Common FET Mistakes That Expose Dealerships to IRS Scrutiny
Dealers who sell heavy-duty trucks and trailers are famously badgered by the federal excise tax (FET) and all its complexities. The intricate set of laws and statutes is certainly confusing, and dealers are right to cry out for clarity amid so many gray areas and cumbersome regulations.
But in my work with dealers, I’m also starting to see a host of common FET compliance mistakes that could easily be avoided. Most are fairly simple and don’t require radical procedural changes or costs to correct. If you currently struggle with some of the errors and omissions among the basic mistakes I list below, you may be exposing your dealership to IRS scrutiny and the associated high costs of FET noncompliance.
Missing or incorrect exemption certificates on exempt sales
When your dealership sells heavy-duty trucks and trailers that are exempt from FET, you generally must collect an exemption certificate from the customer to support that exempt sale. These certificates are not a “one size fits all” document; they vary depending on the customer and the type of sale. I often see dealers collect an incorrect or incomplete exemption certificate. And in some cases, no exemption certificate is collected at all. Failure to collect the requisite or accurate exemption certificate could result in the IRS rendering the sale taxable with FET due and payable on an otherwise exempt sale.
Get your dealership’s sales team up to speed on which certificates appropriately accompany which exempt sales, and have strong policies and procedures in place to ensure compliance on collection, retention, and documentation in the deal file.
Incorrect interpretation of the laws
You’re a truck and trailer dealer, not a CPA or lawyer, but as the seller you are responsible for having a general grasp of FET regulations before you engage in exempt sales. There’s no doubt that there are truly some murky waters surrounding FET, but I see some dealers neglect to do the proper research or get a little “self-generous” in the their interpretation of the laws. Many are overconfident that they are in compliance but find out too late (and after much expense) that they are not.
It’s up to you to do proper due diligence. In many cases, some extra research — such as looking to private letter rulings, court cases, and other types of precedent guidance — will help you arrive at a clear, defensible decision to support an exempt sale. That kind of clarity is worth engaging your CPA or legal counsel for direction and support.
Inconsistent application of the rules
Many dealers have multiple locations and stores, but they aren’t always in sync with their application of the FET laws and regulations across the company. If your dealership sells equipment FET-exempt in one location but collects FET on the same equipment sales in another, you’re automatically sending up red flags to the IRS.
To avoid inconsistency, establish standard, company-wide protocols and make sure they are uniformly communicated and enforced at every location. This is where the proper exemption certificate procedures mentioned above are so important. Once you and your staff get a good handle on these policies and procedures, compliance with FET will come much easier and you will be better protected from potential exposure from the IRS.
Miscellaneous omissions and assumptions
I see this list of relatively small mistakes committed fairly often, and each could create substantial IRS exposure:
- Failure to “show your work” and keep FET calculations in each deal file
- Failure to monitor expiration dates on certain exemption certificates
- Relying on publications that are not law to determine whether something is taxable or exempt from FET
- Relying on manufacturers, customers, or other dealers to determine exempt sales
- Assuming that a “clean” audit history is an indication that you won’t have future IRS exposure
There’s no question the FET is confusing territory, but there are still some simple fixes to make your dealership more compliant and keep it out of regulatory hot water. Make sure your business isn’t committing these errors and it’s likely you’ll have a better chance of keeping the IRS at a more comfortable distance.
How we can help
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