Auto Dealerships - Audit Technique Guide (ATG)

Internal Revenue Service
Market Segment Specialization Program

Auto Dealerships

Audit Technique Guide (ATG)


NOTE: This guide is current through the publication date. Since changes
may have occurred after the publication date that would affect the accuracy
of this document, no guarantees are made concerning the technical
accuracy after the publication date.

This material was designed
specifically for training
purposes only. Under no
circumstances should the
contents be used or cited as
sustaining a technical
position.
The taxpayer names and
addresses shown in this
publication are
hypothetical. They were
chosen at random from a
list of names of
American colleges and
universities as shown in
Webster’s Dictionary or
from a list of names of
counties in the United
States as listed in the
U.S. Government
Printing Office Style
Manual.
www.irs.gov
Training 3147-120 (08-2000)
Catalog Number 85870Y This page intentionally left blank.Preface
One of the goals envisioned with this Audit Techniques Handbook is to achieve a high level of
proficiency in the way we conduct our examinations of Automobile Dealerships. In addition, by
establishing and maintaining close contact with other Industry Specialists, including the Motor
Vehicle Industry Specialist, National Office, Appeals and District Counsel, we can maximize the
effectiveness of our efforts.
This Guide is divided into five parts:
Part I leads the agent through the examination; from pre-audit through the Books and
Records, concentrating on the fulcrum concept of "Financial Status."
Part II illustrates Inventory, concentrating on LIFO computations before and after the
implementation of Rev. Proc. 97-38 I.R.B. 1997-33, 43 (July 31, 1997).
Part III discusses Aftersale Financial Products sold by auto dealerships. This includes
consideration of Non Captive issues, including Rev. Procs. 92-97 and 97-38, Captive Issues
and Producer Owned Reinsurance Companies.
Part IV considers "stand alone" topics, unique to automobile dealerships.
Part V is the Appendix which includes comprehensive case studies, legal authorities, issue
analysis, and a glossary of terms.
In order to encourage technical contributions from agents across the country, this text was
produced in accordance with the "Living Document" idea, which should allow for the inclusion of
important technical ideas and opinions.
No material in this Guide, should be construed as representing the official position of the Internal
Revenue Service. The reader is directed to the Internal Revenue Code, the Income Tax
Regulations and other relevant official publications to obtain the official position of the Service
and for further guidance, as deemed necessary. The scope of this guide is limited to assisting the
revenue agent in the completion of Auto Dealership cases.
iiiThis page intentionally left blank.Table of Contents
Preface..................................................................iii
A u d i t T e c h n i q u e G u i d e O r g a n i z a t i o n ......................................... i v
T a b le o f C o n t e n t s ..........................................................v
Part I General Focus and Procedure
C h a p t e r 1 F i n a n c i a l S t a t u s ............................................ 1 - 1
I n tr od u c tion......................................................... 1 - 1
F in a n c ia l S ta tu s A n a ly s is ............................................... 1 - 1
T y p e A A n a ly s is...................................................... 1 - 2
T y p e B A n a ly s is 1 - 5
T y p e C A n a ly s is....................................................... 1 - 6
C on c lu s ion.......................................................... 1 - 1 1
C h a p t e r 2 G e t t i n g S t a r t e d............................................. 2 - 1
C h a p t e r 3 S t a n d a r d A u d i t I n d e x N u m b e r s – S A I N ......................... 3 - 1
C h a p t e r 4 Bo o k s a n d R e c o r d s.......................................... 4 - 1
C h a r a c te r is tic s 4 - 1
J ou r n a l V ou c h e r E n tr ie s................................................ 4 - 3
S u b - J ou r n a ls ........................................................ 4 - 3
B ook s a n d R e c or d s G e n e r a l L e d g e r A u d it E x a m p le........................... 4 - 4
C on c lu s ion.......................................................... 4 - 7
C h a p t e r 5 Ba la n c e S h e e t .............................................. 5 - 1
