BHPH Report February 2014 : Page 1

Learn From Your Year-End Losses, Don’t Repeat Them Considering BHPH? Here Is a Starting Point or Two A Publication of NABD and SubPrime Auto Finance News 6 13 NABD Ramping Up Compliance Discussion for Academy and National Conference in May 9 February 2014 | Volume 1 | No. 2 Ignoring Form 1099-C Filing Can Become Costly in a Hurry By Nick Zulovich, Editor VINITA, Okla. — The buy-here, pay-here operation Dustin Kerr start-ed to oversee for owner Bill Powell 10 years ago followed a pattern many deal-ers might recognize. The BHPH store FORM 1099-C continued on page 8 started as an off-shoot of a Chrysler franchised dealership — a place where Kerr could send older trade-ins and try BHPH Report’s Form 1099-C Series to retail them on a piece of property Future issues will tackle other elements so already held. operators can handle the responsibilities of “When we these Internal Revenue Service mandates, first got start-including: ed, we didn’t put a ton of thought 9 5 4 • Compliance issues into it,” Kerr the Rise to consider IRS Audits of Operators on Protocol 1099-C said. “Once it Vital to Understand Form • Recent IRS audit positions picked up, we • Defense considerations had to step back • Customer insolvency and say, ‘Hey, • Differences between state this needs a little DUSTIN KERR more attention. and federal rules E-Z Car Credit We need to get a plan in place as to how we’re going to do award-s J.D. Byrider’ First installment can be winning dealerships this because it’s doing well.’” found in the January issue Powell and Kerr did indeed sharpen of the BHPH Report their business plan significantly, so much 11 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 1 | No. 1 January 2014 | Volume A Publication of NABD and SubPrime Auto Finance News HOUSTON and RALEIGH, N.C. — You probably have heard that running cocktail hour joke about the two sure things in life — death and taxes. Well that chuckle starter came up again during the BHPH Report’s conversation with McGladrey’s Scott Ruby when he discussed how important it is for buy-here, pay-here operators who have a related finance company to file Form 1099-C as dictated by Internal Revenue Service guidelines revamped nine years ago. “To my knowledge, there are only two things that have an indefinite statute of limitations. One is murder, and the second is the failure to file a tax form,” Ruby said. “If you have not filed Form 1099-C, your statute is open forever so the IRS right now can audit all the way back to 2005 and assess you penalties.” Assuming that the missed filing is not intentional, there is a $100 penalty for failing to provide a borrow-er with a Form 1099-C by the end of January and a sep-arate $100 penalty against the dealership for failing to file with the IRS by the end of February. Ruby empha-sized that penalties can add up quickly, but there is po-tential relief if operators missed those initial deadlines. “If you’ve missed the deadline for 2013 related fil-ings, your time considerations are still important be-cause penalties increase. The penalties are lower if the late filings are made before Aug. 1. After Aug. 1, it’s at least a $200 penalty per missed Form 1099-C,” he said. He went on to explain that “penalties increase sub-stantially if the failure to file is intentional. Intentional disregard is based upon all the facts. There is always the Successful Operators Stress Importance of Creating & Maintaining Business Plan By Nick Zulovich, Editor BHPH Buzz: Perceived Rise in Voluntary Repossession Sparks Operators’ Concerns By Nick Zulovich, Editor By Nick Zulovich, Editor PARK, OVERLAND Daughtry, NCM Associates to 60 meetings annual-By Gene Associates attends close of Kan. — Brent Carmichael NCM Groups of buy-here, country with 20 Alliance of Buy-Here, ly throughout the HOUSTON — The National meeting agendas often include as well pay-here dealers. While veteran operators Carmichael in-Dealers is giving compliance, Pay-Here discussions about regulatory by learning oper-2014 BHPH to prompting is begin who want topic professionals as another specific dicated all elements will ben-to see that find answers the to chance other industry on each about lean the more ators to as well as the multi-store, dealer action. gravel-lot in single operation thriving efit a the of is set for Jan. 11 next BHPH Boot Camp multi-state NABD’s company. just east of Charlotte. Attend-and 12 in Monroe, N.C., page 3 on continued BUZZ ees will have the all part of the BHPH operation opportunity to examine Ingram Walters, of I’m in who “When has been associated with dealerships NABD since its inception has been running his and doing own dealerships for more consulting than 20 years. about Walters along with Ken founder or NABD collections Shilson intend to use the one of sales, two days to outline every to cre-we it takes things step the that establishing a re-store, we BHPH ate a successful is from do audit at under-look a take do regulatory compliance, company, finance lated will and we to finding inventory that their charge-offs, of collections some writing and to go quickly. and I read the notes for the turn back go session. Register Space is limited for this happened.” to see what back boot camp by visiting bhphinfo.com. Brent Carmichael, NCM Associates Learn more about J.D. Byrider’s outstanding 