Our Tax Season has changed due to the “PATH ACT” and Now Requires a New Strategy!
Instead of money coming in late January and early February, the IRS held refunds for an additional three to six weeks for many folks. That is an additional three to six weeks for a customer to change his or her mind on what to spend their refund dollars on.
If you did not have a tax partner advising you on the refund delays and how to capitalize on the aftermath, your first quarter was likely a disappointment. Dealerships that were prepared had another record season with higher revenues.
Tax season is not three months long the way it was in the ’90s. It’s not even six weeks long the way it was 10 years ago. In the age of technology and fraud prevention, the tax refund sales season consists of just FIVE DAYS in late February and a stream of lesser dollar amounts in late January in the form of refund advances ranging from $400 to $1,500. Future refund advances could reach $2,000 or more.
The tax season has become nonexistent for many dealers. Dealer education seems to be the No. 1 reason behind this problem. Prior to the tax sales period, the shrinking window of opportunity was known only within the tax professional community. Even the best of the best within the automotive industry underestimated the contraction of the tax refund selling season.
Why would a car dealer know about the PATH Act? (Find out more about what the PATH Act is below). Who has the time to focus on the details of the tax industry while dealing with floor plans, employees, compliance, budgets, and everything else in the automotive business? These questions make it crucial to have a tax partner that also has a presence in the automotive industry.
What Is the Value of a Tax Partner?
Tax partners come in many shapes and sizes. Some dealers don’t have a partner; they handle customer traffic as it comes and assume very little changes from one year to the next. Other dealers are content with a “tax place down the street” that offers a discount for the dealer’s customers.
A tax partner that specializes in the automotive industry can offer so much more value. You want a partner that:
- Attends industry conferences, including educational sessions
- Speaks at industry conferences and writes for relevant publications
- Is familiar with the premier DMS companies, such as DealerSocket
- Is known as an authority in multiple segments of your trade
- Understands your customer demographics
- Understands your marketing and advertising needs
- Communicates directly with you about changes in the tax climate will affect your bottom line
- Takes on all IRS liability
What Are Irregular Payments?
Irregular Payments are special, contractual, inflated payments in the customer financing schedule that allow the dealer to collect more money earlier in the loan. Irregular Payments are not down payments nor are they pick-up payments. Irregular payments occur in addition to the down payment and are in the customer’s contract.
What Exactly Happened to the 2017 Tax Season?
In December 2015, Congress passed the PATH Act. This law changed the timing of many of the refunds that car dealers count on to boost their first quarter numbers.
Buried deep within the legislation was a provision that mandated the IRS delay any refund with the “big 3” tax credits: the Earned Income Tax Credit, the Additional Child Tax Credit, and the American Opportunity Tax Credit for college tuition. These returns were held for up to five weeks and not processed by the IRS until Feb. 15.
The reason for the delay was to reduce fraud. The PATH Act also required that businesses submit their employees’ W-2 forms to the IRS by Jan. 31. This allowed the IRS to match the W-2 forms on the tax return with the information provided by employers. Refunds with mismatches did not get paid and underwent an additional level of screening.
What Does This Mean for the Future?
This delay is the new norm. More than 95 percent of tax returns filed in January are not expected to have refunds released until after Feb. 20. You should anticipate the same for years to come. The IRS will save billions by foiling tax refund fraud, so there is no reason to presume that the schedule will change much in the future.
Obviously, we are talking about Uncle Sam and the IRS here, so changes do occur on an annual, monthly, and weekly basis. Having a proper tax partner will allow you to stay educated on the essentials that allow you to run your business in the most efficient manner.
Benefits for Dealers
For years, dealers have understood that you must be the first business the customer visits with their tax refund to stand a chance of getting paid. Statistics show that most Americans spend their $4,000 to $11,000 tax refunds in 24–48 hours. Having the right tax partner allows the dealer to print the customer’s refund check on site before they have the chance to spend the money elsewhere and break their promise to you.
This is also true with collections. If your customer is not willing to catch up on a past-due account when his or her annual tax refund arrives, he or she will never put in the effort to get caught up.
History shows that customers who purchase during the tax refund season put more money down than a July customer. These deals are the best performing deals in static pool analyses.
The customer benefits through lower payments, shorter loan terms, lower payments, increased vehicle equity, less interest paid over the life of the loan, and a savings of up to $200 on his or her tax preparation compared to leading national chains. The process is fast and easy.
The Big Picture
Car prices are on the rise. Your customer’s down payments remain stagnate. This has led to ever-expanding customer loan terms and a business model that is unsustainable. NABD statistics show that more than 60 percent of customers fail to make their final car payment. There is, however, a solution to 45-, 60-, and 72-month loan terms for a car with 100,000 miles.
Do you think this sounds absurd? We have seen the contracts.
Getting a satisfactory down payment is no longer acceptable. Ask your customer for an additional $800 out of his or her next tax refund and put it into the contract. Why settle for $1,000 down when you can get an extra $800 the following February? You will never get what you do not ask for.