As Federal Excise Tax (FET) continues to be a source of confusion, frustration, and complexity for heavy-duty truck and trailer dealers, the thought of an IRS exam only increases the level of anxiety that dealers already have. As such, dealers would be wise to review their systems, personnel, and overall FET function to ensure that they are compliant.
For some dealers, IRS exams have not been a burden or punitive in nature. But other dealers have had to endure some intense anxiety and stress, exhaust valuable time and resources, and in some cases, write some large checks after an exam. Even if your intentions are honest and you never intended to run afoul of the law, your innocent errors could cost you considerably in connection with tax, interest, and penalties.
To help your dealership remain compliant and prepared for when (not if) the IRS pays you a visit, I offer the following simple and inexpensive suggestions. While this is not an exhaustive list, each should help position your organization well for a “clean” or “no change” exam result.
Include FET Calculations in Deal Files. You need the calculations on every single deal to support the FET basis and the amount of FET being charged to the customer. If you are relying upon outside calculations for FET, make sure you review your template on a regular basis to ensure there are no formula errors or hard-coded numbers that could create issues or discrepancies with the FET calculations.
Keep the Proper and Accurate Exemption Certificates on File. First, you should keep exemption certificates in the deal file for your purchase from the OEM and your subsequent sale for any exempt transactions. Deals can happen quickly, so take the time now to ensure proper support is obtained and documented in the deal file. This practice can save you time and grief later upon examination. Second, in nearly every FET exam, there is an issue with a bad exemption certificate. It can be an issue with an improperly executed certificate, the wrong certificate, or no certificate at all. In either case, make sure you’re double-checking exemption certificates on every exempt sale.
Create a Deal File Checklist. When closing a deal, all parties involved in sales, operations, and accounting should play a key role in connection with ensuring that the requisite sales orders, invoices, FET calculations, and exemption certificates are present in the deal file. One way to ensure the proper checks and balances occur is to implement a deal file checklist that requires each party to sign off on the required documentation.
Review Relentlessly. I always recommend our dealer clients to go back through each exempt sale and a sizeable sample of taxable sales to ensure the correct documentation, calculations, and valid exemption certificates are present in each deal file. If your dealership does not have the discipline or resources for a project of this nature, consider hiring an outside FET resource or provider to assist. With a 12 percent tax, finding just one incorrect deal and correcting the problem prior to an exam can pay for this exercise all by itself.
Validate Your Marketing Materials. Your marketing materials should support the taxable and non-taxable sales positions taken on each unit and/or article. As such, make sure each piece of collateral is consistent and does not contradict what you’re selling as taxable and non-taxable. The IRS will request and review documents of this nature to validate your exempt sales. Additionally, don’t forget to review your website material too. The IRS will generally always look at this information to find the specific uses of the equipment that you’re selling.
Train Your Employees. That long-time employee who knew FET well just quit. Does the new employee know the FET laws, or even know what FET is? Make sure all of your sales, operational, and accounting personnel are well-trained on FET. They should all understand and know how to review sales invoices for FET accuracy. Cross-train your accounting personnel on FET to ensure operations continue in a smooth and accurate manner when vacations, sick days, and other absences arise.
Be Consistent with FET Protocol in All Your Locations. Inconsistent application of FET across multiple entities and locations causes concern with IRS agents and can result in dire consequences for your dealership. If you have more than one location selling the same type of unit, make sure your procedures for FET calculations, exemptions, etc., are the same at each location.
Don’t Mistake Publications for Law. While publication 510 is widely used and often referred to for FET answers in industry, it is not law, nor should it be cited as such. We continue to see dealers refer to Publication 510 to support the exempt sale of a unit or article. Unfortunately, when the IRS reviews and examines the sale, an otherwise exempt sale under Publication 510 can become a taxable sale as you drill down on the facts and circumstances. As such, dealers should rely upon the actual code, regulations, revenue rulings, and court cases to support positions taken in connection with taxable and non-taxable sales.
Don’t Give into What Others Deem as Taxable and Non-taxable. Don’t rely upon your OEM, your customers, or other dealers to determine your exempt sales. FET ultimately falls back on the seller when determining who should be charging, collecting, and remitting the requisite amount of tax. Some customers may try to “cheat” the system to save themselves tax. Other dealers may have aggressive approaches or interpretations of the law just to get the sale, and OEM’s should never be in the business of giving tax advice. As such, be very careful of relying upon others when selling exempt.
Don’t Get Smug About Your “Clean” Audit History. You cruised through past exams? Congratulations! Now get over it. A clean audit history in no way should be relied upon as future audit protection or assurances. The next exam could focus on an entirely different issue or area. Plus, turnover, and new employees can lead to something being done incorrectly. In addition, you may have added a new line of equipment or articles that were not present in the prior exam that are being incorrectly sold as exempt. In short, good past results are not a guarantee of the same future results.
Get Experts and Professionals on Your Side. During an exam, I highly recommend having representation (e.g., CPA or attorney) present who is familiar with the exam process, the laws, knows the documents to be signed during the exam, and provides a buffer between you and the agents. Such insulation allows you to prepare the most accurate response to questions and can guard against quick, incorrect, or poorly thought-out responses from your dealership’s personnel. In short, if an agent has a question, it should be filtered through your representative prior to being answered.
These are just a few ways your dealership can stay in compliance with FET laws and be prepared for an IRS exam. If you have any questions or would like additional information or guidance on these suggestions, please contact Tim Reynolds at tim@dhw.cpa or 828.322.2070 to learn more.