Tax Info for the Automotive Industry Business Types-I

Avoiding Problems - Automotive
This section contains important information on recordkeeping, misclassification of employees and warns you of fraudulent automotive schemes.

Recordkeeping
Unless you are a professional bookkeeper, you probably don't like to spend valuable business time keeping records. But keeping good records can actually help you save money.

Consequences of the Misclassification of Employees
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (relief provisions of IRC section 530 will not apply).

If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required Federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977.

If you would like the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Withholding.

For additional information regarding worker classification, refer to:

• Tax Tip, Employees vs. Independent Contractors
• Publication 15-A, Employer's Supplemental Tax Guide (PDF)

Individuals Have Been Investigated and Recommended for Prosecution in the Automotive Industry - Don't let this happen to you.
Scams, schemes and cons are prevalent in all industries and professions. Violations of federal tax and related statutes carry serious consequences.

During the past three years, the Internal Revenue Service has seen an increase in scams and fraud involving the automotive sales industry. Some scam artists have knowingly assisted narcotics traffickers in laundering their ill-gotten gains, while others submit false loan documents to financial institutions to obtain car loans.

Special agents of IRS Criminal Investigation have investigated and recommended to the Department of Justice for prosecution numerous individuals involved in the automotive sales industry. These investigations vary from tax evasion to employment tax fraud to money laundering conspiracies to violations of the Bank Secrecy Act.

In addition, the IRS has more than 1,000 open audits of the tax returns of new and used car dealers for a variety of issues.

Automotive Sales Industry and Anti-Money Laundering

Automotive dealers are required to file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, with the IRS when they receive more than $10,000 in cash in one transaction (or two or more related transactions).

The Form 8300 is an information return that assists the government in its anti-money laundering efforts and must be filed by the 15th day after the date the cash transaction occurs.

Normally, when the Form 8300 is filed, a correlating Form 4789, Currency Transaction Report, is filed by a financial institution when the same cash is deposited with the financial institution.

For example, if an automotive dealer receives a cash payment of over $10,000 for a vehicle, the dealer must file a Form 8300 with the IRS. When the dealer deposits that cash into a financial institution, the financial institution is also required to report the $10,000 or over cash transaction to the IRS by filing a Currency Transaction Report, Form 4789.

When a discrepancy is found between the filings of Forms 8300 for cash sales and the filings of Forms 4789 for currency deposits, it’s often an indication of a possible violation of the currency reporting laws.

A scheme regarding the Form 8300 has surfaced that describes a "dumping clause" or an "IRS Form 8300 Exemption Certification" that can be filled out by the potential client to exclude the business from filing the required form. The IRS says, "There is no such clause or certificate."

Automotive Sales Industry Statistics

Tax fraud investigations are the main component of IRS efforts to foster compliance with the tax laws. Many of these investigations include white-collar financial crimes in legal industries and involve individuals from all facets of our economy. In the past three and a half years, IRS has initiated over 280 investigations involving individuals in the sales sector of the automotive industry. Fifteen percent of those cases involve violations of the currency reporting requirements of the Form 8300.

For the first half of fiscal year 2003, the United States Attorney's Office has filed indictments or informations on twice as many individuals for the same time period as fiscal year 2002, and the average sentence has jumped from 38 months to 55 months.

Case Summaries

The following case summaries are excerpts from public record documents on file in the court in the judicial district in which the cases were prosecuted.

Allstate Auto Sales West, Inc.
On Aug. 6, 2003, Harry F. Zanko, owner of Ohio-based Allstate Auto Sales West, Inc., was sentenced to four years probation, with the first twelve months in electronically monitored home confinement, for attempting to evade his income taxes for 1996, in violation of Title 26, 7201 of the United States Code. As a condition of his probation Zanko was also ordered to perform 300 hours of community service, refrain from gambling and attending gambling establishments, attend mental health counseling for his gambling addiction, follow doctor's instructions regarding his treatment of diabetes, and cooperate with the IRS in determination and payment of his civil tax liabilities.

