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


Charles Diegel, CPA

Tom Earley, CPA, MST

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