2013 dealership performance January 2014 N.C. — HOUSTON and RALEIGH, Service appears The Internal Revenue within the to be increasing audit efforts And one partic-used-vehicle industry. important for ular element is especially to under-buy-here, pay-here dealers stand: Form 1099-C. Before delv-ing too heavily into this wide-top-ranging 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 fi-McGladrey nance compa-these IRS forms ny, the potential to file might be necessary. collects the “If the dealership itself is required. But paper, no Form 1099-C is that the the more common structure their re-paper to the sells car dealership in that struc-lated finance company, and have occurred does have to of eight triggering events company finance the ture levy potential large 1099-C require-examinations and that McGladrey dissected. comply with the Form that, on the a tax director at fines for failure to comply. “The importance here is Ruby, Scott said thing in ” busi-ment, “What was an overlooked accounting income tax return for every McGladrey, a nationwide regulations now federal a company the past because of past an officer or owner of front burner,” ness, firm. must indicate of indus-has been moved to the who signs the tax return And based on decades filed all of the Shilson, presi-Shilson added. or confirm that they have try interaction by Ken The returns are of Buy-necessary Forms 1099. dent of the National Alliance of perjury. It’s the majority of and Dire signed under penalties Behavior Here, Pay-Here Dealers, Past understand a related finance real important that people BHPH dealerships have be confusing, to Consequences these rules, which can ” company. comply, to States avoid penalties for failing “Most dealers in the United have cautioned portfolio Ruby said. Both Ruby and Shilson that have a significant sure that There are a operators who might not have been “You also want to make a related finance company. if they majority do,’” aware that they were required to provide you’re not issuing Forms 1099-C few that don’t, but the vast (and file the are not required if, for no other reason Forms 1099-C to customers be Shilson said. voluntary than an unnecessary 1099 is going to IRS audit ac-with the IRS) even if a “There is considerable forms cause may and of debt oc-confusing to a customer used-car indus-tivity right now in the repossession or a charge-off that conflict or angst between the dealership IRS for whatev-The IRS takes the position try,” he continued. “The any upset if one and customer. You don’t want bring the Form curred. er reason has decided to 1099-C reporting is required to your show-into IRS audit Form people who might return 1099-C issuance question room,” he continued. that send-Shilson also emphasized unnecessar-1099-C Series ing Form 1099-C forms on an oper-BHPH Report’s Form can handle the ily puts even more strain other elements so operators with contending is including: Future issues will tackle ator who already Service mandates, responsibilities of these Internal Revenue • Customer insolvency • Compliance issues to consider Differences between state and federal rules • • Recent IRS audit positions • Defense considerations IRS continued on page 6 bhphreport.com 1 that two years after establishing that first BHPH operation with less than 10 ve-hicles, Powell chose to sell his Chrys-ler franchise and delve into the BHPH space exclusively. The pair opened another lot in 2006 that’s now in Miami, Okla., about 25 miles away from the first store. Then when another lot came into the fold two years later, the business plan had to be refined even further because it is situat-ed in another state. That third location is in Pittsburg, Kan. During each growth stop along the way, Kerr has been the director of opera-tions for E-Z Car Credit, working close-ly with Powell to keep the things going according to their plan, which is revisit-ed twice per year. Kerr recollected what that first meeting was like after getting into the BHPH business. “We just stuck five or six cars over there and didn’t even know what we didn’t know,” Kerr said. “We were just going to put a down payment on them and finance them. Once that started picking up pretty quick, we sat down and had to reevaluate. What capital are we going to put aside just for this part of the business? Instead of just put-ting a few cars over there that we trad-ed for, what is a set amount that we’re go-ing to draw from? What’s going to be our operating capital? “From there, your business plan starts to evolve,” he continued. “This is our starting capital so what’s our av-erage ACV going to be? What’s our re-con going to be? That leads you to how many cars are you going to sell a month, all of those things you hadn’t considered much before. “We sat down, and said this is a dol-lar figure that we’re going to devote just to this part of the business. Here’s our av-erage ACV, and this is how many cars we can sell a month. We can’t sell more than this,” Kerr went on to say. “We just grew organically from there.” In order to grow, Brett Carmichael, of NCM Associates, insisted that any size BHPH operator needs to have a sharp business plan in place. During his time as a 20 group leader, Carmichael noted that he’s seen plenty of operators — large BUSINESS PLAN continued on page 4 bhphreport.com 1 February 2014

