2014-Issue 31—“Do I really need to change my tax provision and compliance software?” We were asked this question the other day by a client. The client uses Microsoft Excel for his accounting for income taxes calculation, a similar scenario to the majority of corporate tax departments. It was one of those courtesy questions many of us have all used from time to time to fill awkward silence. Whenever we ask those questions, we already know what the answer is going to be. He expected us to elaborate on the benefits of provision and compliance software and the woes of Microsoft Excel, all while urging him to implement “the right software.” When I answered “absolutely not,” we got the client’s full attention.
Don’t get me wrong. I think technology is awesome. We don’t go anywhere without our smartphones; many of our houses are wired as “smart houses”; most of us use multiple monitors in our workstations. Yes, I think it can make us more efficient (except during the World Cup or March Madness). Technology truly affects almost everything in our life, so doesn’t it make sense that our tax provision and tax compliance processes also need the latest upgrade? There are some naysayers when it comes to technology, and some claim to prefer the “good ole days” with the green ledger paper, 10 key calculators with tape, and martini lunches. It is, however, difficult to say that technology advancements have not made our lives easier in many respects. The right technology/software can make the difference in hours, days or even weeks of time on critical tasks.
On the other hand, we have a lot of clients that have “the right software” and it takes forever to do their provision; and of course, the experienced VP of tax has his back-of-the-napkin calculation (done in 10 minutes) that falls within 5 percent of the tax department’s final calculation. I know. I know. Every tax department gets completely annoyed when the VP of tax and CFO say, “I did this calculation in 10 minutes. What is taking so long with the provision?” I am not trying to stir up old emotions; the point is simply that “the right software” isnot the short answer that we often hear. It may be a part of the big picture, but there is a world of truth in the old adage GIGO: garbage in, garbage out.
In years past, when I was simply doing technology work (implementations, upgrades, modifications, etc.), I thought the answer was always “the right software.” However, as we spend time in reviewing the accounting for income tax calculations and working with the corporate tax department personnel, we appreciate the balance they face each month with practical day-to-day issues.
Statistics show that the tax function is one of the leading causes of material weaknesses and restatements. Those material weaknesses and restatements may occur with or without different software packages and calculation engines. It is not the software causing the issues, rather the methodology or interdepartmental processes in arriving at the tax provision that often cause the deficiency. Various studies have outlined some of the top reasons related to problems with income tax accounting:
- Complexity not fully appreciated;
- Inadequate risk assessment;
- Company focus and priority;
- Insufficient communication when knowledge from multiple disciplines is required;
- Mismatched tax accounting skills with corresponding job requirements;
- Failure to define and execute a true process;
- Legal entity reporting challenges;
- Problems with source data;
- Insufficient monitoring of changes in laws, rules, events, operations; and
- Growing tax function responsibilities.
Having done implementations and upgrades for numerous software packages, as well as modifications to hundreds of Excel-based tax provision calculations, and as an outsourced provision and compliance professional, I can highlight several key areas that could be viewed as requirements for accuracy and completeness in the integrated provision/compliance process other than selecting the appropriate software. These practical areas can facilitate quality in the tax provision process.
- Provide ASC740 training to the tax department and financial accounting personnel. Although this is a rather fundamental statement, many provision workpapers that we see are prepared by someone in the tax department named SALY (same as last year). While everyone likes to blame SALY because no one can ever find her, we consistently hear from tax department personnel that they are uncomfortable with certain principles of accounting for income taxes.
- Implement a tax basis balance sheet. With growing criticism by the Public Company Accounting Oversight Board (PCAOB), audit firms have had an increased attention to review and reconciliation of the tax assets and liability accounts. One of the best ways to be prepared for this increased scrutiny is to prepare and maintain a tax basis balance sheet. The proper initial preparation of the tax basis balance sheet, which may involve a detailed deferred study, is vital to having a tax basis balance sheet that supports your tax accounts.
- Evaluate data sources and current processes. Certainly, you are using the right data source for your calculations. Right? I am sure that you know exactly what everyone in the tax department is using for the source of their calculation. Right? It can be very enlightening to get the tax department in a room and ask the simple question, “Where are you getting your data?” So often, multiple members of the tax department are doing the same calculations from different sources. Spend some time looking over the tax lifecycle with the entire tax department to evaluate the most efficient use of everyone’s time and the optimal flow of data throughout the provision/compliance process. It is also important to include personnel from other departments that have interdependencies with the tax department to ensure an overall cohesiveness.
- Evaluate the need for a FIN48 reserve. The determination of the need for a FIN48 reserve is a critical process that cannot be automated, regardless of whether you use software or not. The calculation of interest and penalties on your existing positions can be done prior to the year-end close process.
- Evaluate the need for a valuation allowance. The need for a valuation allowance can change based on internal and external factors. It is important to constantly reevaluate the underlying sources of evidence. The third quarter is typically a more convenient time for this assessment, rather than waiting until the busy year-end provision process.
- Establish better and earlier communication with auditors and third-party tax providers. Often, earlier communication makes the difference in a simple, accurate calculation and a hurried, midnight, I-think-it’s-right calculation.
- Document, document, document. Review your internal controls to ensure they are accurately stated and that you are following them. Also, take the time to document the tax department’s daily functional processes known as desktop controls. Lastly, make sure your provision and compliance calculation documents are appropriately referenced and audit ready.
Alvarez & Marsal Taxand Says:
Most of us do have an affinity for technology and the latest-greatest upgrade to hit the market. If you don’t believe that, just look at pictures of the lines of people waiting to get the new iPhone when it is released (or maybe you are one of those standing in line). Tax software can be extremely advantageous, but some practical exercises to address the risks of the tax department regardless of current or future software are a necessity for the future success of your tax department.
Charles Henderson, Managing Director contributed to this article.
For More Information:
Robert J. Filip
Managing Director, Seattle
+1 206 664 8910
Charles Henderson IV
Managing Director, Atlanta
+1 404 720 5226
Managing Director, Miami
+1 305 704 6688
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London.
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