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Is the IRS Aware of Car Dealership’s Methods of Underreporting Taxable Income?

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Is the IRS Aware of Car Dealership’s Methods of Underreporting Taxable Income?

48411514 - car dealer with a key. auto dealership and rental concept background.

Many business owners who frequently deal with trade-ins and cash purchases frequently believe that these and other factors provide the plausible cover they need to fraudulently reduce taxable income. By reducing a company or dealership’s taxable income, the individual also reduces the taxes owed. Unfortunately for business owners who would seek to pad their profits, these types of schemes are reasonably common and well-known to the IRS. IRS agents and auditors are trained to detect common methods utilized by car dealerships and other businesses to conceal or underreport taxable income.

Common Methods Used by Car Dealerships to Commit Tax Fraud

Many auto dealerships offer trade-in deals to potential customers. Essentially, a client can trade-in his or her current vehicle and receive a cash payment or a discount on a subsequent vehicle purchase. There are a number of tax fraud schemes related to car and truck trade-ins that the IRS screens for. To start, the IRS is particularly concerned that purchase and sale prices of the vehicles are recorded. This is due to the fact that, as property, capital gains taxes should be paid when there is an increase in basis. At least some dealerships will misreport or fail to keep records regarding sale and purchase price. Other tax problems that can arise from record-keeping or transactional errors can include:

  • Failure to properly account for vehicle ACV.
  • Are sales taxes included in the gross sale price?
  • Are titling, licensing, or other fees included in the gross sale price?
  • Is there additional income during or after the sale?
  • Is there warranty or service agreement income?
  • Issues stemming from the use of a related finance company (RFC).

Furthermore, some trade-ins can only be described as “junkers.” That is, it is cost prohibitive make the vehicle roadworthy. However, the dealership may accept the trade due to profits on a subsequent purchase. Thus, the dealership may make arrangements with a scrap yard or an auto wrecker to receive compensation for parts and materials supplied. If the dealership has a service center, the company may even use parts from trade-ins in-house. Regardless, the dealership cannot conceal income received in this or similar fashion.

The dealership environment leaves room for both financed purchases and cash purchases. As for financed purchases, the IRS is likely to check for unreported interest income and other tax problems typically associated with auto financing. In the case of a dealership that often conducts business in cash, the IRS recognizes that cash provides a greater opportunity for fraud and abuse. Thus, dealerships with significant cash transactions may attract additional scrutiny. Furthermore, as more and more businesses move online, the IRS also recognizes that the borderless and paperless nature of online business and records also provides for a greater opportunity for fraud and abuse.