Ignoring Form 1099-C Filing Can Become Costly to Operators

Nick Zulovich

HOUSTON and RALEIGH, N.C. — You probably have heard that running cocktail hour joke about the two sure things in life — death and taxes.

Well that chuckle starter came up again during the BHPH Report’s conversation with McGladrey’s Scott Ruby when he discussed how important it is for buy here, pay-here operators who have a related finance company to file Form 1099-C as dictated by Internal Revenue Service guidelines revamped nine years ago.

“To my knowledge, there are only two things that have an indefinite statute of limitations. One is murder, and the second is the failure to file a tax form,” Ruby said. “If you have not filed Form 1099- C, your statute is open forever so the IRS right now can audit all the way back to 2005 and assess you penalties.”

Assuming that the missed filing is not intentional, there is a $100 penalty for failing to provide a borrower with a Form 1099-C by the end of January and a separate $100 penalty against the dealership for failing to file with the IRS by the end of February. Ruby emphasized that penalties can add up quickly, but there is potential relief if operators missed those initial deadlines.

“If you’ve missed the deadline for 2013 related filings, your time considerations are still important because penalties increase. The penalties are lower if the late filings are made before Aug. 1. After Aug. 1, it’s at least a $200 penalty per missed Form 1099-C,” he said.

He went on to explain that “penalties increase substantially if the failure to file is intentional. Intentional disregard is based upon all the facts. There is always the concern that continued non-filing is an indication the omission is intentional. Intentional disregard is the larger of $500 per omission or 10 percent of the amount that would have been reported on the 1099s. The amounts really add up quickly.”

To ease the burden of preparing the Forms 1099-C, operators could use the same service provider that handles their payroll and other 1099 matters.

There’s a clear point emphasized by Ruby as well as Ken Shilson, founder of the National Alliance of Buy-Here, Pay-Here Dealers.

“If you haven’t filed in prior years, and you’re filing this year, you need to consult with your lawyer and tax adviser,” Shilson said.

Tennessee Bankruptcy Case Clouds Issue

Last May, Tennessee’s Eastern District Bankruptcy Court issued a ruling that might have muddied the situation.

Tennessee-based attorney Ernest Williams explained the state’s Eastern District Bankruptcy Court latched onto the “defined policy” exception and determined that the issuance of a Form 1099-C reflects that a financial institution has discharged an indebtedness, which must then be reported by the debtor as taxable income.

“But legally, unless the debt is truly ‘discharged’, it is still owed,” said Williams, who runs EWIV Law in Nashville, Tenn.

Williams added that this bankruptcy case is likely to be cited by borrowers seeking to avoid repayment. He encouraged his clients “to ensure their ‘defined policies’ are not to ‘cancel debt’ unless discharged.”

Avoiding Forbearance Agreement

Shilson mentioned a few states that are prime BHPH markets, including Texas and the Carolinas, have state statutes that prohibit recovery measures beyond repossessing the vehicle. In these states and a few others, garnishing wages and remedial recoveries such as property liens simply aren’t possible. And as a result, Shilson has seen many operators use what’s known in the industry as a voluntary forbearance agreement.

“Basically it’s an agreement signed with the customer and the finance company in which the customer agrees to gives the car back voluntarily and in return the operator agrees not to pursue him any further, not to report negative credit and not to do certain other things which sometimes includes an agreement not to file a Form 1099-C with the Internal Revenue Service,” Shilson said.

“The problem is that the IRS doesn’t recognize the forbearance agreement as a federal exemption,” he continued. “You’re making a hollow promise. It doesn’t relieve the operator from the responsibility of reporting that the debt was cancelled. It’s not a smart move because the operator can incur significant penalties.”

