IRS audits & RFC setup Steven Goldberg, CPA Steven Carstens, CPA SGC Accounting
IRS audit issues
IRS audit hot topics: Expanding the audits to include all entities Bad debts Issuing 1099 forms Inventory issues IRS 26 point checklist
Expansion of audits Government regulations and reporting requirements allow for so much information Agents are checking your state s DMV record and matching up sales Agents are researching information on owners
Bad debts Policy for determining when an account should be written off Right to cure letter Proof of transfer of title Guidebook to determine repo ACV Lookback loss
Issuing 1099's Issue for contract labor, interest, rent, cancellation of debt and service providers Penalties can be steep Must be issued to individuals by January 31
Inventory Make ready expenses included in inventory balance Guidebook value to determine market value for inventory write down (if on lower of cost or market method)
IRS 26 point checklist IRS issued a 26 point audit checklist for related finance companies This checklist is for their own auditors to follow and so you should follow the same checklist
Setting up and operating a related finance company
Cash basis versus accrual basis In general, IRS requires any entity where inventory is a significant part of operations to file on the accrual basis of accounting.
Legal structure of a RFC IRS regulations that allow you to deduct the loss on sale of finance receivables from a dealership to an RFC apply only to corporations. Therefore both the dealership and the RFC must be corporations (C- Corporations, S-Corporations, or LLCs filing as corporations).
Selecting the discount rate for selling receivables to the RFC IRS rules require that notes be sold to your RFC at fair market value. In addition, you may not have a discount rate higher than your gross profit in the deal, as dealers may not sell receivables to the RFC for less than they have in the deal.
Paying for the receivables purchased from the dealership Because the sale of the receivables between the dealership and the RFC must be completed as though the RFC were a third party finance company, the RFC must pay in-full for the receivables it purchases in a reasonable amount of time.
Documenting the sale of receivables between the dealership and the RFC You must have proper legal documentation, which details and supports the sales of the receivables from the dealership to the RFC. Without the supporting legal documents, the IRS could argue that the sale of receivables never took place.
Non-recourse sale When the RFC buys the receivables, it must assume full risk of loss if the receivable turns out to be a bad debt.
Properly capitalizing the RFC IRS rules require that the RFC be a fullfledged company. It should have adequate capital to cover its startup expenses and to purchase the initial batch of receivables.
Sharing expenses between the dealership and the RFC The related finance company must pay its fair share of the expenses, particularly things like collector salaries, rent and telephone. The RFC should also pay reasonable salaries to the officers.
Commingling funds between the dealership and the RFC Dealers often only have one cashier and all of the money collected during the day just gets deposited into the bank account of the dealership. IRS rules require the you separate collections belonging to the RFC and deposit them directly into the RFC s bank account.
Managing basis When a dealer has a RFC in place, often the dealership will have little to no profit and the RFC will have significant profit. Dealers need to take their distributions from the entity that has profit and basis to avoid tax penalties.