BHPH Report March 2015 : Page 1
Tax Season Is Over. Now What? 6 14 House Lawmakers Make Move to Restructure CFPB NJ & NY Lawmakers Are Out to Prohibit Payment Assurance Devices A Publication of NABD and SubPrime Auto Finance News 22 March 2015 | Volume 2 | No. 2 NC BHPH Dealer Resolves Claims with Attorney General & DOJ By Nick Zulovich, Editor Talking Through Tax Time Accounting Experts Share Strategies to Navigate IRS Requirements CHARLOTTE, N.C. — Rather than incurring more legal costs than what already has mounted during the past year, a buy-here, pay-here operator in business for nearly two decades in one of North Carolina’s largest markets chose to resolve claims as-serted by the United States Attorney’s Offi ce, Depart-ment of Justice and North Carolina Attorney Gener-al’s Offi ce by entering into a consent decree in Feb-ruary that includes a six-fi gure compensation order. Th e settlement resolves a lawsuit fi led in Jan-uary of last year by North Carolina Attorney Gen-eral Roy Cooper, the Civil Rights Division of the U.S. Department of Jus-tice and the U.S. Attorney for the Western District of North Carolina against Auto Fare Inc., Southeastern Auto Corp. and their owner, Zuhdi Saadeh. Despite entering the consent order, Saadeh’s legal counsel said in a message to BHPH Report that “the deal-ROY COOPER N.C. Attorney General erships do not admit, and vehemently deny, all allega-tions of discrimination or predatory conduct.” Saadeh was represented by the legal team of Richard Farley, partner at Katten Muchin Rosen-man, as well as James Wyatt and Robert Blake from the fi rm, Wyatt and Blake. “Th e dealerships were confi dent of prevailing at any trial of this case. But as a small family business that would have incurred substantial litigation costs in defending this matter, they instead have made the diffi cult decision to resolve this matter and to focus on continuing to serve their customers,” the legal team continued. Farley, Wyatt and Blake went on to say that Saa-deh’s dealerships are still in business despite being of-fi cially investigated since the start of last year. DEALER continued on page 3 By Nick Zulovich, Editor CARY, N.C. — McGladrey tax director Scott Ruby understands many buy-here, pay-here dealerships are small family oper-ations without a squadron of certifi ed pub-lic accountants on staff that watches every move the IRS makes. However, Ruby sug-gested that BHPH operators spend a fair amount of time with their tax profession-al throughout the year, but especially in the springtime when forms and fi lings must be completed. “Make sure you’ve got good commu-nication with your tax adviser. Don’t just send your data. Make sure you have discus-sions. Update them on what the year was like,” Ruby told BHPH Report . Ruby shared some example questions BHPH operators and their tax profession-als could discuss: ■ What were the challenges in the past 12 months? ■ Did you have new capital improve-ments this year? ■ Are you planning capital improve-ments next year? ■ Did you (or will you) expand your business by buying another business? ■ Did you change any bonus or com-pensation plans (or do you plan to make any changes)? ■ How do you determine the transfer rate when you sell installment sales con-tracts to your related fi nance company? ■ Are you fi ling all the necessary Form 1099-C? ■ What are the criteria for taking a bad debt deduction, and are you taking the de-duction as early as the tax law allows? ■ Have you created any reserves for future contingencies? Th e McGladrey tax director noted that companies should also block time to dis-cuss the recent tax law changes that impact the tax depreciation rules. “Th e rules have a retrospective element and all business taxpayers will need to ex-amine their tax depreciation computations. Th ey will need to determine whether items that were expensed as repairs in prior years should have been capitalized or something things that were capitalized might be eligi-ble to be expensed,” Ruby said. “Some businesses may fi nd favorable adjustments during this review and others will not,” he continued. “Th ese new rules are very complex. Adding to the complex-ity is a very recent announcement giving smaller taxpayers additional time to com-ply with the rules.” TAX continued on page 4 Cherokee Automotive Group | 301 Cascade Pointe Lane | Cary, NC 27513 6 New Sessions Added to Next NABD Conference E. GREENVILLE, PA US POSTAGE PAID PRSRT STD Permit No. 555 13
NC BHPH Dealer Resolves Claims With Attorney General & DOJ
Nick Zulovich, Editor
CHARLOTTE, N.C. — Rather than incurring more legal costs than what already has mounted during the past year, a buy-here, pay-here operator in business for nearly two decades in one of North Carolina’s largest markets chose to resolve claims asserted by the United States Attorney’s Office, Department of Justice and North Carolina Attorney General’s Office by entering into a consent decree in February that includes a six-figure compensation order.
