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NABD 2007 National Buy Here Pay Here Conference Terri Harris Motor Vehicle Technical Advisor Grand Rapids MI 616-235-1655 616-235-2249-fax Terri.S.Harris@irs.gov Technical Advisor Program Pre filing and Technical Guidance - LMSB Pre-Filing and Technical Services

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slide1

NABD 2007

National Buy Here Pay Here Conference

Terri Harris

Motor Vehicle Technical Advisor

Grand Rapids MI

616-235-1655

616-235-2249-fax

Terri.S.Harris@irs.gov

technical advisor program
Technical Advisor Program
  • Pre filing and Technical Guidance - LMSB
    • Pre-Filing and Technical Services
      • Pre Filing Initiatives (IIR, PFA)
      • Legislation Implementation
        • Example – Alternative Motor Vehicle Credit
          • Energy Act of 2005
    • Office of Tax Shelter Analysis
      • Listed Transactions and Shelter Coordination
    • Technical Advisors – 75+ in various industries and issues
technical advisor program3
Technical Advisor Program
  • TA Program Goals
    • Ensure uniformand consistent treatment of issues nationwide
    • Resolve Issues Globally
    • Alternative Issue Resolution Strategies
      • IIR – Demo Vehicles
      • Pending IIR on LIFO Pooling for Cross over vehicles
    • Responsibilities are both Internal and External
      • Communication is Vital
        • Internal – Examiners, Counsel on Current Audits
        • External – Industry Associations
          • NADA, NIADA, NABD, Recreational Vehicle Assoc, various CPA Consortiums, others
motor vehicle team members
Motor Vehicle Team Members
  • Terri Harris, Technical Advisor
  • Michael Willemsen, Technical Advisor
  • Laurie Schutter, Assistant Technical Advisor
  • Fred Gavin, Appeals Coordinator
  • Grant Gabriel, Industry Counsel
  • Melissa Brainard, Examination Audit Aide
issue resolution strategies
Issue Resolution Strategies
  • Examination
    • Examiner and Manager Issue Discussions
    • Involve Industry Specialist if appropriate
    • Request Advice from IRS Counsel
      • Technical Advice Memorandum or Case Specific Advice (Field Issued)
    • Request Appeals Conference on unagreed issues
    • On issues with national implications - involve industry associations
issue resolution strategies6
Issue Resolution Strategies
  • Global Issues
    • Industry Issue Resolution
    • IR 2007-47
      • Most recent solicitation for IIR suggestions
      • Considered twice a year for guidance
    • Intended to:
      • Resolve issues common to significant numbers of taxpayers through new and improved guidance
audit activity trends
Audit Activity Trends
  • Overall increase in examinations including dealerships
  • A few issues being considered:
    • Cash Reporting – Form 8300
    • Service Technician’s Tool Programs
    • 263A – Uniform Capitalization
    • Inventory –Lower of Cost or Market (LCM)
what resources are available
What Resources Are Available?
  • Audit Technique Guides
    • New Vehicle Dealerships Audit Technique Guide (ATG)
    • Used Car Dealerships – Part of Retail ATG
  • CPA/Accountant/Attorney
    • Are they Experienced in Your Industry?
  • Trade Associations
  • MVTA
dealership audit technique guide new vehicle atg
Dealership Audit Technique Guide“New Vehicle ATG”

December 2004

http://www.irs.gov/businesses/corporations/article/0,,id=137743,00.html

dealership atg
Dealership ATG
  • Chapter 1 & Chapter 2-Books and Records (franchised)
  • Chapter 3- Balance Sheet Accounts
  • Chapter 4, 5, 6 - Inventory Overview and Methods
  • Chapter 7-After Market Products–Service Contracts, etc.
  • Chapter 8 - Producer Owned Reinsurance Company
  • Chapter 9 - Advertising Associations
  • Chapter 10 - Sales of Dealerships
  • Chapter 11 - Related Finance Companies
  • Chapter 12 - Related Entity Returns
  • Chapter 13, 14 - Other Automotive Issues
retail atg including used vehicle dealerships
Retail ATGIncluding Used Vehicle Dealerships