Ruby took a similar position, citing federal guidelines associated with Form 1099- C as a general recommendation to any BHPH operator.

“Operators should not agree to omit the filing of Form 1099-C because it’s required by federal law. Do not include language in the settlement agreement suggesting that they will exclude the settlement from the Form 1099-C reporting,” Ruby said.

“Don’t get sucked into breaking the law,” he added.

Importance for Sale of Dealership

Beyond the annual tax filing, Ruby mentioned another reason why BHPH operators need to monitor the filing of Form 1099-C closely.

“At some point in time, operators want to retire, and that may mean they want to sell their business. If they’re not filing Form 1099- C (and we’ve already determined that statute of limitations hasn’t started), any knowledgeable buyer will adjust the sales price for the exposure they’re going to inherit on the purchase of the business,” Ruby said.

“Likewise, anyone who is buying a business will be looking for any liabilities that aren’t disclosed on the financial statements. Missed Form 1099-C or penalties for not filing are the types of liabilities a knowledgeable buyer will check,” he added.

Inconsistent Enforcement Application

Both Ruby and Shilson indicated to BHPH Report that each have has worked with clients who have encountered varying degrees of enforcement of Form 1099-C compliance.

“IRS auditors of en approach the issue differently and can arrive at very different conclusions. Scott and I have been comparing notes on our respective experiences and we have found some very different approaches and results,” Shilson said.

“As I’ve talked with other CPAs, they’re also experiencing some differences. The IRS does not seem to be taking a clear approach to this matter,” Shilson continued.

“It’s a case where it is complicated and it doesn’t seem that there is a clear position that the IRS is asserting. It doesn’t appear that there is any guidance makes it easier for operators to understand how to comply or for IRS auditors to understand how to that helps us either comply or them to enforce the rules,” he went on to say.

If the IRS does contact a BHPH operator, Ruby recommended the dealership contact its tax adviser and legal counsel immediately.

“Because of the difficulty applying or interpreting the rules, the application may be inconsistent from one IRS audit to another,” Ruby said. “The point is the buck stops with the operator to know the rules and to be able to crisply explain how they have complied with the reporting requirements. I know that Ken and I share the same objective — helping operators understand these rules. Hopefully these articles are helping.”

Read the full article at http://digital.subprimenews.com/article/Ignoring+Form+1099-C+Filing+Can+Become+Costly+to+Operators/1648028/199553/article.html.

Successful Operators Stress Importance Of Creating & Maintaining Business Plan

Nick Zulovich

VINITA, Okla. — The buy-here, pay-here operation Dustin Kerr started to oversee for owner Bill Powell 10 years ago followed a pattern many dealers might recognize. The BHPH store started as an off -shoot of a Chrysler franchised dealership — a place where Kerr could send older trade-ins and try to retail them on a piece of property already held.

“When we first got started, we didn’t put a ton of thought into it,” Kerr said. “Once it picked up, we had to step back and say, ‘Hey, this needs a little more attention. We need to get a plan in place as to how we’re going to do this because it’s doing well.’”

Powell and Kerr did indeed sharpen their business plan significantly, so much that two years after establishing that first BHPH operation with less than 10 vehicles, Powell chose to sell his Chrysler franchise and delve into the BHPH space exclusively.

The pair opened another lot in 2006 that’s now in Miami, Okla., about 25 miles away from the first store. Then when another lot came into the fold two years later, the business plan had to be refined even further because it is situated in another state. That third location is in Pittsburg, Kan.

During each growth stop along the way, Kerr has been the director of operations for E-Z Car Credit, working closely with Powell to keep the things going according to their plan, which is revisited twice per year. Kerr recollected what that first meeting was like after getting into the BHPH business.

“We just stuck five or six cars over there and didn’t even know what we didn’t know,” Kerr said. “We were just going to put a down payment on them and finance them. Once that started picking up pretty quick, we sat down and had to reevaluate. What capital are We going to put aside just for this part of the business? Instead of just putting a few cars over there that we traded for, what is a set amount that we’re going to draw from? What’s going to be our operating capital?

“From there, your business plan starts to evolve,” he continued. “This is our starting capital so what’s our average ACV going to be? What’s our recon going to be? That leads you to how many cars are you going to sell a month, all of those things you hadn’t considered much before.

