BHPH Report January 2014 : Page 1
2013 Is in the Rearview Mirror, So What’s Ahead? What Are You Doing Today To Bring Your Customers Back? Department of Justice Sues Two North Carolina BHPH Dealers 4 A Publication of NABD and SubPrime Auto Finance News 5 9 January 2014 | Volume 1 | No. 1 BHPH Buzz: Perceived Rise in Voluntary Repossession Sparks Operators’ Concerns By Nick Zulovich, Editor IRS Audits of Operators on the Rise Vital to Understand Form 1099-C Protocol By Nick Zulovich, Editor OVERLAND PARK, Kan. — Brent Carmichael of NCM Associates attends close to 60 meetings annual-ly throughout the country with 20 Groups of buy-here, pay-here dealers. While meeting agendas ofen include discussions about regulatory compliance, Carmichael in-dicated another specifc topic is prompting BHPH oper-ators to lean on each other to fnd answers that will ben-eft the single gravel-lot dealer as well as the multi-store, multi-state company. BUZZ continued on page 3 “When I’m in dealerships doing consulting about collections or sales, one of the things we do take a look at is we do audit some of their charge-offs, and we go back and I read the notes to go back to see what happened.” Brent Carmichael, NCM Associates J.D. Byrider’s award-winning dealerships HOUSTON and RALEIGH, N.C. — Te Internal Revenue Service appears to be increasing audit eforts within the used-vehicle industry. And one partic-ular element is especially important for buy-here, pay-here dealers to under-stand: Form 1099-C. Before delv-ing too heavily into this wide-ranging top-ic, two account-ing experts in-dicated opera-tors need to un-derstand one im-portant point. If the BHPH store Scott Ruby has a related f-McGladrey nance compa-ny, the potential to fle these IRS forms might be necessary. “If the dealership itself collects the paper, no Form 1099-C is required. But the more common structure is that the car dealership sells the paper to their re-lated fnance company, and in that struc-ture the fnance company does have to comply with the Form 1099-C require-ment,” said Scott Ruby, a tax director at McGladrey, a nationwide accounting frm. And based on decades of indus-try interaction by Ken Shilson, presi-dent of the National Alliance of Buy-Here, Pay-Here Dealers, the majority of BHPH dealerships have a related fnance company. “Most dealers in the United States that have a signifcant portfolio have a related fnance company. Tere are a few that don’t, but the vast majority do,’” Shilson said. “Tere is considerable IRS audit ac-tivity right now in the used-car indus-try,” he continued. “Te IRS for whatev-er reason has decided to bring the Form 1099-C issuance question into IRS audit examinations and levy potential large fnes for failure to comply. “What was an overlooked thing in the past because of past regulations now has been moved to the front burner,” Shilson added. Past Behavior and Dire Consequences Both Ruby and Shilson cautioned operators who might not have been aware that they were required to provide Forms 1099-C to customers (and fle the forms with the IRS) even if a voluntary repossession or a charge-of of debt oc-curred. Te IRS takes the position that Form 1099-C reporting is required if one BHPH Report’s Form 1099-C Series Learn more about J.D. Byrider’s outstanding 2013 dealership performance 11 Future issues will tackle other elements so operators can handle the responsibilities of these Internal Revenue Service mandates, including: • Compliance issues to consider • Customer insolvency • Recent IRS audit positions • Differences between state and federal rules • Defense considerations of eight triggering events have occurred that McGladrey dissected. “Te importance here is that, on the federal income tax return for every busi-ness, an ofcer or owner of a company who signs the tax return must indicate or confrm that they have fled all of the necessary Forms 1099. Te returns are signed under penalties of perjury. It’s real important that people understand these rules, which can be confusing, to avoid penalties for failing to comply,” Ruby said. “You also want to make sure that you’re not issuing Forms 1099-C if they are not required if, for no other reason than an unnecessary 1099 is going to be confusing to a customer and may cause confict or angst between the dealership and customer. You don’t want any upset people who might return to your show-room,” he continued. Shilson also emphasized that send-ing Form 1099-C forms unnecessar-ily puts even more strain on an oper-ator who already is contending with IRS continued on page 6
BHPH Buzz: Perceived Rise In Voluntary Repossession Sparks Operators’ Concerns
OVERLAND PARK, Kan. — Brent Carmichael of NCM Associates attends close to 60 meetings annually throughout the country with 20 Groups of buy-here, pay-here dealers. While meeting agendas often include discussions about regulatory compliance, Carmichael indicated another specific topic is prompting BHPH operators to lean on each other to find answers that will benefit the single gravel-lot dealer as well as the multi-store, multi-state company.
