The Internal Revenue Service appears to be increasing audit efforts within the used-vehicle industry. And one particular element is especially important for buy-here, pay-here dealers to understand: Form 1099-C.
Before delving too heavily into this wideranging topic, two accounting experts indicated operators need to understand one important point. If the BHPH store Scott Ruby has a related finance company, the potential to file these IRS forms might be necessary.
"If the dealership itself collects the paper, no Form 1099-C is required. But the more common structure is that the car dealership sells the paper to their related finance company, and in that structure the finance company does have to comply with the Form 1099-C requirement," said Scott Ruby, a tax director at McGladrey, a nationwide accounting firm.
And based on decades of industry interaction by Ken Shilson, president of the National Alliance of Buy- Here, Pay-Here Dealers, the majority of BHPH dealerships have a related finance company.
"Most dealers in the United States that have a significant portfolio have a related finance company. There are a few that don't, but the vast majority do,'" Shilson said.
"There is considerable IRS audit activity right now in the used-car industry," he continued. " The IRS for whatever reason has decided to bring the Form 1099-C issuance question into IRS audit Examinations and levy potential large fines for failure to comply.
"What was an overlooked thing in the past because of past regulations now has been moved to the front burner," Shilson added.
Past Behavior and Dire Consequences
Both Ruby and Shilson cautioned operators who might not have been aware that they were required to provide Forms 1099-C to customers (and file the forms with the IRS) even if a voluntary repossession or a charge-off of debt occurred. The IRS takes the position that Form 1099-C reporting is required if one Of eight triggering events have occurred that McGladrey dissected.
" The importance here is that, on the federal income tax return for every business, an officer or owner of a company who signs the tax return must indicate or confirm that they have filed all of the necessary Forms 1099. The returns are signed under penalties of perjury. It's real important that people understand these rules, which can be confusing, to avoid penalties for failing to comply," Ruby said.
"You also want to make sure that you're not issuing Forms 1099-C if they are not required if, for no other reason than an unnecessary 1099 is going to be confusing to a customer and may cause conflict or angst between the dealership and customer. You don't want any upset people who might return to your showroom," he continued.
Shilson also emphasized that sending Form 1099-C forms unnecessarily puts even more strain on an operator who already is contending with other issues such as collecting on contracts, increasing sales or focusing on other compliance matters.
"It's costly to do all of this. You've got to figure out exactly what the discharge amount was on an account-by-account basis. You've got to issue all of these forms. There's a lot of labor involved. You sure don't want to do more than what you have to do," Shilson said.
"Once you open Pandora's Box and you start issuing them, if you haven't been issuing them in years past, you may expose yourself to possible liability from prior years," he continued.
Confusion on the Issue
The entire subject has been a stirring controversy for the past 18 months. Differing opinions from attorneys and certified public accountants added to the confusion.
Shilson told BHPH Report he discussed this matter with several other CPAs and received different recommendations. Several have had different experiences during IRS examinations.
After communicating with Shilson, Ruby approached BHPH Report about being a source for an ongoing series because, "There is stuff on the Internet and being sent to buy-here, pay-here dealers that's just flat wrong.
"As Ken said, you have increased IRS attention to this industry. This is going to be one of the standard requests in an IRS exam will be to list the accounts you have settled and show the agent the Forms 1099-C," Ruby added.
Both Ruby and Shilson explained that confusion stems from the IRS sending instructions about Form 1099-C along with the similar but different Form 1099-A, which is associated with the abandonment of physical property.
Shilson recommended operators consult with their tax and legal advisers and adhere to the proper instructions.
"When the IRS released the instructions, the rules for Form 1099-A and Form 1099-C were packaged together. The point is to make sure you read the separate instructions,"Shilson said.