“We sat down, and said this is a dollar figure that we’re going to devote just to this part of the business. Here’s our average ACV, and this is how many cars we can sell a month. We can’t sell more than this,” Kerr went on to say. “We just grew organically from there.”

In order to grow, Brett Carmichael, of NCM Associates, insisted that any size BHPH operator needs to have a sharp business plan in place. During his time as a 20 group leader, Carmichael noted that he’s seen plenty of operators — large And small — without one, or not checking the plan at least on an annual basis to see if it’s working at optimum capacity.

“There are quite a few dealers who have the philosophy that I’m just going to sell some cars and collect some money,” Carmichael said. “Now they’re starting to become a little more sophisticated to see what the business is going to generate. A lot of it comes from accountability. We’ve got dealers struggling at finding or keeping good people. One way to develop people is to make sure we have goals and things set in place for ways to hold them accountable.”

Before coming to NCM, Carmichael spent more than 17 years in the trenches of special finance and BHPH, playing an integral role in growing Auto Master BHPH of Northwest Arkansas to 10 locations in three states with receivables in excess of $50 million before the operation sold in August 2006 to a publicly held company.

“We were a small operation but fairly sophisticated and grew it. We always did annual budgeting. Ours were due by Dec. 1,” Carmichael said.

“I guess when I got into this side of the business (consulting and moderating 20 groups), I assumed everyone did it that way, but I guess we were an exception,” he continued. “There are quite a few who really don’t do that and are starting to understand that to manage money, to be competitive in this market, they’re going to have to get a little more sophisticated in their overall business practices. The first step they’ve taken is let’s take a step back to see what I’ve done and what I can do and make sure that makes sense so I know I’ve got enough capital available to either run the model.”

Both Carmichael and Kerr emphasized how important it is nowadays to review the operation’s business plan, especially in light of some captive finance companies and commercial banks giving vehicle financing to buyers with severely damaged credit histories.

“Know how much you can afford to sell per month, and know what your risk is and what your cash in the deal needs to be when the customer rolls out. That is so important to know what you can afford to sell every month, because here’s what happens in the market: It’s a revolving door. We have ups and downs,” Kerr said.

“Let’s say you’re small and you can afford to sell 20 cars a month,” he continued. “When business is good and it’s easy to sell cars, it’s easy to get caught up and say ‘I don’t want to limit myself. I could sell 30 cars this month or I could sell 40 cars this month.’ Ten you can really sell yourself out of business. Know what that number is that you can afford to sell, and don’t sell more than that.

“On the flip side when business is bad, and you can afford to sell 20 a month and you’re selling only 10, maybe I need to start taking more risk and putting more cars out there,” Kerr went on to say. “That’s just as bad because you’re taking more risk and putting more money out on the street with Customers who don’t have as much stability.

“It’s very important to get that business plan and no matter what stick by it,” Kerr concluded.

BHPH Boot Camp Can Help to Sharpen Plan

If veteran operators need a fresh set of eyes on their business plan or “green peas” aren’t sure of where to start in the buy-here, pay-here world, attending the next BHPH Boot Camp hosted by the National Alliance of Buy-Here, Pay-Here Dealers could solve the issue.

The next two-day session is set for March 29 and 30 in Monroe, N.C., near Charlotte. NABD founder Ken Shilson along with veteran BHPH operator Ingram Walters give hands-on training on a wide array of topics, ranging from formulating that business plan to creating a related finance company as well as state and federal compliance requirements.

Walters literally opens up his books and one of his BHPH lots to show how he’s been thriving for 20 years. Attendees see how vehicles are reconditioned, how Walters markets his inventory and more.

“You come here to the boot camp so you can touch it; you can feel it; you can take pictures of it,” Walters said. “You can see an operation works, not just hear about it.”

Meanwhile, Shilson takes a portion of the weekend to delve deeper into how BHPH accounting is different from many other financial operations.

“Ingram and I, our skills complement each other because he’s an operator and my background is in the financial and analytics side of the business,” Shilson said. “Together, I think we can give you a complete perspective on how to operate a buy-here, pay here business successfully.

Operators can secure a spot at the next boot camp by calling (832) 767-4759 or visiting www.bhphinfo.com.

Read the full article at http://digital.subprimenews.com/article/Successful+Operators+Stress+Importance+Of+Creating+%26amp%3B+Maintaining+Business+Plan/1648033/199553/article.html.

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