The settlement resolves a lawsuit filed in January of last year by North Carolina Attorney General Roy Cooper, the Civil Rights Division of the U. S. Department of Justice and the U.S. Attorney for the Western District of North Carolina against Auto Fare Inc., Southeastern Auto Corp. and their owner, Zuhdi Saadeh.
Despite entering the consent order, Saadeh’s legal counsel said in a message to BHPH Report that “the dealerships do not admit, and vehemently deny, all allegations of discrimination or predatory conduct.”
Saadeh was represented by the legal team of Richard Farley, partner at Katten Muchin Rosenman, as well as James Wyatt and Robert Blake from the firm, Wyatt and Blake.
“The dealerships were confident of prevailing at any trial of this case. But as a small family business that would have incurred substantial litigation costs in defending this matter, they instead have made the difficult decision to resolve this matter and to focus on continuing to serve their customers,” the legal team continued.
Farley, Wyatt and Blake went on to say that Saadeh’s dealerships are still in business despite being officially investigated since the start of last year.
“Auto Fare has and will continue to fill an important need in the automobile market by providing buy-here, pay-here financing to many individuals who would not be able to purchase a car at other dealerships,” the three attorneys said. “They have sold automobiles to thousands of satisfied customers in Charlotte for over 18 years. They have maintained an excellent rating with the Better Business Bureau, and most of their business comes from repeat customers and referrals from satisfied customers, of many different backgrounds and races.
“They compete with dozens of other dealers in the Charlotte area, and their customers refer their friends and family and return for multiple purchases because they know they have been treated fairly and with respect,” the legal team continued.
“The dealerships are glad to have the litigation behind them, and look forward to continuing to serve their customers,” Farley, Wyatt and Blake added.
Reaction from Legal Experts
BHPH Report reached out to a pair of attorneys to gather analysis about what this legal development means for the industry beyond the Tar Heel State.
Hudson Cook partner Tom Hudson explained that he expected the portion of the consent decree that included what he described as the “we won’t do that anymore” points. Hudson indicated that material is “pretty standard” settlement language.
“The agreement by the dealer not to do things plainly permitted under N.C. law were surprising,” Hudson said. “In the future, the dealership has to stay 5 percentage points under the legal rate cap, and cannot repossess a car from a delinquent buyer until the buyer misses two payments.
“This dealer cannot do, in effect, what its competitors may legally do,” he added.
AutoStar Solutions chief legal officer Steve Levine pointed out what segments of the consent decree he expected to see as well as what was surprising.
“In reviewing this decree, it is important to understand that reverse redlining is already illegal. This decree doesn’t create any new ground in that regard,” Levine said.
“That being said, I was a bit surprised by the specificity with regard to the APRs the dealers will be allowed to charge going forward as well as the relation to the down payment amounts,” he continued.
“I was also surprised by the language about how, going forward, these dealers must price their vehicles ‘competitively’ with the market. That is a very vague standard because inventory can be different,” Levine went on to say.
“On the other hand, I did fully expect the decree to include compliance training mandated as well as adoption of policies and procedures and believe that we’ll see that in future actions going forward,” he went on to say.
Hudson also touched on the redlining segment of the authorities’ allegations.
“This isn’t the last such suit we will see, but ‘reverse redlining’ cases are uncommon. I’d expect to see more cases alleging prohibited discrimination and unfair and deceptive acts and practices,” Hudson said.
Consent Decree Details
As alleged in the lawsuit, state and federal officials said the dealerships charged African American customers in Charlotte prices far above market rate for vehicles and signed them up for what they called “predatory” loans. North Carolina Attorney General Roy Cooper contends that the dealers’ actions violated North Carolina’s Unfair and Deceptive Trade Practices Act, and federal officials alleged violations of the Equal Credit Opportunity Act.
Under the settlement, Auto Fare, Southeastern Auto Corp. and Saadeh must change their business and lending practices to make sure their loans and vehicle repossessions are fair. The settlement also requires defendants to pay $225,000 to compensate consumer victims.
The settlement came after the court denied the defendants’ motion to dismiss the case and agreed that intentionally targeting African American customers with unfair loans, a practice known as reverse redlining, is illegal discrimination.
As alleged in the lawsuit, Saadeh required what state and federal officials considered to be “unusually” high down payments and charged 29 percent interest on vehicle installment contracts, the maximum allowed under state law. The officials said payments and interest rates were set without actually assessing customers’ credit histories or their ability to make payments.
