Terri Harris Motor Vehicle Technical Advisor Grand Rapids MI 616-235-1655 616-235-2249-fax Terri.S.Harris@irs

1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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)

8. 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

9. Dealership Audit Technique Guide“New Vehicle ATG” December 2004 http://www.irs.gov/businesses/corporations/article/0,,id=137743,00.html

10. 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

11. Retail ATGIncluding Used Vehicle Dealerships Publication Date - August, 2005 http://www.irs.gov/businesses/small/article/0,,id=141373,00.html

12. 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

13. 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

14. 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?

15. 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?

16. 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?

17. 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?

18. 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

19. A Few Specific Issue Cash Reporting Electronic Records Retention Employee Tool and Equipment Plans Inventory Write Down IRC 263A Questions

20. Cash Reporting for Auto Dealerships

21. 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)

22. 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

23. 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

24. 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?

25. Electronic Records Update

26. 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

27. 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

28. 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

29. 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

30. Employee Tool & Equipment Plans

31. 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)

32. 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

33. 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

34. 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?

35. 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

36. 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

37. 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

38. Inventory –Lower of Cost or Market (LCM)

39. 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.

40. 263A and Auto Dealerships

41. 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……..

42. 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

43. 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

44. 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

45. 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”

46. Questions?

47. Thank You