According to court documents, Zanko’s source of income from 1996 through 1998 was from owning and operating used car lots, initially with a partner in Cleveland, Ohio, under the name of Allstate Auto Sales. Then in 1998 he moved to a new location in Parma, Ohio, where he operated a dealership alone under the name of Allstate Auto Sales West, Inc.

Zanko acknowledged that he diverted receipts and funds for his personal use consisting of: (1) currency payments by customers, (2) four check payments from customers, and (3) various checks written on the corporate checking account, which he recorded on the corporate disbursements records as being for business purposes. Zanko attempted to evade income taxes of approximately $249,669 for the years 1996 through 1998, by willfully understating his income for those years by approximately $1,151,636 on his personal income tax returns and amended 1996 return.

Raley-Vaughan Motor Company, Inc.
On April 7, 2003, four family members who operated an automobile dealership in Rogersville, Tenn. were sentenced to prison terms ranging from 22 to 30 months for conspiring to commit various schemes to fraudulently obtain money, according to court documents.

The family ran the Raley-Vaughan Motor Company, Inc. (RVMC) with Terry Vaughan as Vice President and general manager. His mother, Wanda Vaughan, was Secretary/Treasurer and a co-owner, and his father, Edward Vaughan, was President and a co-owner. His sister, Sheree Vaughan Kelso, was employed by the dealership handling accounting, sales and other duties.

During the course of the conspiracy, the Vaughan family, through RVMC, (1) fraudulently obtained money, funds and credit by making false applications, installment contracts, promissory notes and other documents to banks and lending institutions; (2) engaged in a scheme to defraud General Motors Acceptance Corporation (GMAC); (3) deposited non-sufficient funds to RVMC accounts to fraudulently inflate the balances, and (4) used the money unlawfully obtained from banks, lending institutions and GMAC to promote the fraudulent schemes.

Terry E. Vaughan was sentenced to a prison term of 30 months. Edward K. Vaughan, Wanda R. Vaughan and Sherree Vaughan Kelso were sentenced to prison terms of 22 months. All prison terms are to be followed by 36-months of supervised release and the four were ordered to pay restitution totaling $572,250.

Car Outlet
On Nov. 15, 2002, Andrew S. Holloway, owner of Car Outlet in Blue Springs, Mo. was sentenced to 30 months in prison for laundering the proceeds of another person's cocaine trafficking, according to court records. In August 2002, Holloway pleaded guilty to charges that he conducted a financial transaction that involved the proceeds of an unlawful activity, knowing that the transaction was designed to avoid a federal transaction-reporting requirement.

According to court records, Holloway sold a 1999 Chevy Tahoe to a cocaine dealer for $21,000, which he knew represented the proceeds from unlawful drug sales. Holloway admitted that he assisted the cocaine dealer in concealing his use of substantial amounts of cash by creating false sales documents, which understated the purchase price of the vehicle. Those false sales documents were created to avoid filing Form 8300 with the IRS, and to conceal the method of payment.

Relevant Criminal Statutes

There are many United States Code Statutes for which IRS has jurisdiction with which to recommend prosecution. The ones most commonly associated with persons involved in the automotive industry are the following.

• Title 26 USC Section 7201, attempt to evade or defeat tax;
• Title 26 USC Section 7203, Willful failure to file return, supply information, or pay tax;
• Title 18 USC Section1956, Laundering of monetary instruments;
• Title 18 USC Section 1957, Engaging in monetary transactions in property derived from specified unlawful activity;
• Title 31 USC Section 5324, Structuring transactions to evade reporting requirement.

All except the Title 26, 7203 charge are felony criminal statutes, some of which carry a possible maximum sentence of 20 years.

Additionally, there are provisions under the federal statutes that allow for the seizure of vehicles and/or funds from auto dealerships that knowingly engage in transactions which involve proceeds derived from a specified unlawful activity (Title 18 USC Section 981 & Title 18 USC 982).

Understanding Your IRS Notice
We realize that receiving a notice from the IRS can be unnerving, but if you follow these simple steps, the process to resolving the discrepancy should be straight forward.

