Tackling TCJA tax compliance challenges
The scope and sheer complexity of the Tax Cuts and Jobs Act of 2017, along with a frequent cadence of regulatory guidance since then issued by the Treasury Department, have created a host of tax-reporting challenges for companies across all industries. Among these challenges have been uncertain or evolving guidance, demand for much greater data, inadequate or outdated technology, and staff overload.
KPMG recently released a report, “The new normal for tax compliance in a post-tax-reform environment,” which offers insights on tax compliance management based on key lessons learned during the 2018 tax year compliance season. The insights are especially relevant as compliance management is being reshaped across industries due to the TCJA and as companies address tax implications of the government’s response to COVID-19’s related challenges, including enactment of the CARES Act in March 2020.
Here are some of the lessons learned from the 2018 tax year compliance season for companies to consider during the 2019 compliance season:
Continued evolution of the TCJA: As the guidance continues to evolve and includes technical corrections, the journey to unpack the complexity and interdependency of the TCJA and the CARES Act will continue in the foreseeable future.
Additionally, the U.S. presidential and congressional elections this November, as well as the governmental response to the economic impact of COVID-19, add more uncertainty to the mix. Expect only incremental changes to the tax law if control of the House, the Senate and the White House remains divided between Democrats and Republicans. But if one party takes complete control, look for more changes — some perhaps dramatic — to U.S. tax law.
Data collection issues: Companies labored long and hard to locate and gather additional data needed to meet the new 2018 tax year compliance requirements under the TCJA. This search contributed to an increase in labor hours to complete compliance during the 2018 season. Since then, many have fully reviewed their tax compliance processes and technologies. These efforts should pay off in the 2019 tax year compliance season by helping them more efficiently and effectively access, analyze and use the considerable amount of information required by the new law.
Technology shortfalls: Those companies that have not taken a hard look at data and related technology issues should consider doing so sooner rather than later. Specifically, they should assess the level of automation they have in their processes and determine whether or not other available technologies may be beneficial. Tax forms, technical guidance and rules will continue to change throughout the year. Teams need to be prepared to adapt their processes to keep up with the changes. Integrating technology solutions throughout the compliance process will help reduce manual calculations and, thus, some of the biggest hurdles companies faced during the 2018 tax year compliance season.
Time and resource challenges: Many companies vastly underestimated the number of hours and level of resources needed to navigate the 2018 tax year compliance season. Tax departments’ ability to automate certain processes and harness new technology will have a direct impact on their ability to address tax compliance resource constraints going forward. Companies need to acknowledge that extra time is needed to address the known compliance challenges and be prepared for new ones that will present themselves this year.
Modeling considerations: Analyzing the impact of the highly complicated federal, state and international provisions of the TCJA on taxable income calculations absorbed a great deal of time and will continue to do so this year. Tax departments should consider adopting enhanced modeling tools to map the interaction of these provisions in order to meet their tax compliance requirements, facilitate tax planning, and enhance risk mitigation.
Fluidity of state law in response to TCJA: The complexity of the federal law created state and local tax compliance headaches for many companies. As tax departments seek to alleviate this pain, state tax professionals should be a vital part of the discussion. Identifying those aspects of the state compliance process and supporting calculations that can be automated will go a long way toward eliminating some time-consuming manual work that teams had to undertake last year.
Partnership considerations: Partnerships faced unique challenges during the 2018 tax year compliance season due to the nature of their organizations and provisions in the TCJA. And they should expect more of the same as rules and related guidance continue to evolve. The explosion of information that partnerships are now required to report means their tax returns now must include extensively detailed footnotes. For those partnerships required to e-file, they may need to address issues relating to the volume of footnote reporting. Also, as a result of the new Centralized Partnership Audit Regime (CPAR), the IRS generally has the ability to adjust “partnership-related items” at the partnership level upon audit. This rule covers (1) any item required to be maintained in the partnership’s books and records, and (2) any item required to be shown on the tax return. CPAR’s broad scope especially heightens the importance of paying close attention to complete and accurate footnote reporting.
Mitigating risks and amended returns: Tax professionals may be entering a world in which filing amended returns is considered the “new normal.” Contributing factors include the continuing and potentially retroactive release of regulations and corrections, as well as possible law changes; the identification of calculation errors and missed opportunities due to data and resource constraints or lack of experience with the 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. Ultimately, if the taxpayer decides not to file amended returns, they still may be required to provide reconciliations for the current year’s beginning balances, if errors are found in what they reported in prior periods. In this environment, it’s more important than ever for tax departments to understand and try to anticipate the audit consequences of their decisions.
In summary, thanks to experience gained in the 2018 tax-year compliance season, this current compliance season should go more smoothly for most. Those companies that have learned the lessons taught by the previous compliance season under the TCJA should encounter fewer surprises and headaches in the future.