Publication Date - August, 2005

http://www.irs.gov/businesses/small/article/0,,id=141373,00.html

retail atg
Retail ATG
  • Includes many retail industries
    • General Issues in Retail
    • Specific Industry Related – Chapter 3
      • INDEPENDENT USED CAR DEALERS
        • Organization and activities
        • Income reporting
        • Expenses
        • Inventory valuation
        • After market products
        • More
independent used car dealers atg
INDEPENDENT USED CAR DEALERS ATG
  • Key Income Questions – Food for Thought
    • Are you using the Accrual Method of Accounting?
      • Accrual Method of Accounting is Required
        • Inventory is a Material Income Producing Item
independent used car dealers atg14
INDEPENDENT USED CAR DEALERS ATG
  • Inventory Questions – Food for Thought
    • Auction Purchases – How do you allocate costs on a bulk purchase?
      • Actual Costs on Individual Vehicle
    • How Do You Book the Inventory Value of A Trade In? An Auction Purchase?
      • Official Used Vehicle Guide/Auction Purchase Price
      • Adjusted for condition of the vehicle?
      • Documentation Retained?
independent used car dealers atg15
INDEPENDENT USED CAR DEALERS ATG
  • How Do You Value Inventory at Year End?
    • LIFO?
    • Lower of Cost or Market?
      • How Do you Determine the Write Down Amount?
        • Used Car Guide?
        • Experience?
        • Flat Percentage?
independent used car dealers atg16
INDEPENDENT USED CAR DEALERS ATG
  • After Market Products – Food for Thought
    • What Kinds of Extended Service Contracts Do You Offer?
      • Dealer Obligor?
      • Dealer Agent?
      • How Do You Report the Income? Expense?
    • What other After Market Products Do You Offer?
      • How are they treated for tax purposes?
independent used car dealers atg17
INDEPENDENT USED CAR DEALERS ATG
  • How Are Vehicle Sales Financed? – Food for Thought
    • Do You Receive any “Back End Payments?”
    • Unrelated Finance Company?
      • How is the sale of the note reported?
      • Any Dealer Reserves?
independent used car dealers atg18
INDEPENDENT USED CAR DEALERS ATG
  • Related Finance Company?
    • Operational Issues – Arms Length Standards
    • How is the discount rate determined?
    • Bulk Sales, Individual Sales
      • Arms Length Standards Apply
  • Buy Here Pay Here
    • How is income reported?
    • Bad Debts – When does collection stop and write off occur?
      • Reserves for Bad Debt Not Allowable
a few specific issue
A Few Specific Issue

Cash Reporting

Electronic Records Retention

Employee Tool and Equipment Plans

Inventory Write Down

IRC 263A

Questions

slide21

Form 8300 - Who Must File?

Any person who is engaged in a trade or business [including sales and service] and receives more than $10,000 in currency or certain monetary instruments to report to IRS and Financial Crimes Enforcement Network (FinCen)

what is cash
What is Cash?
  • Coin and currency of the United States or other country; and …
  • Monetary Instruments having a face amount of $10,000 or less,
    • Cashier’s Check (by whatever name)
    • Bank Draft
    • Travelers Checks
    • Money Orders
multiple cash payments
Multiple Cash Payments
  • Initial Payment > $10,000
    • Recipient must report the initial payment within 15 days of receipt
  • Aggregating Sales
    • When aggregate amount exceeds $10,000,
      • report within 15 days after receiving the payment that caused the aggregate amount to exceed $10,000
auto dealership specific questions
Auto Dealership Specific Questions
  • Automotive Alert Issued
  • 31 Questions - Issued with the assistance of NADA
    • Most are Dealer Specific
  • Answers determined in conjunction with IRS Anti Money Laundering Specialists
  • Copy is available to public
  • Any other BHPH specific questions?
electronic records a review
Electronic Records – A Review
  • Revenue Procedure 98-25
    • Applies to Taxpayers with Assets > $10,000,000
      • Best Practice for All Others
    • Electronic records must be retained
    • Must be “capable of being processed”
      • Retrieve, manipulate, print, produce output
    • Must contain sufficient transaction level detail
    • If data files stored in DBMS structure, must convert to an ASCII/EBCDIC format, or allow IRS to process historical DBMS files on taxpayer’s computer equipment
electronic records a review27
Electronic Records – A Review
  • Revenue Procedure 97-22 -Applies to:
    • taxpayers that maintain books and records by using an electronic storage system that either:
      • images their hardcopy (paper) books and records, or
      • transfers their computerized books and records, to an electronic storage media, such as an optical disk
electronic records a review28
Electronic Records – A Review
  • Rev Proc 97-22 continued:
    • permits the destruction of the original hardcopy books and records and
    • the deletion of original computerized records
    • after a taxpayer completes testing of the storage system to establish that books and records can be reproduced
electronic records update
Electronic Records - Update
  • MVTA and CAS currently working with vendors at vendor’s request
    • Conducting architecture design discussion
    • Evaluating specific software applications at a detailed level
    • IRS prohibition against disclosing companies that we are working with
    • IRS will not endorse any vendor product
slide30
Employee Tool &

