This is a newsletter from
J.D. Choi of
Tax Technologies, Inc. to tax
professionals whose interests are improving the tax management processes.
Table of Contents
- Tax Audit Tracking / Best Practices
- Form 8865 - the second year issues
- Mark your calendar
Every company has to face tax audits by multiple
jurisdictions. The reserve balance can be quickly depleted if not properly defended. So,
how do companies deal with audit issues and what should be the best process that would
enhance the outcome?
I recognize the audit as an integrated part of the tax process. As such, I have decided
to discuss a better way to deal with multi-jurisdictional audit issues in this issue of
Tax Data Management newsletter.
In addition, I will briefly discuss Form 8865 compliance issues since most companies
will have to address second year filing issues.
1. How do you deal with tax audits?
Based on my experience dealing with tax audits (primarily with international tax issues),
most of the audit management issues fall into one of the three categories: 1) documentation
and support, 2) calculation, and 3) process management.
1) Documentation and support issues:
Since most tax audits occur a few years after the returns have been filed, it is very difficult
to collect the supporting documents unless the supporting documentation was accumulated and retained
as part of the compliance process. In the last several years, I have noticed that many companies
have focused on expediting the filing of tax returns, as the date filed is one of the few clear
benchmarks for so called "Best Practice" tax departments.
This expedient filing has benefits and it also has costs. Some are obvious, and others not so
obvious. One of the most significant costs is the documentation. To meet the accelerated filing
deadlines mandated, frequently documentation will suffer. Not that it is a stated goal to reduce
the documentation but the process does not allow for the documentation to be developed before
the return is filed. At the same time, it is very difficult to put together the supporting documentation
after the return is filed. Most people get busy with other things after the return is filed and
documentation and workpapers are just not viewed as being a "value added" endeavor.
Even companies that file on a standard schedule can experience problems locating supporting
documentation. Although most companies institute an effective process for archiving the tax return
with attachments, supporting documents are usually not maintained with the returns. Instead, the
supporting documents are often scattered in your tax software packages or in spreadsheets and other
documents. Many times, it is less expensive for companies to re-create documents from scratch in
support of their original position.
2) Calculation issues:
Audit calculations require comparative calculations: one "as-filed" and others "as-adjusted".
Further, audit calculations need to take into account the cross-jurisdictional elements and changes
to the cumulative historical tax attributes.
For example, most international tax audit issues require recalculation of income inclusion, deemed
paid credit and a redetermination of the foreign tax credit similar to the original compliance calculation.
However, in performing the audit calculation, one needs to take into account the cumulative change from
the prior audit cycle and the changes generated by foreign tax jurisdiction audits. Thus, an increase in
the UK tax liability due to a UK audit adjustment may offset some of the proposed audit adjustment by US
tax authorities, or vice versa.
3) Process management issues:
Another significant problem in dealing with audit issues is that of process management. In short,
nobody knows what's going on at any given moment. It is almost impossible to know what the total exposure
is for a given audit.
So, what is the answer?
To gain an advantage in audit, it is necessary to focus on the tax compliance and audit workflow process.
Supporting documentation must be archived during the preparation of the tax returns so that it is available
when you need to defend the positions taken during compliance. When forced to make changes to prior period
returns, comparative calculations must be supported by your compliance and planning environment. In addition,
you must be able to measure your exposure or risk while tracking and managing your responses.
Most companies have been using spreadsheets to keep track of audit issues. This has proven to be inadequate
for large companies with multinational audits for multiple tax years. In particular, it is impossible to keep
the supporting documentation together, calculate the effects of proposed adjustments and manage the audit process
using a spreadsheet.
I have not found any vendor product that deals with audit issues in a comprehensive fashion. Thus, in response
to this particular problem, Tax Technologies has developed and released www.AuditTracker.com. Built based on
requests from our clients, Audit Tracker helps companies manage the audit adjustment workflow and response process.
As a plug-in intranet or hosted Internet solution, you can find any requests or supporting documentation with ease
and prepare responses quickly while tracking status and assessing risk.
It addresses the issues in the following ways:
1) Documentation and support issue
All supporting documents can be saved to a central web-based repository along with the issue itself. For example,
companies can save all supporting documents related to a proposed adjustment in one place so that a user can identify
and access all supporting documents at the same time. It also maintains the history of every issue along with all the
supporting documentation for each step of the process.
Obviously storing the documentation is the initial priority; however, retrieving the documentation is equally as important.
Any document stored in AuditTracker can be searched for using many different criteria (company, name, date, audit issue,
person, etc.). Documents can also be found through use of a full text search feature comparable to many web-based
search engines. Once a document has been found all related documents can also be obtained with a single click of the mouse.
2) Calculation issue
AuditTracker is fully integrated with our TaxSeries software. Thus, it can process multiple scenarios of audit calculations.
AuditTracker can also produce proposed audit adjustments for other compliance software. If a company uses a compliance system
that supports multiple scenario calculations, AuditTracker can produce the adjustments to support the calculation.
3) Process management issue
AuditTracker has a built-in e-mail notification feature. Thus, it generates e-mail notification based on various user-defined
criteria. For example, a tax director can be notified automatically if there is any audit adjustment over $5 million entered
into the system. This means that if an audit adjustment is proposed in Italy for $5 million, the US tax director will be notified
automatically.
There are many other features that are part of the AuditTracker. Built as a general workflow tool to automate adversarial
proceedings, it can be used to manage other issues, including: amended returns, internal audits, SEC investigations, sales tax
exemption certificates, and more. If you are interested, you can check it out at
www.AuditTracker.com.
2. Form 8865 - the second year issues »
Return top
So, what's new this year? There is very little change to the form itself. However, since most
companies have filed the first return for tax year 2000, tax year 2001 will have to take into account the
returns filed for the prior year. This means that there are a number of reconciliations that need to be
done as part of second year compliance. For example, schedule M2 and partner capital accounts will have to
be reconciled to the prior year returns. Although it may sound simple, it may not be that simple since
partnership accounting is only done for US tax reporting purposes while the supporting financials are
generally prepared for foreign corporate reporting purposes.
Our Tax Series software fully supports Form 8865 and can help facilitate the compliance process. An
overview of the product can be found at
www.taxseries.com.
3. Mark your calendar »
Return top
March 25 and 26, 2002 - Chicago
I will be presenting the Form 8865 compliance issues.
For additional details, visit
http://www.fdta-cite.org
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Regards,
J.D. Choi
CEO, Tax Technologies, Inc.
201-387-9451
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