IMGCAP(1)]As companies continue to experience an increase in the frequency of tax-related audits, due to sales and use tax complexity, new levels of enforcement and other factors, they are experiencing a corresponding impact on the efficiency of their tax departments.
Today’s climate of hyper-regulation for tax departments includes changing tax rules, state revenue pressures and subjective tax law interpretations, making this one of the most difficult times in history for corporate tax departments. The mandate for many of these departments is to do more with less.
Against this backdrop, the demand for tax outsourcing has increased, particularly for sales and use tax compliance. In a recent survey, 28 percent of corporate tax departments reported they were “outsourcing some aspect of their sales and use tax compliance.” Indications are that the number of companies moving to sales and use tax outsourcing is climbing by some 15 percent per year.
The benefits can be substantial. Not only can tax outsourcing improve risk management and have a positive impact on the bottom line, but done correctly it enables over-burdened tax departments to focus on higher-value activities.
But just as many companies are finding that outsourcing is essential to the management of tax, they are also realizing that choosing a solution means addressing their current needs, as well as looking down the road and considering factors like growth, expansion into new markets, and changing regulations.
For this reason, prudent organizations should think about the present and future when they consider outsourcing tax compliance, and how their outsourcing solution helps support those needs.
The Value of Planning Ahead
Surprisingly, the evidence shows that many companies only address what matters today when choosing and planning their tax outsourcing solutions. To understand the value of looking ahead when planning tax outsourcing, here are some key areas to consider and some supporting examples:
Treasury and Funds Management: Solid controls, and visibility into the process of funds management of tax, are essential to not only accurate, timely remittances, but also to GL reconciliation, managing credits and carry forwards, and reducing the risk of under- and over-payments. If this key process is not done in-house directly by your outsourcer, you can incur the needless risk of too many parties getting involved. When processes under this area are outsourced, the present needs of an organization can be very different than they will be five, ten or twenty years down the road.
Take the example of a company that used a sales and use tax outsourcer, who themselves outsourced the payment process. The outsourcer, a CPA firm, explained that this was done to avoid a conflict of interest of being both their auditor and funds manager. The result was that the company using the outsourcer regularly spent 10-15 hours per month verifying payments because of the extra party in the process. Each tax authority remittance question triggered the need to contact the outsourcer, who in turn contacted its outsourcer.
Needing to address their problems, and future needs, the company switched to an outsourcer who handled the process in-house. The result was that $40,000 of un-applied valid credits were found that could still be used, and another $50,000 found that unfortunately had passed the statute of limitations for claiming a credit.
Companies considering their future needs in this area should consider if their provider remits funds for them, and if they certify that they have done so with tax authorities. If they do manage funds, do they do it in-house or outsource it? If they outsource it, consider if it conflicts with the company’s treasury and accounts payable controls, not the outsourcers’.
Other important considerations: Do they manage the company’s credits and carry-forwards? Do they require funds in advance? Today if the provider outsources or offshores the payment process, or for that matter any part of the compliance process, it adds needless risk, time, and uncertainty to the compliance process. Tomorrow that can lead to mistakes being scrutinized by tax authorities, or missed credits and overpayments.
Technology Used for Compliance: An organization that experiences growth or expansion is going to have a corresponding change in the size and scope of data related to tax and finance. For this reason, the technology used by an outsourcer is critical to the organization’s current and future needs.
If an outsourcer does not employ technology that integrates and checks tax calculations, it defeats the time savings of outsourcing. Perhaps worse, the company risks inaccurate compliance and potential negative impact to the bottom line.
Looking at their present and future needs from a tax perspective, companies must consider the technology the outsourcer is using and ensure that it is well accepted and easy to use, has flexible importing capabilities, checks tax calculations, and tracks credits.
Also make sure the outsourcer’s technology is commercially available. This is essential down the road, because if a company ever brings the process back in-house, it may find itself switching from a proprietary technology to something that is commercially available. This can potentially cause issues as the company may have to reconcile discrepancies caused by using multiple systems.
Services Provided
Consider a company that outsourced its sales and use tax returns process with a provider for three years. While the returns were archived for all three years, when the company had to retrieve over 400 of them for an audit, it found it had to download each return individually. The result: between downloading and traditional mail, the company lost over 50 hours of work time.
Companies outsourcing the tax process should ensure that their outsourcing solution addresses their current needs and also consider what might be required later.
This can be done by looking for specific services, including a Web-based secure portal that alerts companies when they have new information, the ability to approve returns before they are filed, transparency into what tax authority correspondences came in and how they are being handled, and a comprehensive reconciliation report. Also consider how easy it is to retrieve returns, as well as the data sent to generate them.
If these services are not available, a company may find itself with new needs in the future, especially from an audit perspective. At some point, a company may not be able to retrieve the necessary information for audits, or could even help trigger one because of the lack of information available. Not to mention the impact of lost time and resources.
Tax Expertise
When looking to outsource, tax expertise is an essential element for current and future needs. However, a company that has an evolving tax landscape may find that the expertise it needs from its outsourcer today is not sufficient to meet future realities. The result can be wasted hours helping an outsourcer get up-to-speed and educated on tax issues it should already understand and appreciate. If a tax department has multiple or inexperienced contacts handling compliance, research indicates it will spend a minimum 50 percent more of its time managing its work.
What’s more, tomorrow the company may be dealing with tax authority scrutiny and have an outsourcer with little understanding or support for the filings that were done. For that reason, consider if the outsourcer provides dedicated, experienced preparers who understand its business and filing requirements. They should also be able to help the company determine if it needs to remit tax in new jurisdictions and help the company register.
The fact is that many companies will address their current tax needs through outsourcing. The issue, however, is that failing to account for factors like a company’s growth, future audits and changing tax regulations will eventually cause new issues and potentially expose a company to financial and organizational risks.
It is imperative for any company to consider its outsourcing provider for what it can do today and tomorrow. This means providing the right technology, tax expertise and services that are scalable, timely and transparent. Only then can companies unlock the significant potential that tax outsourcing offers their organization in financial and organizational gains.
Mark Sergas is a service line leader at
