Developing an Effective Tax and Risk Management Strategy

Most enterprises face a growing tax burden and audit risk, yet many are not stepping up efforts to automate tax processes and reduce tax risk factors, according to a study by technology research firm Forrester.

The report, ‘Tax Risk Management: An Inconvenient Truth’, highlights the potentially high negative financial impact when high tax burdens are mixed with business risk elements, such as an IRS audit. Additionally, manual tax processes create the potential for added business process inefficiencies, errors, audit concerns, and financial and tax compliance exposure.

Scott Tiazkun, senior analyst at Forrester and author of the report, reported that despite the popularity of financial management applications, tax management applications are seldom more that an afterthought in the grand scheme of financial management. In fact, enterprise tax management applications are less than 5% of the total financial management applications market. This means that the vast majority of CFOs have no automated application system to collect tax data or provide a complete system of record for tax processes and audits. Yet 71% of the financial management applications market is made up of core accounting applications, such as general ledger, accounts payable, accounts receivable, and fixed assets.

In the report, Tiazkun highlights the importance of identifying and assessing all elements of tax risk, such as reputational, regulatory, operational, economic and corporate risk. He stresses the need to assess tax risks in order to minimise financial exposures. “The first step in addressing risk is to asses which of these risk types affect the enterprise; in many cases it will be all of them. Both the CEO and the corporate board will then need to prioritise the tax risks, decide which risks are already addressed and which need to have fully-fledged mitigation programmes developed,” he wrote.

He proposes that CFOs consider the following tax risks: not fully understanding current tax law and practice; failure to systematically update tax formulas; inadequate documentation of tax assumptions and positions; and lack of in-house or consulting tax expertise. They must then determine the financial magnitude of each risk element on the business.

Figure 1: The Elements of Tax Risk: A CFO Checklist

Source: Forrester Research, Inc.

Tiazkun goes on to make five recommendations for an effective tax and risk management strategy:

1. Investigate and select a complete tax management software system.
2. Define tax risk categories, then implement assessments.
3. Continue risk definition and mitigation efforts.
4. Feed broader governance, risk and compliance strategies for added value.
5. Consider outsourcing.

To read the full report, please go to https://www.forrester.com/Research/Document/Excerpt/0,7211,46461,00.html