Avoiding the pitfalls of assessing federal excise tax

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Updated Jan 29, 2021

A busy day at the 2018 National Trailer Dealers Association (NTDA) Convention Thursday in Colorado Springs, Colo., was punctuated by an informative presentation on common mistakes dealers make when assessing federal excise tax (FET) by Tim Reynolds of CliftonLarsonAllen.

As one of the most frustrating responsibilities for trailer and truck dealers, Reynolds says the most common reason dealers get in trouble with the IRS on FET is due to failing to accurately record all exemption sales. He says this refers to not only tax-exemption forms, but also documentation from customers to why a product was sold without FET applied. Regarding the latter, Reynolds says dealers should always request proof of exemption from a customer ahead of a sale. He says this process can be cumbersome and sometimes can be met with resistance from customers, but immediately becomes useful when the IRS comes knocking.

Ultimately, FET responsibility “always goes back to the seller,” he says.

Reynolds says another important thing to remember with FET is that all exemption documentation must be submitted before or at the time of a sale. He says exemption forms completed a day or week after a sale are invalid in the eyes of the IRS, regardless of the validity of the exemption claim.

Then there’s the matter of individual parts and components. Reynolds advises dealers to research exactly how the items in their inventory are viewed under FET law to determine no components are improperly categorized. He mentions cargo control products as one category specifically where CLA sees dealers making mistakes.

Reynolds also says prior legal obedience does not ensure future compliance in the eyes of the government. The IRS does not favor or provide leniency to a dealer with a spotless record of tax compliance when discrepancies are found. All mistakes are judged equally and impartially.

Additionally, when the IRS begins investigating a dealership, Reynolds says it’s a good idea to hire a third-party representation to act as an intermediary for their investigation. He says this ensures all communication with the agency is carefully managed and that any information presented to the government only bolsters the dealer’s position.

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