HOUSTON — It won't be long before buy-here, pay-here
dealerships begin sales campaigns in hopes of turning metal based on potential
buyers' tax refunds to be cashed in early next year.

However, Ken Shilson warned of a snag those
potential buyers might have already encountered if BHPH stores followed through
with paperwork mandated by the Internal Revenue Service. The founder of the
National Alliance of Buy-Here, Pay-Here Dealers explained the situation
involving Form 1099-C when Shilson was part of the organization's BHPH Boot
Camp last month in Monroe, N.C.

"When you write off an account as a bad debt, the IRS is
saying that's forgiveness of income so the amount of the deficiency that you
wrote off should be income to the recipient. So you're supposed to issue a
1099-C and they're supposed to report that as income on their tax return. Of
course, none of (the consumers) do," Shilson said.

"So what does it do when it hits? When it hits, it blows
their earned income credit, blows all of their subsidies and everything else, which
is what the IRS wants," he continued.

In meetings with IRS officials, Shilson stood up for BHPH
dealers by insisting stores only should be sending this forms when they have
stopped pursuing any recovery activity. But Shilson believes the IRS is
beginning to take a stance that dealers should be issuing the form when they
write off the debt.

"I think that's wrong because if you're in a state where
you're pursuing wage garnishments and remedial stuff, you still are working the
account and shouldn't have to treat it as a total write-off yet because you may
still recover some of it," Shilson said.

Shilson then explained how the matter can become even more
complicated for dealers looking to make sales later this year.

"Guy comes last November or December, and does a deal based
on getting his refund back in the early part of 2013. Of course, he doesn't
know about the 1099-C because it's not filed until February, so he's already
filed his return and gotten his refund," Shilson said.

"Then in June or July, that's when the IRS is matching up
the 1099-Cs with the tax returns. They look at it and say, ‘This guy shouldn't
have gotten a refund.  He's got this big
1099-C," he continued.

"Let's write him a letter and say, ‘You owe us $2,500.'
These customers being what they are, they say, ‘This is stupid and a mistake.'
They just throw it away. They don't pay any attention to it. Then 30 days
later, the IRS, says, ‘Hey, he didn't pay us. Let's issue a stronger letter.'
He gets it again and throws it away again calling it crazy," Shilson went on to
say.

And what's going to happen to this potential BHPH buyer if
he or she arrives on the lot looking to buy a vehicle before the end of this
year but all of these tax matters arose?

"The IRS files a tax lien on him. He goes in and files next
year, and instead of getting a refund, it gets all gobbled up," Shilson said.

That means the money for those down payments, pick-up
payments or other strategies BHPH stores use to make the deal work has
vanished.

Shilson called the development with the IRS ramping up its
1099-C enforcement strategy a change in philosophy.

"At one time, you were supposed to do it, but they didn't
enforce it. Now they're enforcing. Now what they're doing is sending agents out
there and looking at your bad debt write-offs and saying show me a 1099-C for
every one of these write-offs. Of course, that's creating problems, especially
in states like Texas where you can't pursue recoveries," Shilson said.

Shilson noted one another potential complication he's seeing
associated with this tax form matter.

"What a lot of these guys are doing is entering into forbearance
agreements where the customer agrees to give the car back and you agree not to
issue bad credit reports or pursue the deficiency against them," Shilson said.

"One dealer said, ‘We've got these forbearance agreements.
The IRS said, ‘We don't care about those. That's state law. We're federal. They
fined him $50,000 for failure to issue 1099s," he continued.

Shilson is adamant about how important this particular tax
matter is to BHPH dealers. A longer discussion about it is on tap for NABD's
East Coast Conference, which is set for Nov. 3 through 5 in New Orleans. A
complete agenda, early bird registration discount opportunities and more are
available at bhphinfo.com.

"(The IRS is) going after that pot of goal. And they're
using us as the meat between two pieces of bread. It's ugly," Shilson said.

"I think we are in uncharted territory. I think there's a
lot that still needs to be played out. Nobody has taken it to appeals yet. I
think when it does, it's going to put the recovery side of it into perspective.
There's still a chapter or two left in the book," he went on to say.

Nick Zulovich can be reached at nzulovich@subprimenews.com. Continue the conversation with SubPrime Auto Finance News on LinkedIn and Twitter.


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