NOVI, MI – New-car dealers will undergo more Internal Revenue Service audits, says Terri S. Harris, motor vehicle technical adviser for the federal agency.

Why more dealership tax-return audits? Because many domestic dealerships have experienced tightening profits and revenue challenges in the past two years.

That raises the greater possibility of dealers fudging on their tax returns. At least that is how the IRS sees it.

“We are hiring more auditors to handle the dealer load, which is rising with the recession in sales for domestic brands,” Harris tells an annual auto dealership conference here of the Michigan Assn. of Certified Public Accountants.

And where is the IRS getting those extra staffers?

From an ironic source, as it turns out. “Many of our new examiners are laid-off finance personnel from auto makers or dealerships,” says Harris.

She denies dealerships are “a favorite target” for tax audits. Nor is the IRS necessarily trying to catch dealers doing something wrong, she claims.

“We want to help you stay out of trouble,” she says, and to “not overpay” on taxes.

She reminds dealership principals, chief financial officers and CPAs that the IRS insists dealers comply with filings of 8300 forms for cash payments above $10,000, and the IRS is cracking down on a rule requiring retailers with sales of $10 million per year to capitalize certain costs as “resellers” with production activity.

Meanwhile, another conference attendee, James Egan of Plante and Moran, a certified public accounting firm, warns auto dealers to beware of fraud schemes.

He doesn’t want to cause alarm, but a dealer unworried about fraud “may soon find nothing left to worry about,” he says.

“Dealers are particularly vulnerable to electronic fund transfers (EFT) fraud, unless reasonable protections are in place,” Egan says. Safeguards include daily bank conciliations “preferably by someone with no access to cash or accounting duties.”

Financial and cost-control advice at the conference comes from three dealership chief financial officers:

  • Joel S. Sloan of Joe Panian Chevrolet, Southfield, MI.
  • Joseph S. Fornal of the Ganley dealership group, Lakewood, OH.
  • Ronald R. Ver Planck of Todd Wenzel Pontiac GMC, Hudsonville, MI.

Sloan, a 40-year veteran as a dealership controller and CFO, saved his store $100,000 in insurance premiums by getting bids from three or four insurers.

He reviews cash receipts daily, plus all checks over $2,000.

Ganley’s 19 stores in northeast Ohio have joined a self-insurance group with four other dealer groups, resulting in significant savings over the past five years, says Fornal.

Ver Planck says he is constantly reviewing his dealer management systems providers’ invoices because “they have trouble getting the bill right.”

He says his dealer principal personally interviews every job applicant. Ver Planck says that can save money because a wrong hiring choice can be costly.

Meanwhile, here are 10 ways to cope with ways a dealership can be defrauded, according to Plante and Moran certified public accounting firm:

  • Establish security agreements with the bank concerning EFT transactions. A call-back procedure is effective.
  • Establish an agreement with the bank whereby the dealership cannot sign up for automatic clearing house (ACH) disbursement capability.
  • Do daily bank reconciliations. (Some notification requirements are 24 hours only.)
  • Sign up for bank-provided software that prevents an unauthorized outsider from tapping the cash account.
  • Sign up for positive-pay capability. That’s a process in which only those checks you electronically communicate on a batch basis to the bank are paid by the bank.
  • Effectively use your available ACH password-level controls.
  • Establish a separate floor-plan offset account that effectively is “locked by the financial institution.
  • Reconsider if it is worth the fraud risk to leave large amounts of excess cash in the dealership.
  • Limit the number of check signers.
  • Seek out higher dishonesty-insurance coverage on check signers or any other cash handlers.