ORLANDO, Fla. – Changes to the timing of tax refunds caught many dealers by surprise last year. They need to know this is the new normal.
The Path Act of 2015 went into affect for the 2016 tax year, affecting returns in 2017. In addition to extending or making permanent several tax provisions and addressing other issues, the law also changed the timing of some tax returns as a way of preventing identity fraud.
The change meant that the Internal Revenue Service waited until Feb. 15 to start processing returns that claim the Earned Income Tax Credit or Additional Child Tax Credit.
Bill Neylan, president and CEO of Tax Refund Services Tax Max, said that delay was devastating to some dealers who expected earlier returns. Dealers who bought cars in October or November on 60- or 90-day floor plans waited in vain for tax money.
“A lot of dealers who were not aware of the Path Act violated their floor plans and a lot went out of business,” Neylan said.
In the upcoming refund season, he predicts the IRS will hold these types of refunds until Feb. 26 or Feb. 27 and then send them out all at once.
“Ninety percent of all refunds (this year) were released in two days,” Neylan said. “You can’t sell two months worth of cars in two days. It’s impossible.”
He discussed the tax season and the problems of the Path Act during the National Alliance of Buy-Here, Pay-Here Dealers fall conference.
He said because of the changes in the law and the challenges of the market, dealers need to find a tax partner to find out how to succeed in this area.
“If they don’t, then they need to come to trade shows like this,” he said. “They need to go to NABD, NIADA (National Independent Automobile Dealers Association) and sit in these sessions and meetings.”
Neylan also speaks at state IADA events about the changes.
Ingram Walters, of Griffin’s Credit Quick in Monroe, N.C., pushes a promotion to boost sales during income tax season – which has already begun for him.
“Fortunately, we have the money to start stockpiling,” he said. “So we start stockpiling in October, November and December.”
This helps increase profits because cars become pricier after the first of the year.
“We think a $5,000 car is going to jump at least 10-12 percent,” Walters said. “So if you wait until February, that $5,000 car is going to cost you $5,500 or $5,800.”
Historically, February is Walter’s best selling month, but the earlier dealers can start making tax season sales, the better.
Once a customer gets their check, they can take it anywhere, Walters said. He said statistics show that most of his customers will spend their entire refund in 24 to 48 hours.
The key is to close a deal before they get the refund.
“The creative dealers are starting in November,” he said.
Walters starts working customers in October and November, asking them about their previous year’s tax return amount. Knowing that, he can estimate what their refund will be this year and base the deal on that.
Walters uses the TRS Tax Max program that sets up tax return service right in the dealership, securing the deal before the government even sends the checks out.
“We prepare the returns,” he said. “We’re also advertising, ‘Buy a car now, pay us when you get your taxes done here and we’ll wait on the down payment.
“It works for us.”
By getting the deal done early, it takes the customer out of the market before they check out another dealer.
“Your customers will love it, but your competition will hate it,” Walters said.
The key is to get customers to commit as early as possible, Neylan said.
The refunds of buy-here, pay-here customers are substantial.
“Last year, 40 percent of the refunds we processed were over $6,000. Ten percent were over $9,000,” Neylan. “If you’re not active during tax season, your customer is going to spend it somewhere else.”
A typical buy-here, pay-here customer is a single parent, making about $20,000, with one or two children with no taxes withheld.
“How much do you think their refund is?” Neylan asked the conference attendees. “It’s $8,388. That’s crazy money.”
Even with the new rules, taxpayers can still file returns as early as Jan. 2. Neylan said his firm’s tax preparation program allows their dealer clients to provide an advance on their refund starting Jan. 10, up to $2,500, “in two to four hours on their printer.”
The other option is the dealer can still handle the customer’s return and close the car deal. Then the dealer can wait until the refund comes in late February. In that case, the money goes directly from the IRS to the dealer.
Another option is “irregular payments” in which the dealer builds the tax return into the payment plan. A customer pays $300 a month, for example, until February, the month of their tax return, and that payment could be $1,200, then back to $300 the next month.
Whatever dealers decide, they have to change to make tax season successful.
“If you do nothing, you’re going to have another crappy January and February, I promise you that,” Neylan said.
The common complaint from dealers has been that tax season isn’t the same anymore.
“It’s not the same,” Neylan said. “They’re thinking of tax season in the ’90s. People got money in January and February and started flooding into the dealership for two months.
“Those days are gone.”