What did we learn from the 2018 and 2019 tax compliance seasons?
Well, for one, we learned that hope is not a strategy. As tax professionals during the 2018 tax-year compliance season, we also learned that tax compliance in the Tax Cut & Jobs Act’s aftermath will not be simple or straightforward.
The new normal for tax compliance in a post-tax-reform environment is here, but the time crunches, stretched resources, and hair-pulling data collection issues of the 2018 tax season do not have to become normal. CFOs must develop technology- and data-driven strategies to drive productivity and empower their tax teams to deal with key issues arising this tax season, including ongoing guidance and corrections stemming from the TCJA and now also The Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Technology is too often viewed as a silver bullet or moonshot, requiring significant investment that fundamentally transforms the way teams work. This framework may serve technologists well on stage and in venture capital pitches, but it’s a misleading picture for CFOs and tax teams.
Tax technology is best viewed as a journey, especially when it comes to automation. CFOs should examine each step in their tax compliance process — from tracking tax law changes to ingesting and transforming internal data to conducting calculations — to best assess their current use and effectiveness of technology. This approach empowers teams to take simple first steps in process automation, for example, that will compound to deliver productivity benefits.
Three focus areas are top of mind from the 2018 tax compliance season.
First, a common 2018 challenge was the need for an integrated technology ecosystem that updated data inputs and calculations across multiple tax forms for filing. Calculations at the group level that did not filter down to business unit workpapers led to delays and around-the-clock manual work to reconcile. Too often, third-party technology failed to deliver.
When thinking about this challenge, CFOs and tax teams will benefit from a three-tiered approach for leveraging technology to improve this work. Automated workpapers can provide effective mapping of the detailed inputs needed for group-level computations and result in auditable workpapers. Filing software provides the critical hub where the forms are maintained and populated for e-filing. Tax models, such as KPMG’s International Tax Reform Analyzer, serve as a third-party or in-house program that houses the complex calculations. These technologies build on each other and become more potent as teams take a step forward with each.
Second, data collection was a laborious effort in 2018 and continues to be in the 2019 tax season. CFOs and tax teams need to step back and ask key technology questions that break down this challenge. Can some of the data collection be automated, and what are the best means for doing so? Can data be collected throughout the year instead of at year-end? In the context of company-specific data needs, these answers can help build automated processes to drive productivity and generate critical compliance insights.
Third, the interaction of federal, state, and international provisions of the TCJA on taxable income calculations took up many professionals’ time and will continue to do so in the current compliance season. Enhanced modeling capabilities will best map these interactions, enabling CFOs to meet compliance requirements, facilitate tax planning, and improve risk mitigation.
Extra Time Needed
CFOs need to acknowledge that extra time is necessary to address the known compliance challenges. Still, the following areas are filled with clear technology opportunities that will empower tax professionals to tackle challenges we foresee in the current compliance season:
The continued evolution of the TCJA and the tax-related responses to the COVID-19 economic crisis. Guidance implementing the TCJA continues to be issued and has been intertwined with some of the economic stimulus measures. There are also more than 100 technical corrections to the TCJA that have been identified. As guidance continues to evolve and as technical corrections are addressed, challenges involved in unpacking the complexity of the TCJA and the COVID relief legislation — and better understanding the interdependencies between them — will persist for the foreseeable future. Furthermore, it’s an election year, which means the trajectory of that guidance may drastically shift.
The fluidity of state law. States provide guidance often very late in tax compliance seasons or often without sufficient instruction on tax positions’ appropriate reporting. Last-minute adjustments to federal returns sometimes lead to a complete rework of state calculations. As tax departments work toward alleviating this pain in the future, it’s important for state tax professionals to be a vital part of the discussion, especially on automation.
Partnership considerations. The explosion of information that partnerships are now required to report means that their tax returns must include extensively detailed footnotes, and for those partnerships required to e-file, they may need to address issues relating to the volume of footnote reporting.
Mitigating risks and amended returns. Filing amended returns may be considered the “new normal” for tax professionals. Contributing factors include the continuing and potentially retroactive release of regulations and corrections, as well as possible law changes; identification of calculation errors and missed opportunities from data and resource constraints or lack of experience with TCJA’s new rules; changes to the U.S. foreign tax credit rules and increased non-U.S. tax disputes; and new guidance under the CARES Act and any pending additional stimulus relief.
All in all, this new normal requires a renewed emphasis on technology and data capabilities. CFOs need to invest in that journey, one step at a time, to empower their professionals to best tackle ongoing tax compliance challenges … or risk falling behind.
French Taylor ([email protected]) is a partner and national service line leader of the business tax services practice of KPMG LLP, the U.S. audit, tax, and advisory firm.
The information in this article is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 because the content is issued for general informational purposes only.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author or authors only, and does not necessarily represent the views or professional advice of KPMG LLP.
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