Automotive Dealerships - IRS Audit Guide Part 2

 IRS Audit Guide Table of Contents 



  • What is the agent looking for –
    • Inventory account represents everything that should be inventoried
    • Allowable method is being used
    • Any adjustment made is scrutinized
  1. Lower of Cost or Market (LCM)
    • Used Vehicles
    • Documentation, documentation, documentation
    • Valuation Guide
      • using 100 percent of wholesale valuation
  2. Last-in, First-out (LIFO)
    • Compliance
      • Book and Tax the same
    • Calculation
      • Pooling, agent will look for new models being compared to existing models
      • Determine the index for vehicles in ending inventory and applying it against ending inventory  

Extended Service Contracts 

  • Dealerships Role
    • Agent; sells product of a third party insurer without assuming legal obligations or insurance risk
    • Principal/Obligor; assumes risk in the contract
  • Dealer Agent and Dealer Obligor Program
    • Dealer Agent
      • Commissions must be included in income in the year sold  
    • Dealer Obligor
      • Selling price included in income in year sold
      • Insurance premium amortized over term of contract
  • Agent To Request the Following Documentation
    • Listing of all plans sold
      • copies of actual, executed service contracts
      • copies of promotional material
      • copies of any and all agreements and documentations including all endorsements, amendments and schedules between the dealership and other parties to the program
      • written samples of accounting entries for all income and expenses
      • written statement regarding payments made by party to the program, directly or indirectly, to the dealership owner, and relative of owner, or entity owned or controlled by owner

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Charles Diegel, CPA

Tom Earley, CPA, MST

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