Equipment Plans

slide31

Employee Tool & Equipment Plans

  • Technician must be an employee and must be required to provide and maintain tools
  • Employer compensates technician with hourly wage and a tool reimbursement
  • Programs generally purport to be compliant with Accountable Plan rules of IRC 62(c)
slide32

Employee Tool & Equipment Plans

  • Accountable Plan Rules - IRC §62(c)
    • Expense Must be Ordinary and Necessary
    • Employee Must Actually Pay or Incur an Expense
    • Employee Must provide Adequate Accounting to Employer of Expenses
      • Written Documentation & Receipts
    • Employee Must Account for All Amounts Received
    • Excess Amounts Must be Returned to Employer
employee tool equipment plans
Employee Tool & Equipment Plans
  • What are the advantages of an Accountable Plan?
    • Amounts paid under a qualifying plan are not subject to income or employment tax
      • No income or employment tax for technicians
      • Reduced employment tax for employer
employee tool equipment plans34
Employee Tool & Equipment Plans
  • Key Questions for Dealers -
    • What Are the Requirements to Qualify as an Accountable Plan?
    • What is the IRS Position on Service Technicians’ Tool Reimbursement Plans?
    • Is My Plan Compliant?
service technicians tool reimbursements coordinated issue paper july 2000
Service Technicians’ Tool ReimbursementsCoordinated Issue Paper – July 2000
  • Conclusion
    • Generally, amounts paid to motor vehicle service technicians as tool reimbursements will not meet the accountable plan requirements
    • Amounts paid under a non-accountable plan:
      • Included in the employee’s gross income
        • Must be reported on employees’ Form W-2
      • Are subject to the withholding and payment of federal employment taxes
employee tool equipment plans irs position
Employee Tool & Equipment PlansIRS Position
  • Revenue Ruling 2005-52 – August 3, 2005
    • Facts:
      • Employees required to provide and maintain various tools
      • Employees receive hourly wages and a tool allowance
        • Tool allowance is determined using national survey data and technician questionnaire
      • Employees not required to substantiate actual expenses
      • Employees not required to return any part of allowance that exceeds actual expenses
employee tool equipment plans irs position37
Employee Tool & Equipment Plans IRS Position
  • Conclusion –
    • Arrangement fails to meet the accountable plan requirements
      • No substantiation required
      • No return of excess
    • Amounts paid under such a plan are:
      • Includible in technician’s income
      • Subject to employment taxes
  • Re-characterization Issue:
    • Even if employees substantiated actual amounts and any excess paid is treated as wages by employer -- Plan does not qualify
used vehicle write downs
Used Vehicle Write Downs
  • Dealer must elect LCM
  • Write downs not allowed for dealers on LIFO
  • Rev Rule 67-107
    • Permits dealers to value vehicles for inventory purposes using an official used car guide.
    • Average wholesale prices for comparable cars.
  • Must be applied to each vehicle individually
    • No overall percentage write down (historical averages)
    • No write down based on experience
    • Watch write downs on vehicles purchased close to year end.
    • Write down must be supported with documentation.
irc 263a
IRC 263A
  • Requires certain taxpayers to capitalize direct and indirect costs related to inventory
  • Applies to retailers with sales of $10,000,000 or more and all producers
    • Average
  • Requires dealerships to capitalize certain indirect costs
  • Method of Accounting
  • Many of the issues would not apply to used vehicle dealers – except……..
irc 263a42
IRC 263A
  • Recent Service Activity
    • Overall increase in auto dealership examinations
      • Resulting increase in potential 263A issues
    • Dealerships as Resellers with Production Activity Issues Raised in Limited Areas
      • No specific guidance on this issue
    • Automotive Alert – Q&A – stand down on producer issue
irc 263a43
IRC 263A
  • If Dealers are Resellers with Production Activity
    • Do activities in the service department and body shop qualify as production?
      • Simplified Production Method is the only simplified method available
    • If this issue were sustained, it could affect BHPH dealers
irc 263a44
IRC 263A
  • Dealer as Reseller with Production Activities - continued
    • Raised in a limited number of examinations
      • Geographically concentrated
    • Technical Advice Request Submitted
    • Industry Raised Concerns to Service Executives
      • Service has committed to securing guidance on this issue
irc 263a45
IRC 263A
  • Dealer as Reseller with Production Activities – continued
  • Stand Down on “Producer” Issue ONLY
    • Other IRC 263A issues may continue to be considered
  • General Legal Advice on Producer Issue Requested
  • NADA allowed to provide “white paper”