Do you need to see what an IRS notice or letter says, but don't have it in front of you? If you know the notice number, you can look up its purpose, basic message, possible enclosures, and other useful details. And if you have the tear-off stub from the last page, you can use the information printed on it to see some of the variable content included in that notice.

How To Identify Your Notice
The notice number prints on the top of the first page of all our notices and on the lower left-hand side of the tear-off stub included with most of them. That number identifies the message we deliver in every notice. While the contents may vary somewhat, every notice with the same number has the same basic purpose.

Understanding Your Notice or Letter

What If My Notice Isn't Listed

• Individual Filer Notices
  Notices we send about Form 1040, 1040A, or 1040EZ, or any schedules, forms, or attachments included with it are Individual Filer Notice.
• Business Filer Notices
  Notices we send about business-related tax forms such as Forms 941, 1065, and 1120, are Business Filer Notices.

What To Do When You Disagree
If your notice or letter is listed above, follow the link for advice on handling disagreements with the notice. In general though, you need to contact IRS at the contact number provided on the notice to explain why you disagree. If that doesn't result in your satisfaction, the Taxpayer Advocate may be able to assist.

Related Links - Automotive
This page provides you links to sites that have specific information dealing with the automotive industry.

Tax Laws and Regulations - Automotive
This page provides revenue rulings and court cases related to the Automotive industry.

Court Cases, Revenue Rulings, Internal Revenue Codes, and Treasury Regulations

New tax laws and regulations may affect your tax situation. View important rulings related to the following topics:

• Business Expenses
• Finance and Insurance
• Independent Contractor or Employee
• Inventory
• Methods of Accounting
• Miscellaneous

Revenue Procedure 2001-56 (PDF), provides simplified methods auto dealerships can use to determine the dollar amount to be included in, or excluded from, the income of employees provided with vehicles by dealerships.

Tax Tips - Automotive
This section provides general information on subjects such as installment sales and how to value inventory.

Helpful Tips - Automotive Tax Tips
Important information to keep in mind.

Form 8300

Who must file?

Each person engaged in a trade or business who, in the course of conducting that trade or business, receives more than $10,000 in cash in one transaction or in two or more related transactions must file a Form 8300 (PDF). Any transactions conducted between a payer (or its agent) and the recipient in a 24-hour period are related transactions. Transactions are considered related even if they occur over a period of more than 24-hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions. Form 8300 may be filed voluntarily for any suspicious transaction, even if the total amount is less than $10,000. You, as the filer, should keep a copy of each Form 8300 for 5 years from the date you file it.

When to file?

File Form 8300 by the 15th day after the date that the cash was received. If that date falls on a Saturday, Sunday, or legal holiday, file the form on the next business day.

Provide a written statement

You, as the filer, must give a written statement to each person named on a required Form 8300 on or before January 31 of the year following the calendar year in which the cash is received. The statement must show the name, telephone number, and address of the information contact for the business, the aggregate amount of reportable cash received, and that the information was furnished to the IRS. Keep a copy of this statement for your records.

Changing Accounting Methods

Changing your accounting method generally requires IRS approval. To get approval, you must file Form 3115, Application for Change in Accounting Method (PDF). A change in your accounting method includes a change not only in your overall system of accounting but also in the treatment of any material item. A material item is one that affects the proper time for inclusion of income or allowance of a deduction.

Installment Method

If you finance the purchase of your property, instead of having the buyer get a loan or mortgage from a third party, you probably have an installment sale. It is not an installment sale if the buyer borrows the money from a third party and then pays you the total selling price. Read more about installment sales in the Installment Methods Tax Tip.

Inventory - Automotive Tax Tips
How do I value my inventory?
An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales.

Automobile dealerships have a great deal of discretion in what accounting methods they will employ for various classes of their inventoried items. Whatever method the taxpayer chooses, it must clearly reflect income. Dealerships typically maintain distinct inventories and tend to account for them differently. Among the types of inventoried items are:

• New vehicles
• Used vehicles
• Parts and Accessories

The methods used for valuing and accounting for these classes of items do differ from dealership to dealership, but once a method is chosen, it must be adhered to. If a taxpayer elects to change his/her inventory method, Form 3115, Application for Change in Accounting Method must be submitted (PDF).

