Description

IRS Tax Audit Manual for the Auto Body and Repair Industry

Overview of the industry… Discusses some issues that may be encountered – including other sources of income; cost of sales; employment taxes; etc.

TABLE OF CONTENTS

• CHAPTER 1: THE NATURE OF AUTO/BODY REPAIR INDUSTRY
  • Overview 1-1
  • Description of Auto Body Repair Process 1-2
  • Repair/Replacement 1-2
  • Paint Process 1-2
  • Other Processes 1-3
  • Estimation Process 1-3
  • Differences Between Body and Repair Shops 1-4
• CHAPTER 2: DOCUMENTS AVAILABLE
  • Introduction 2-1
  • General Books and Records 2-1
  • Specific Documents 2-2
  • The Mitchell Guide 2-5
  • Organization of Records 2-5
• CHAPTER 3: INITIAL INTERVIEW/TOUR OF BUSES
  • Initial Interview 3-1
  • Tour of Business 3-4
• CHAPTER 4: BALANCE SHEET ACCOUNTS AND M-1 ANALYSIS
  • Introduction 4-1
  • Comparative Review 4-1
  • Cash Account 4-2
  • Inventories 4-3
  • Buildings and Other Depreciable Assets 4-3
  • Other Receivables 4-4
  • Liabilities and Shareholder’s Equity 4-4
  • Treasury Stock 4-4
  • Schedule M-1
  • Review 4-5
• CHAPTER 5: SALES
  • Introduction 5-1
  • Categories of Charges 5-4
  • Labor 5-4
  • Sublet 5-4
  • Towing 5-4
  • Storage 5-5
  • Estimate Fees 5-5
  • Vehicle Sales 5-5
  • Sales Tax 5-5
  • Other Income Sources 5-6
  • Rebates and Refunds of Expense 5-6
  • Sublease of Premises and Equipment 5-6
  • Advertising Space 5-6
  • Old Checks 5-6
  • Other Sources 5-7
  • Accounting for Sales Taxes 5-7
  • Sales Tax Audits 5-8
  • Indications of Underreporting 5-9
  • Estimating Sales 5-9
  • Bank Deposits 5-10
  • Repair Orders 5-12
  • Breakdowns of Sales and Costs 5-13
  • Checks to Check Cashers 5-13
  • Cash Transactions Records 5-13
  • Other Income Issues 5-14
  • Held Checks 5-14
  • Waived Deductibles 5-14
  • Cash Payments 5-15
  • Cashed Checks 5-15
  • Journal Entries 5-17
• CHAPTER 6: COST OF SALES
  • Introduction 6-1
  • Purchases 6-1
  • Records to Request/Examine 6-2
  • Labor 6-4
  • Metal Labor 6-4
  • Frame Labor 6-4
  • Paint Labor 6-4
  • Minor Mechanical Repairs 6-5
  • Labor: Records to Request/Examine 6-5
  • Audit Procedures 6-5
  • Sublet Expenses 6-7
  • Inventory 6-7
  • Inventory Requirements 6-8
  • Records to Examine/Request 6-9
  • Audit Procedures 6-9
  • Inventory Listed on Return 6-13
  • Paint and Supplies Inventory 6-13
  • Change in Accounting Method 6-14
• CHAPTER 7: EXPENSES
  • Introduction 7-1
  • Automobile Expense 7-1
  • Vehicle Owned by Corporation 7-2
  • Vehicle Owned by Shareholder 7-2
  • Leased Vehicles 7-3
  • Entertainment and Promotion 7-3
  • Inadequate Verification 7-3
  • Personal Expenses 7-4
  • Misclassified Business Meals 7-4
  • Gifts 7-4
  • Expense Allowances 7-4
  • Rent Expense 7-4
  • Real Property 7-5
  • Personal Property 7-6
  • Insurance 7-6
  • Prepaid and Accruals 7-6
  • Dividends, Refunds and Claims 7-7
  • Medical Insurance 7-7
  • Life Insurance 7-8
  • Auto Insurance 7-8
  • Officer Compensation 7-9
  • Reasonable Compensation 7-9
  • Bonuses 7-10
  • Journal Entries 7-10
  • Accruals 7-11
  • Loan Accounts and Related Interest Expense 7-11
  • Imputed Interest 7-12
  • Employee Related Expenses 7-14
  • Uniforms 7-14
  • Employee Advances 7-14
  • Group Plans 7-15
  • Bonuses and Gifts 7-15
  • Expenses Reimbursements 7-15
  • Unethical Practices 7-15
  • Automobile Rental Kickbacks 7-15
  • Finders or Referral Fees 7-16
  • Political Contributions and Lobbying Costs 7-16
  • Lien Sale Filings 7-16
  • Towing Service Payments 7-17
  • Insurance Fraud 7-18
  • Smog Certificate Sales 7-18
• CHAPTER 8 : CHANGE IN ACCOUNTING METHOD
  • Introduction 8-1
  • Why Make an IRC Section 481 Adjustment? 8-1
  • Inventory Adjustment 8-1
  • Computation of Accrued Sales and Purchases 8-3
  • Computation of IRC Section 481
  • Adjustment for Accrued Receivables 8-3
  • Determination of Accrued Purchases 8-8
  • IRC Section 481(b)(1) & (2) Limitations 8-8
  • Revenue Procedure 92-20 8-11
• CHAPTER 9: EMPLOYMENT TAXES
  • Introduction 9-1
  • Recharacterization of Payments as Wages 9-4
  • Consistent Treatment as Non-Employees 9-5
  • Occasional Treatment as Non-Employees 9-6
  • Bonuses 9-7
  • Officer Salaries 9-8
  • Other Situations 9-8
  • Examining Returns, Books and Records 9-9
  • The Tax Return 9-9
  • Transcripts 9-9
  • Reconciliation and Form W-2 and
  • 1099 Inspection 9-10
  • Disbursements 9-11
  • Related Returns 9-11
  • Penalties 9-12
  • Backup Withholding 9-12
  • Statutes and Closing Procedures 9-12
• CHAPTER 10: INFORMATION RETURNS/PENALTIES FORM 1099
  • Information Returns 10-1
  • Audit Techniques 10-2
  • Other Issues 10-4
  • Form 8300 Information Returns 10-4
  • Package Audit Requirements/Audit Techniques 10-5
  • Penalties 10-7
  • Failure to File Correct Information Returns —
  • IRC section 6721 10-7
  • Failure to Furnish Correct Payee Statements —
  • IRC section 6722 10-8
  • Backup Withholding 10-9
  • Abatement Procedure for Backup
  • Withholding 10-11
• Glossary G-1