For example, as detailed in the complaint, Saadeh purchased a 2001 BMW for $7,610. The suggested retail value of the vehicle was $10,625 but Saadeh sold it for $12,900. Even though the consumer’s only income at the time was unemployment payments, Saadeh approved financing. The customer paid $2,500 down and then made bi-weekly payments of $200.
With an interest rate of 29 percent, the consumer ended up paying a total $20,013.42 for the vehicle — approximately 188 percent of its suggested retail value.
When consumers could not keep up with the payments on their vehicle installment contract, the lawsuit alleged that Saadeh repossessed vehicles “without reasonable” notice.
“In some instances, the dealerships repossessed cars even though the owners were not behind on their loan payments,” state and federal officials said. “Saadeh sometimes used GPS devices installed without the customers’ consent to locate and repossess cars.”
To prevent what state and federal officials believe to be unfair practices from happening in the future, the settlement requires the dealerships to:
• Charge “competitive” sales prices
• Limit buyers’ projected monthly payments to no more than 25 percent of a borrower’s income
• Offer interest rates at least 5 percentage points below the state’s rate cap
• Offer lower interest rate for borrowers who are at lower credit risk
• Prohibit hidden fees on top of the required down payment
• Allow consumers to get an independent inspection of the vehicle before buying it
• Disclose more information at the time of sale (including the presence of a GPS or automatic shut-off device)
• Provide down payment refunds to borrowers who quickly go into default
• Strictly comply wiThstate laws on repossession of vehicles
• Prohibit repossessions until at least two consecutive payments have been missed
• Give borrowers improved notices before repossession
“All consumers deserve to be treated fairly when they buy a car,” Cooper said. “We hope this case sends a strong message that car dealers cannot use race when targeting buyers with overpriced cars and oppressive loans.”
Consumers who are eligible for money back under the settlement will be contacted by the settlement administrator later this year by mail.
“The terms of a person’s loan should not be determined by their race,” said U.S. Attorney Anne M. Tompkins for the Western District of North Carolina. “Predatory lending and illegal discrimination will simply not be tolerated.”
Individuals who believe that they may have been victims of illegal conduct by Auto Fare or Southeast Auto and have questions about the settlement can call (800) 896-7743, mailbox 92, or email AutoFareLawsuit@usdoj.Gov.
“Thanks to the consumers who came forward with information to help us bring this case,” Cooper said. “If you spot potentially unfair and illegal business practices, let us know about it.”
What Other BHPH Operators Can Do
Levine acknowledged the BHPH industry has to be careful about the “takeaways” from this matter.
“The allegations involved very specific egregious facts regarding actions that are already prohibited by law,” Levine said. “The biggest takeaway might also be the simplest — discrimination is illegal and will not be tolerated.”
Going forward, Hudson suggested that BHPH operators considered legal advisers who might have more experience in working in the auto world.
“In my experience, most smaller BHPH dealers do not have counsel that specialize in consumer credit compliance issues, but instead when they use lawyers, use lawyers who are the dealership’s general business lawyers,” Hudson said. “There are times when specialized knowledge helps.
“A thorough review of a dealership’s operations by a lawyer who knows what the Justice Department will be looking for, followed by implementing whatever recommendations that lawyer comes up with, will go a long way toward eliminating, or at least blunting, attacks like these,” Hudson continued.
Levine shared a similar strategy for BHPH dealers to consider.
“I think BHPH dealers should be inviting their lawyers and compliance professionals to examine their dealerships and business practices to look for vulnerable areas, but that advice is nothing new,” Levine said.
“On the front end of the business, dealers need to honestly assess whether their program satisfies the intent of the anti-discrimination law,” he continued. “On the back end, they need to proactively examine whether the end result of the transaction was harmful or unfair to the consumer.”
Levine closed by reiterating a negative tactic he doesn’t want dealers to utilize.
“Counsel needs to reiterate that dealers need to learn from these cases and not take an ‘it won’t happen to me” approach,” Levine said.
“Even if something is legal on a ‘one-off ’ basis, such as keeping a down payment if the car gets repossessed a few weeks later, it can make regulators question the overall business practices if it happens enough times,” he went on to say.
Talking Through Tax Time Accounting Experts Share Strategies To Navigate IRS Requirements
Nick Zulovich, Editor
CARY, N.C. — McGladrey tax director Scott Ruby understands many buy-here, pay-here dealerships are small family operations without a squadron of certified public accountants on staff that watches every move the IRS makes. However, Ruby suggested that BHPH operators spend a fair amount of time wiThtheir tax professional throughout the year, but especially in the springtime when forms and filings must be completed.