Throughout 2013, Carmichael shared with BHPH Report how dealerships seem to be seeing a rise in voluntary repossessions. While the industry benchmarks NCM Associates compiles with Subprime Analytics are still being finalized, Carmichael is still unsure if voluntary repossessions are spiking as much as dealers fear. Some of the early data he's reviewed shows only a few operators in some of his 20 Groups are enduring significant rises in voluntary repossessions.
"I think it's a feel," Carmichael said. "The sense is everybody is giving up earlier because they're kind of blaming subprime (finance companies) and what they're doing, buying into sub-500 credit. So people are just dropping off cars and buying cars in other places, which has always happened. That's not any different.
"The only difference in subprime now and what it's been in the past is that it's been around a lot longer and has been aggressive a lot longer because money is so cheap right now. And it has been for two years," Carmichael continued. "As long as money is cheap, they're going to be buying deep. So I think it's lasted a little bit longer, and I think dealers have been a little more hypersensitive to customers dropping them off.
"When I'm in dealerships doing consulting about collections or sales, one of the things we do take a look at is we do audit some of their charge-offs, and we go back and I read the notes to go back to see what happened," he went on to say. "I'm not seeing it from the consulting I'm doing that here it's Monday morning and a customer who's never missed a payment and all of a sudden their car is on the lot. I'm not really seeing that as a trend as of now. But the 'dealer feel' is that it's on the rise."
Carmichael spotted another element that might be triggering BHPH dealer concern over voluntary repossessions. While the exact benchmark numbers will be revealed during the National Alliance of Buy-Here, Pay-Here Dealers Conference in May in Las Vegas, he is noticing that softer sales combined with charge-off amounts remaining steady or even hedging up slightly could be eroding at operators' confidence — and their bottom lines.
"In 2007, 2008, 2009, 2010, the downturn for everybody else was our upturn," Carmichael said. "We flourished in 2009, 2010 and even into 2011 because subprime wasn't back and customers couldn't buy anywhere else. We're starting to see some of the residual effect of really good years and now normal years with some charge-offs."
Carmichael is anticipating that voluntary repossessions will be a subject of 20 Group meetings he orchestrates throughout this year. He is leaning on decades of BHPH experience to formulate strategy recommendations for NCM Associates clients and other operators who seek his recommendations.
"I think it's hypersensitivity at this point," Carmichael told BHPH Report about voluntary repossessions. "I'm not seeing anything personally that concerns me that's really out there as far as not being in cyclical or in a normal cycle. Charge offs are up as far as severity and dollar wise, and they should be because (actual cash values) are going up.
"It's something dealers are very aware of," he continued. "Something they've been concerned about is how to I stop them or mitigate them if at all possible. We're all looking to find the true trend out there whether customers are giving up quicker or just finding another option they didn't have before."
IRS Audits Of Operators On The Rise
Vital To Understand Form 1099-C Protocol
HOUSTON and RALEIGH, N.C. — The Internal Revenue Service appears to be increasing audit efforts within the used-vehicle industry. And one particular element is especially important for buy-here, pay-here dealers to understand: Form 1099-C.
Before delving too heavily into this wideranging topic, two accounting experts indicated operators need to understand one important point. If the BHPH store Scott Ruby has a related finance company, the potential to file these IRS forms might be necessary.
"If the dealership itself collects the paper, no Form 1099-C is required. But the more common structure is that the car dealership sells the paper to their related finance company, and in that structure the finance company does have to comply with the Form 1099-C requirement," said Scott Ruby, a tax director at McGladrey, a nationwide accounting firm.
And based on decades of industry interaction by Ken Shilson, president of the National Alliance of Buy- Here, Pay-Here Dealers, the majority of BHPH dealerships have a related finance company.
"Most dealers in the United States that have a significant portfolio have a related finance company. There are a few that don't, but the vast majority do,'" Shilson said.
"There is considerable IRS audit activity right now in the used-car industry," he continued. " The IRS for whatever reason has decided to bring the Form 1099-C issuance question into IRS audit Examinations and levy potential large fines for failure to comply.
"What was an overlooked thing in the past because of past regulations now has been moved to the front burner," Shilson added.
Past Behavior and Dire Consequences
Both Ruby and Shilson cautioned operators who might not have been aware that they were required to provide Forms 1099-C to customers (and file the forms with the IRS) even if a voluntary repossession or a charge-off of debt occurred. The IRS takes the position that Form 1099-C reporting is required if one Of eight triggering events have occurred that McGladrey dissected.
" The importance here is that, on the federal income tax return for every business, an officer or owner of a company who signs the tax return must indicate or confirm that they have filed all of the necessary Forms 1099. The returns are signed under penalties of perjury. It's real important that people understand these rules, which can be confusing, to avoid penalties for failing to comply," Ruby said.
