Recently, there has been a lot of buzz in the industry regarding the Internal Revenue Service and its electronic record keeping requirements for car dealers. Revenue Procedure 98-25 of the internal revenue code was issued in 1998, so why all the fuss now?
The procedure requires dealers to maintain an electronic version (that can be read by any PC) of all general ledger activity going back seven years. Dealers also are required to maintain all of the supporting documents, including all invoices.
It was a question of ability — or rather, inability. Businesses and dealers were using computer systems that could not store data in a means that met the IRS requirements. That did not however, relieve a dealer from the responsibility of complying with the law or the resulting penalties for non-compliance.
But for the most part, the IRS did not make Revenue Procedure 98-25 an issue. For years, the IRS tried coaxing dealer-management system vendors into helping dealers become compliant, but met with little success. As data storage becomes easier, the IRS is beginning to enforce the rule.
Many DMS providers have tested software in cooperation with the IRS that meets its requirements if installed and used appropriately. Let's regress a bit though and look at some key issues that are addressed in Revenue Procedure 98-25 and then consider a forward plan of action.
Documentation: The taxpayer must maintain and make available to the IRS upon request documentation of the business processes that create, modify, maintain and retain its records. In addition, support and verification of entries made on the taxpayers return to determine the tax liability is required. Documentation to support the authenticity and integrity of the taxpayer's records is also required.
Resources: The taxpayer must provide the IRS at the time of examination with the resources (hardware, software, terminal access, etc.) that the IRS determines is necessary to process the books and records.
If your records are stored in an electronic format as opposed to hard or printed copy, you are headed in the right direction. That is until you switch vendors. What happens when you switch from, say,to Reynolds & Reynolds or vice versa? The data might not be readable or accessible to you with the new DMS provider. So, that requires a data conversion, which means money. In some cases it could be six figures to convert data into a format that was readable for the IRS or anyone else.
Many DMS providers have developed a solution that allows the customer to store the data in a format that can be read or retrieved with or without the use of their system. In other words, the data can be stored to a CD and read from a personal computer. Make sure to ask for this from your provider since many of them do not advertise the service to their customers.
We corresponded with several DMS vendors to determine what solutions they offer to help you address the record retention requirements from the IRS.
We've provided a guide for you based on the responses we received. (Some vendors who chose not to participate in the questionnaire).
ADP software now produces an audit file (automatically during fiscal year-end close) that will meet the electronic audit requirements of the IRS and the Canada Revenue Agency (CRA).
Enhancements are available for 9200 and the upgraded DMS upon load of the AC/GL981 or AC/GL990B releases.
This is now a standard part of ADP Accounting software and the file is created during the fiscal year-end close.
If the client uses the Month-13 feature of ADP's software, the audit file is augmented with Month-13 data during the Month-13 close.
Files can be retained on the DMS for multiple years. The audit files can also be uploaded to a PC and written to a CD or DVD, and provided to the IRS or CRA during an electronic audit.
These enhancements have been validated during a field test with participation by IRS & CRA representatives and are contained in the release and load bulletins at no charge.
ACS — Automotive Computer Services
The ACS system “ACCESS” retains all “machine-sensible records” forever and is capable of viewing, printing and exporting these records to Excel. This data can also be stored on CDs or DVDs. It does not require additional software or hardware; it is built into the system. In addition, there is no additional fee for this feature functionality.
All month-end and year-end financial documents that are normally printed are archived into PDF format on the Auto/Mate server and can be read by Auto/Mate's Doc/Mate module or can be transferred to a CD for reading by Adobe Acrobat. These files are automatically archived during the close-out process and kept forever. In addition, all accounting detail with audit trail is kept on the system for up to eight and a half years, and can be accessed at any time. These files are transferable in standard-delimited format if necessary.
Reynolds and Reynolds Co.
Reynolds and Reynolds' ERA Accounting allows users to produce a monthly IRS audit file that can be downloaded to a PC by running executable 0713. This software has been part of ERA (free of charge) for over 4 years. POWER uses the Accounting Detail Download (ADL) that automatically generates files for download to a PC in a comma-delimited format that helps simplify IRS audits. Both accounting applications are under ongoing review by the IRS. Meanwhile, ERA Accounting has been approved by the Canada Revenue Agency (CRA).
Meanwhile, Reynolds and Reynolds' Kodata archiving solutions and Electronic Document Management (EDM), -- both of which have been validated by the IRS -- archive or save all month-end information and various reports as needed. EDM archives 14 different types of documents, plus all month-end information that can be readily available from any workstation at any time.
I also spoke with Terri Harris, Motor Vehicle Technical Advisor for the IRS, to get the agency's perspective on the rule.
She comments: “The IRS will continue to work with individual dealership software vendors, at their request, on compliance with Revenue Procedure 98-25 and Revenue Procedure 97-22. Our level of involvement in the past has varied by vendor ranging from detailed discussions on system modifications to consultation only. We look forward to continuing to work with dealership software vendors; however the requirement to maintain appropriate electronic records remains the responsibility of the dealership.”
You need to ask, how comfortable are you that your vendor can satisfy and meet the IRS record retention requirements? This issue is not going away, and at the end of the day, it is the dealer who is responsible to produce the records required by the IRS, not the DMS provider. You owe it to yourself to ask your vendor to determine where your risks and exposure lies. Once you have gained some insight and facts, I believe it would be wise to share this information with your accounting firm. You should have a plan of action in place now for the possible event of an IRS audit in the future. A little due diligence now could pay big dividends for you down the road.
Certified Public Accountant Wayne Fortier is a dealership consultant with Dixon Hughes PLLC. He is at 919-876-4546.
Questions or comments about this column? Send us an e-mail at Dealers@wardsauto.com.