Part II Inventory
C h a p t e r 6 G e n e r a l – N o n L I F O ........................................ 6 - 1
T y p e A – S c h e d u le C U s e d C a r s ......................................... 6 - 1
IRC section 263A – Uniform Capitalization Rules ............................ 6 - 2
Type B – Smaller New Vehicle Dealerships: Schedule C, Form 1120-S or Form 1065 . . 6 - 3
Type C – Large Multi-Entity Dealerships: Form 1120, Form 1120-S or Form 1065
............................................................... 6 - 4
vC h a p t e r 7 L I F O Ba c k g r o u n d .......................................... 7 - 1
O v e r v ie w of th e M e th od ............................................... 7 - 1
O r ig in s of th e M e th od ................................................. 7 - 2
A Short History of LIFO Applications: Auto Dealership LIFO and the IRS
............................................................... 7 - 3
C h a p t e r 8 C o m p u t i n g L I F O : P r e R e v e n u e P r o c e d u r e 9 7 - 3 6.................. 8 - 1
I n tr od u c tion.......................................................... 8 - 1
L I F O C on c e p ts ...................................................... 8 - 1
P oolin g ........................................................... 8 - 1 1
F ou n d a tion P r in c ip le s................................................. 8 - 1 4
T h e L I F O E le c tion................................................... 8 - 1 6
C om p u ta tion s 8 - 2 0
C h a p t e r 9 A lt e r n a t i v e L I F O f o r A u t o D e a le r s ............................. 9 - 1
S u m m a r y of R u le s .................................................... 9 - 1
C om p u ta tion s ....................................................... 9 - 5
O th e r C on s id e r a tion s .................................................. 9 - 9
I n for m a tion to r e q u e s t w h e n e x a m in in g th e A lte r n a tiv e L I F O M e th od ............ 9 - 1 0
Part III Aftersale Financial Products
C h a p t e r 1 0 A u t o m o b i le D e a le r s h i p A f t e r s a le F i n a n c i a l P r o d u c t s .............. 1 0 - 1
I n tr od u c tion........................................................ 1 0 - 1
E x te n d e d S e r v ic e C on tr a c ts ............................................ 1 0 - 1
C r e d it L ife I n s u r a n c e ; C r e d it A c c id e n t a n d H e a lth I n s u r a n c e ................... 1 0 - 2
C h a p t e r 1 1 E x t e n d e d S e r v i c e C o n t r a c t s.................................. 1 1 - 1
A g e n t v e r s u s P r in c ip a l/ O b lig or.......................................... 1 1 - 1
D e a le r " A g e n t" E x te n d e d S e r v ic e C on tr a c ts................................ 1 1 - 2
D e a le r " O b lig or " E x te n d e d S e r v ic e C on tr a c t ............................... 1 1 - 2
S e r v ic e W a r r a n ty I n c om e M e th od ( S W I M ) 1 1 - 3
C on tr a c t C on s tr u c tion ................................................. 1 1 - 6
Change in Accounting Method Concerns and IRC section 481(a) ................. 1 1 - 6
Chapter 12 Extended Service Contracts – " D e a le r R e s e r v e A c c o u n t s " .......... 1 2 - 1
C h a p t e r 1 3 T h e P r o d u c e r O w n e d R e i n s u r a n c e C o m p a n y ( P O R C ) ............. 1 3 - 1
I n tr od u c tion......................................................... 1 3 - 1
I n tr od u c tion to R e in s u r a n c e............................................. 1 3 - 1
Considerations for Forming a Producer Owned Reinsurance Company
............................................................... 1 3 - 2
viT h e R e in s u r a n c e T r a n s a c tion ............................................ 1 3 - 4
P r od u c e r O w n e d R e in s u r a n c e C om p a n y I s s u e s .............................. 1 3 - 5
T h e C a p tiv e T r a n s a c tion ............................................... 1 3 - 7
R e in s u r a n c e a n d A u to D e a le r s h ip A fte r S a le F in a n c ia l P r od u c ts................. 1 3 - 1 3
T h e F u tu r e......................................................... 1 3 - 1 4
Part IV Stand Alone Issues
C h a p t e r 1 4 A d v e r t i s i n g A s s o c i a t i o n s .................................... 1 4 - 1
I n tr od u c tion........................................................ 1 4 - 1
A d v e r tis in g A s s oc ia tion s ..............................................