"You also want to make sure that you're not issuing Forms 1099-C if they are not required if, for no other reason than an unnecessary 1099 is going to be confusing to a customer and may cause conflict or angst between the dealership and customer. You don't want any upset people who might return to your showroom," he continued.
Shilson also emphasized that sending Form 1099-C forms unnecessarily puts even more strain on an operator who already is contending with other issues such as collecting on contracts, increasing sales or focusing on other compliance matters.
"It's costly to do all of this. You've got to figure out exactly what the discharge amount was on an account-by-account basis. You've got to issue all of these forms. There's a lot of labor involved. You sure don't want to do more than what you have to do," Shilson said.
"Once you open Pandora's Box and you start issuing them, if you haven't been issuing them in years past, you may expose yourself to possible liability from prior years," he continued.
Confusion on the Issue
The entire subject has been a stirring controversy for the past 18 months. Differing opinions from attorneys and certified public accountants added to the confusion.
Shilson told BHPH Report he discussed this matter with several other CPAs and received different recommendations. Several have had different experiences during IRS examinations.
After communicating with Shilson, Ruby approached BHPH Report about being a source for an ongoing series because, "There is stuff on the Internet and being sent to buy-here, pay-here dealers that's just flat wrong.
"As Ken said, you have increased IRS attention to this industry. This is going to be one of the standard requests in an IRS exam will be to list the accounts you have settled and show the agent the Forms 1099-C," Ruby added.
Both Ruby and Shilson explained that confusion stems from the IRS sending instructions about Form 1099-C along with the similar but different Form 1099-A, which is associated with the abandonment of physical property.
Shilson recommended operators consult with their tax and legal advisers and adhere to the proper instructions.
"When the IRS released the instructions, the rules for Form 1099-A and Form 1099-C were packaged together. The point is to make sure you read the separate instructions,"Shilson said.
The 36-Month Rule
The last triggering event, often referred to as the 36-month rule, has been a particular source of confusion as no formal or legal cancellation of the debt has occurred, and the lender may still fully intend to continue minimal efforts to collect the debt (such as through automated mailings).
The good news is that, for testing periods that end on or after Dec. 31, 2007, independent specialty finance lenders may be exempt from filings to report events under the 36-month rule. Only the following types of entities continue to be required to report under the 36-month criteria:
• Domestic banks, savings and loans, and other entities described in section 581 or 591(a)
• Credit unions
• Specifically listed government or quasi-government entities
• Corporations that are subsidiaries of a financial institution or credit union that is also subject to supervision and examination by a federal or state regulatory agency
Therefore, while specialty finance companies owned by one of the entities listed above likely are subject to the 36-month rule, others may well not be. The 36-month rule has caused considerable confusion. In fact, the IRS is currently inviting public comments on this rule. Your organization may wish to take this opportunity to weigh in on the issue with the IRS.
The final word on the triggering events? They are complicated. Lenders are advised to check with their tax advisers before taking any action.
8 Potential Triggering Events For Form 1099-C
Consider the eight triggering events that indicate a finance company should issue a Form 1099-C:
1. A discharge of indebtedness under Title 11 of the U.S. Bankruptcy Code (bankruptcy) for business or investment debt.
2. A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure or similar federal or state court proceeding.
3. A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for fling a claim or beginning a deficiency judgment proceeding expires. The expiration of the statute of limitations is an identifiable event only when a debtor’s affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired.
4. A cancellation or extinguishment when the creditor elects foreclosure remedies that by law end or bar the creditor’s right to collect the debt. This event applies to a mortgage lender or holder that is barred by local law from pursuing debt collection after a “power of sale” in the mortgage or deed of trust is exercised.
5. A cancellation or extinguishment due to a probate or similar proceeding.
6. A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration.
7. A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor’s deifined policy can be in writing or an established business practice of the creditor. A creditor’s practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a deifined policy.
8. The expiration of the nonpayment testing period (commonly referred to as the 36- month rule).
While some of the triggering events are relatively straightforward, others are anything but. Detailed technical analysis may be necessary to determine whether a triggering event has in fact occurred. For example, of the eight triggering events above:
• Event No. 1
Does not apply to personal (non-investment) loans discharged in bankruptcy.
• Event No. 3
Requires court action, and the borrower must have raised an affirmative defense. Te mere passing of time does not trigger event three.
• Event No. 7
Has two prongs. Te company must have a policy to discontinue collection activity, and abandon the debt. Many companies discontinue active collection but do not abandon the debt in the hopes that the borrower might pay at a future date.
Read the full article at http://digital.subprimenews.com/article/IRS+Audits+Of+Operators+On+The+Rise/1626134/195187/article.html.