As companies' tax reporting responsibilities have become more complicated and voluminous, vendors have developed tax software applications to address much more than just the annual income tax return.
Most, if not all, tax directors and CFOs are aware that annual income tax return preparation has been automated for some time. For many years corporate tax returns have been prepared on commercially available software and the supporting documentation prepared on automated spreadsheet software applications. In addition, there have long been software applications in existence to handle sales tax and consumer use tax collection and payment responsibilities. Most other tax reporting tasks have been prepared using commercially available spreadsheet, database or word processing applications.
Today, software is available to automate numerous tax processes and calculation tasks, including, but not limited to: tax provision for U.S. GAAP and IFRS, tax return compliance, transfer pricing, sales and use tax, 1099 reporting, and unclaimed property, among others.
Since Sarbanes-Oxley went into effect more than nine years ago, tax departments have been the recipients of significant deficiencies and material weaknesses in the area of the financial reporting of taxes. In fact, some errors in tax reporting led to restatements that affected stock prices and eventually caused shareholder lawsuits. In many cases, these were results of errors related to home-grown legacy spreadsheets used by the tax departments for FAS 109 (ASC 740), Accounting for Income Taxes.
In response to this, numerous software vendors developed tax provision software applications that have been used successfully since the early days of Sarbanes-Oxley compliance. Over the past few years, the software vendors have integrated these programs with tax return compliance software tools, as well as numerous other tax software tools. Tax automation can either be proactive - to mitigate risk and take advantage of increased efficiencies - or reactive, as a result of perceived or actual automation requirements to remediate a deficiency or improve a process.
NOT TOO TAXING
The benefits of tax automation include better internal control of tax reporting responsibilities, mitigation of numerous risks (including those due to personnel attrition), electronic warehousing of multiple years of data, and flexibility to address changes to the company's environment and legislative changes. The size and cost of a tax automation project will be dependent on what software applications are needed to properly automate the required tasks.
In general, the costs associated with tax automation include licensing one or more software applications, and engaging a service provider to implement the software. There may be additional training and ongoing support costs, and tax personnel and possibly IT personnel will need to devote a certain amount of time to the project. Done correctly, this time commitment can be minimized.
These software applications can either be hosted by the software vendors or installed on company servers, depending on the software selected.
The benefits of automation to a CFO or tax director can be separated into four areas:
Risk management. Automation increases "peace of mind," as it is SOX-compliant (SAS 70/SSAE 16) and takes into account internal controls. Automating decreases opportunities for significant deficiency, material weakness, and restatements.
Financial benefits. Automating allows for enhanced tax planning and potentially lower effective tax rates for federal, state and international income tax expense. In addition, automating provides direct and indirect cost savings as a result of speeding up processes and reducing use of resources. Tax department personnel may spend more time doing other, more important work as a result of having to spend less time preparing the provision. As a result of reducing error-prone spreadsheets, there may be a possible reduction in audit and tax preparation hours.
Operational efficiencies. Tax software tends to enhance tax department integration with finance groups as a result of bridging or mapping to existing ERP general ledger systems. Many companies realize a significant reduction of time incurred preparing quarterly and annual tax provisions, which frees up more time for value-added tasks. Automating also allows for faster turnaround time in routine tasks and helps shorten the close cycle. Automating transfer of data between a provision tool and the tax return software can speed up return preparation and enhance the process of booking tax journal entries. Overall, the return-to-provision process and time required can be improved.
Other benefits. Automating will prepare a tax department for the possible transition to IFRS reporting. Tax software can also be used to create an electronic global tax data warehouse of information - minimizing the impact of personnel turnover due to the standardization of these tools.
Above all, successfully automating the tax lifecycle from data collection to tax provision preparation and tax return compliance requires good software, competent implementation teams, and proper training.
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