- 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
- 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–
- IRS Form 8300 filed as required?
- All income reported?
- Audit Techniques–
- Trace outstanding checks to determine payment of a liability
- Accounting for & questioning all material related company transfers
- Review AJE’s, standard entries & Journal Vouchers
- Receivable Issues–
- Unreported sales
- Proper year of inclusion
- Related Party transactions arm’s length?
- Dealership financing of transactions – note terms reasonable?
- Audit Techniques–
- Test sales in opening days of subsequent year
- Confirm tested sales against deal jackets and general ledger
- Scrutinize note transfers for related party or unrecorded transactions
- Loans to/from Shareholders–
- Arms length transactions (length, rate, etc)?
- Properly documented?
- Interest deducted only when paid?
- Demand loans > $10,000 properly accounted for?
- Property & Equipment–
- Fair Market Value Rent – constructive dividend
- Large, unusual or questionable items
- Personal items
- Image Payments – conclusion: taxable
- Payables and Accrued Expenses–
- Liability exists
- Liability reasonably determinable?
- Has economic performance occurred?
- Is the expense ordinary & necessary?
- Is the expense directly related to the business?
- Capital Stock–
- transfers between family members properly handled (i.e. gift tax returns filed when required)?
- Flow through entities compared to individual returns and passive/active treatment proper?
IRS Form 8300
- Audits are Resulting in Large Assessments:
- Penalties = $25,000 per missed 8300
- Many audits on East Coast resulting in six figure settlements – no negotiation
- Ask yourself:
- Do I have a system in place to file all required forms on a timely basis?
- Have I trained all front-end and office employees to recognize the need to file?
- Have I performed a self-audit to ensure that procedures are followed in every case?
- Cash Refresher :
- Cash = currency
- Cashiers checks, bank drafts, traveler’s checks and money orders less than $10,000
- File 8300 for:
- One lump sum > $10,000
- Installment payments that cause cash received within one year of the initial payment to exceed $10,000
- Previously unreportable payments that cause total cash received in 12 month period to exceed $10,000
email to: 8300QUESTIONS@IRS.GOV
Charles Diegel, CPA
Tom Earley, CPA, MST