Lower of Cost or Market (LCM)

Most taxpayers use the Lower of Cost or Market Method (LCM). The LCM method is the same as the cost method (which simply requires inventory to be valued at its acquisition cost), except when the fair market value of the merchandise drops below cost. If the dealer is unable to recover its cost on the merchandise because the "market" has fallen below cost, the dealer is allowed to recognize the difference even though the loss has not been realized.

With the LCM method, the "market" generally refers to replacement cost for the same goods in the same quantities that the taxpayer would normally acquire. For auto dealers, the "market" will often be the retail sales price after markdowns and discounts. It is important to remember that the market value cannot be estimated. The taxpayer must actually offer (or be offered) those goods for sale at that price in order to call it market.

When you offer merchandise for sale at a price lower than market, you can value the inventory at the lower price, less the direct cost of disposition. These prices are figured from the actual sales for a reasonable period before and after the date of your inventory. Prices significantly different from the actual prices are not acceptable.

If no market exists, or if quotations are given without reference to actual conditions because of an inactive market, you must use the available evidence of fair market price on the dates nearest your inventory date. This evidence could include specific purchases or sales you or others made in reasonable volume and in good faith or compensation amounts paid for cancellation of contracts for purchase commitments.

You MUST use the FIFO or LIFO methods, explained below, if:

• You cannot specifically identify items with their costs
• The same type of goods are intermingled in your inventory and they cannot be identified with specific invoices

First In, First Out (FIFO)

The First In, First Out method assumes the items you have purchased or produced first are the first items you sold, consumed, or otherwise disposed of. The items in inventory at the end of the tax year are matched with the costs of items of the same type that you most recently purchased or produced.

Last In, First Out (LIFO)

The Last In, First Out method assumes the items of inventory you purchased or produced last are sold or removed from inventory first. Items included in closing inventory are considered to be from the opening inventory in the order of acquisition and acquired in that tax year.

The rules for using the LIFO method are very complex. Two common methods are used to price LIFO inventories, the Dollar-value method and the Simplified dollar-value method. To adopt the LIFO method file Form 970, Application To Use LIFO Inventory Method (PDF).

Dollar-value method - Under the dollar-value method of pricing LIFO inventories, goods and products must be grouped into one or more pools (classes of items), depending on the kinds of goods or products in the inventories.

Simplified dollar-value method - Under this method, you establish multiple inventory pools in general categories from appropriate government price indexes. You then use changes in the price index to estimate the annual change in price for inventory items in the pools. An eligible small business (average annual gross receipts of $5 million dollars or less for the 3 preceding tax years) can elect this method.

For additional information on the LIFO method, see Internal Revenue Code sections 472 through 474.

Differences Between FIFO and LIFO

Replacement Costs / Loss of Inventory

Regardless of which inventory method you use, you must take a physical inventory at reasonable intervals and the book figure for inventory must be adjusted to agree with the actual inventory. Precise inventory records will assist you if you were ever to incur a loss. There are several ways to claim a casualty or theft loss of inventory.

You can claim a casualty or theft loss of inventory, including items you hold for sale to customers, through the increase in the cost of goods sold by properly reporting your opening and closing inventories. If you choose to report the loss this way, you cannot claim the loss again as a casualty or theft loss. Any insurance or other reimbursement you receive for the loss is taxable.

You can also choose to take the loss separately as a casualty or theft loss. If you take the loss separately, adjust opening inventory or purchases to eliminate the loss items and avoid counting the loss twice. Also, reduce the loss by the reimbursement you receive or expect to receive. If you do not receive the reimbursement by the end of the year, you cannot claim a loss for any amounts you reasonably expect to recover.

If your inventory loss is due to a disaster in an area determined by the President of the United States to be eligible for federal assistance, you can choose to deduct the loss on your return for the immediately preceding year. However, you must also decrease your opening inventory for the year of the loss so the loss will not show up again in the inventory.

If your creditors forgive part of what you owe them because of your inventory loss, this amount is treated as income and is taxable.