“Make sure you’ve got good communication with your tax adviser. Don’t just send your data. Make sure you have discussions. Update them on what the year was like,” Ruby told BHPH Report.
Ruby shared some example questions BHPH operators and their tax professionals could discuss:
• What were the challenges in the past 12 months?
• Did you have new capital improvements this year?
• Are you planning capital improvements next year?
• Did you (or will you) expand your business by buying another business?
• Did you change any bonus or compensation plans (or do you plan to make any changes)?
• How do you determine the transfer rate when you sell installment sales contracts to your related finance company?
• Are you filing all the necessary Form 1099-C?
• What are the criteria for taking a bad debt deduction, and are you taking the deduction as early as the tax law allows?
• Have you created any reserves for future contingencies?
The McGladrey tax director noted that companies should also block time to discuss the recent tax law changes that impact the tax depreciation rules.
“The rules have a retrospective element and all business taxpayers will need to examine their tax depreciation computations. They will need to determine whether items that were expensed as repairs in prior years should have been capitalized or something things that were capitalized might be eligible to be expensed,” Ruby said.
“Some businesses may find favorable adjustments during this review and others will not,” he continued. “These new rules are very complex. Adding to the complexity is a very recent announcement giving smaller taxpayers additional time to comply with the rules.”
McGladrey’s website provides resources that can help taxpayers navigate the rule changes.
“The better your adviser understands your strategic plan the higher the chances are that you’re going to get a really good tax planning tip,” Ruby said.
“You might not want to pay the cost to have your tax accountant review all of the entries in your general ledger. Some operators just want to put their tax data in a shoebox and send it to the accountant,” he continued. “If you just want to send the data, at least leave a memo or note for your tax accountant so they are aware of significant items so they don’t miss something that is in the ledger details.”
While BHPH operators might not pay to have a tax accountant to look at all of the account details, Ruby cautioned “The IRS is going to come through and look at your books at ground zero. Good communication with your tax adviser will minimize the chance of a surprise if you are audited.”
And missing something not only could mean a BHPH operator pays too much — or too little — in taxes, but the records and other documents might also not be as strong as they could be if the IRS decides to audit the dealership and related finance company.
“Buy-here, pay-here is an industry where there are a lot of tax issues. That’s due to the nature of the specific industry rules. It is an area that makes the IRS exams more complicated when they do occur,” Ruby said.
“To sum it up, you can have the best accountants in the world, but if they don’t know you put something in your ledger, it can get missed when your return is prepared,” he continued. “If you’re not talking with your tax adviser planning opportunities can get missed. Perhaps you should invite your tax adviser to lunch to discuss your business and with proper documentation you can even deduct the cost of the lunch.”
Steven Goldberg is one of the partners with Shilson, Goldberg, Cheung & Associates, a Houston-based accounting firm that specializes in handling the complex needs of keeping accurate compliant records in BHPH. Goldberg explained that BHPH operators and their tax professionals need to work together closely, and dealers should “not to bury their heads in the sand” when it comes to following IRS protocol.
“Knowing what the IRS is focusing on and being prepared is the best way to defend yourself against IRS audit issues. You don’t want to have to react to an IRS problem when it’s too late and they’re already on your lot auditing you,” Goldberg said.
“I previously went through an audit that resulted in a no-change to the tax return. However, the IRS still assessed a penalty just for a failure to file Form 1099-C. It’s a real tic-tac penalty. But if the dealer knows this is where the IRS enforcement is headed, this entire penalty can be prevented simply by issuing the proper form,” he continued.
“It’s extremely important that they not bury their heads in the sand and be aware of what’s going on around them so they can be prepared in case they’re picked for an IRS audit,” Goldberg went on to say.
Capabilities of Inventory Write-Down & Other Best Practices
During the Best Practices Conference hosted by the National Alliance of Buy-Here, Pay-Here Dealers in Dallas earlier this year, Goldberg made a presentation emphasizing how BHPH operations can take advantage of the inventory write-down when used properly.
“Buy-here, pay-here dealers are required to report on the accrual basis of accounting, so that means the dealer must recognize its taxable income, the full sales price of the car, in the year the inventory item was sold,” Goldberg said. “The cash flow and taxable income are not the same. So the down payment is likely not even enough to replace the inventory item on the lot. That’s where the inventory write-down, if it’s done properly, can help out.
