Included in a report released by the Treasury Inspector General for Tax Administration, is an interesting fact about IRS audit activities through 2012. Corporations with more than $10 million in assets have about an 18% chance of being audited by the IRS, while those with less than $10 million in assets are audited less than 1.2% of the time. The IRS considers a company that has total assets in excess of $10 million to be a large business. Audits of these businesses are conducted by the Large Business and International Division of the IRS. This division serves taxpayers that “employ large numbers of employees, deal with complicated issues involving tax law and accounting principles, and conduct business in an expanding global environment.” Many taxpayers, like auto dealers, may consider themselves small businesses and would not expect to be included in this division.
In the past, the total assets of single point auto dealerships would not typically exceed this $10 million threshold, but we are seeing more instances lately where this does not hold true. The trend in total inventories has been steadily rising for a number of years now and consequently, so has the trend in total assets. The International Business Times reports that January, 2014 inventories at U.S. auto dealerships were up significantly over January, 2013 and at their highest levels since 2009. While it may not be overly painful to carry excess inventory in a low-interest-rate environment, it is still a source of frozen capital and, if it causes total assets to exceed $10 million, it can lead to a greater chance of an IRS audit.
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