“An inventory write-down does not cost the dealer any cash, but it gets the writedown as a deduction. The effect of the inventory write-down is to defer income to the future and help reduce the tax burden caused by the required accrual method of accounting,” he continued.
Whether it’s to help with completing the inventory write-down process properly or other matters, Goldberg also maintained several recommended strategies for data and information organization that help dealers.
“I recommend purchasing a strong DMS system that can keep track of the receivables, the inventory and their collections. The DMS system will complement the dealer’s accounting software like QuickBooks and Peachtree. When it comes time to report Form 8300, the DMS will already have information ready and available. Many dealers are also using the DMS software to obtain the information required to file Form 1099-C, the cancellation of debt,” Goldberg said.
“I think a strong DMS system will definitely help any dealer keep their information organized and ready,” he continued.
Goldberg recounted an example of a BHPH operator who chose not to use some kind of digital system to keep track of store figures.
“I’ve actually heard of a case where someone had used basically cards, a manual system. They would keep track of the payments on these cards. They were telling me they put them in a fire-safe proof in case there is a fire,” Goldberg said.
“But the thing is at the end of the year when you have to aggregate all of your payments for Form 8300, that’s the one where it’s more than $10,000 in payments of cash or cash equivalents, if you use a manual system, it’s so hard to determine if you’ve hit $10,000 over the past 12 months,” he continued. “You really need it to be computerized, especially if there is any kind of volume or huge number of receivables. I think a strong DMS system would greatly help any dealer comply with all of the rules they’re being asked to comply with these days.”
How IRS Tangible Property Regulations Can Help Dealers
IRS officials indicated they made changes in an attempt to make it easier for small business owners such as BHPH operators to comply with final tangible property regulations.
Requested by many small businesses and tax professionals, the simplified procedure is available starting with the 2014 return taxpayers are filling out this tax season. The new procedure allows small businesses to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1.
Also, the IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.
“We are pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” IRS Commissioner John Koskinen said. “We carefully reviewed the comments we received and especially appreciate the valuable feedback provided by the professional tax community on this issue.”
The new simplified procedure is generally available to small businesses, including sole proprietors, with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less. Details are in Revenue Procedure 2015-20, posted on IRS.gov.
“This may apply to some dealerships and many related entities such as real estate companies,” the National Automobile Dealers Association said. “The revenue procedure allows small-business taxpayers to make changes in methods of accounting associated with the tangible property regulations without filing Form 3115.”
The revenue procedure also requests comment on whether the $500 safe-harbor threshold should be raised for businesses that choose to deduct, rather than capitalize, certain capital expenses.
A fact sheet on the IRS guidance has been prepared for NADA by the dealer accounting firm Crowe Horwath. The fact sheet is available on NADA’s website.
“Dealers currently working with their tax preparers to adopt the regulations are encouraged to discuss the applicability of this new simplification provision,” NADA said.
Recovery Vehicle’s Lifting & Towing Equipment Not Subject To Excise Tax
For BHPH operators who handle their own repossessions with company owned equipment, McGladrey shared an IRS update that might help these dealers.
McGladrey recapped that the IRS released an update dealing with the taxability of certain machinery and equipment installed on an otherwise taxable vehicle. The taxpayer addressed in the ruling manufactures recovery vehicles in the United States and sells these vehicles to end users or to retail dealers.
The tax firm explained these recovery vehicles are mainly used to:
• Retrieve a damaged vehicle from a difficult- to-reach accident site
• Position a retrieved vehicle near a recovery vehicle that will tow the retrieved vehicle
• Lift heavy equipment, such as air compressors and electrical transformers, over fences or other obstacles
• Position heavy equipment, such as air conditioning units, on rooftops.
McGladrey indicated the following equipment sometimes is installed by the taxpayer on the taxable recovery vehicles:
“The IRS concluded that the taxpayer’s equipment contributes primarily to the non-highway transportation function of the recovery vehicles,” McGladrey said. “Any contribution to the highway transportation function of the recovery vehicles is merely incidental.
“Accordingly, the IRS ruled that the taxpayer is permitted to exclude from the taxable sale price of a recovery vehicle amounts charged for the installed equipment that is installed if the reasonableness of the charge for the equipment is supportable by adequate records,” the firm continued.
“This ruling serves as a reminder to examine trucks for onboard equipment that does not primarily contribute to the highway transportation function of a vehicle’s chassis or body in order to take advantage of the exemption from the retail excise tax,” McGladrey went on to say