It’s Time to Improve Your Company’s Tax Accounting Process

Effective tax accounting is a complex and high-stakes function. The accuracy of tax provisions is critical to financial reporting, yet vulnerabilities exist due to the reliance on spreadsheets and the dynamic nature of tax regulations. A deep understanding of both tax law and business operations is essential for navigating a constantly evolving landscape. The subjective nature of tax accounting, coupled with the complexity of tax software and data discrepancies, introduces significant risks. To mitigate these challenges, organizations must prioritize data integrity, invest in skilled tax professionals and implement robust control mechanisms.

Key Mistakes for Corporate Tax Leaders to Avoid

Most companies use some combination of internal and external resources to manage various income and other tax reporting activities and responsibilities. These functions are usually coordinated by a tax leader within the organization or other responsible party, such as the controller or CFO.

Due to constant changes in tax law and its inherent complexity, we often see errors in tax reporting related to financial statement preparation. Here are the top mistakes corporate tax leaders should avoid in maintaining compliance, accuracy and financial integrity. By understanding these common errors, businesses can implement strategies to mitigate risks and enhance their tax management practices.

1. Lack of Tax Accounting Expertise

Companies must accurately account for income and other taxes in their financial statements, a requirement distinct from preparing income tax returns. Tax provisions, estimates set aside to cover future tax assets and liabilities, are a crucial component of financial reporting. Calculated using generally accepted accounting principles (GAAP)-based information, these provisions are based on taxable income, expenses and applicable tax laws. Given the timing differences and specialized expertise needed for tax accounting, discrepancies between tax accounting and tax returns are common.

A business whose tax professionals lack tax accounting expertise may face several serious issues:

• Lack of Auditor and Investor Confidence: If the company’s external auditors identify errors, it can trigger a restatement or recast of the financial statements. This scrutiny undermines stakeholder confidence in the company’s financial reports.

• High Costs: Correcting mistakes made by an underqualified tax team can be incredibly expensive.

2. Spreadsheet Errors 

Most accounting departments use a variety of Excel spreadsheets to calculate tax accounting entries. A critical mistake in corporate tax management is relying solely on these spreadsheets for calculations without a second review by tax experts or specialized software. These spreadsheets often include complex formulas with a tremendous amount of financial data without adequate controls over the integrity of data inputs and calculations. The possibility of one figure or calculation being wrong is high—even experienced professionals can miss these errors, making this area particularly prone to mistakes.

Errors in tax provision spreadsheets can precipitate severe financial and reputational consequences. Inaccurate calculations can necessitate costly and time-consuming financial restatements, significantly eroding investor confidence and market valuation. Such errors can also trigger heightened scrutiny from regulatory bodies, resulting in potential penalties and fines. Furthermore, the complex interplay of tax jurisdictions, tax rates and accounting standards within tax provision spreadsheets amplifies the risk of human error and system glitches. These factors collectively underscore the critical importance of robust error prevention and detection mechanisms to safeguard financial integrity and mitigate potential liabilities.

To mitigate risks, it’s crucial to have adequate spreadsheet controls, including a robust review process. Every spreadsheet should be reviewed by a second person who understands the spreadsheet and can identify potential errors. Additionally, consider having in-house tax leaders or an outside firm prepare the provision and another firm review it to provide an extra layer of oversight and assurance.

3. Poor Project Management

Often, errors are the result of poor project management. Effective project management is crucial for accurate and timely tax accounting calculations. Unfortunately, companies often overlook this aspect, leading to rushed and incorrect work.

Many companies fail to understand the full scope of work required for accurate tax accounting calculations. This underestimation can also lead to last-minute scrambling, leaving outside auditors with incomplete or incorrect information. Here are some examples/considerations:

• Plan early in the financial reporting process.

• Identify all tasks, manage time effectively, and understand the amount of work required.

• Consider the impact of changes in the business that have occurred, such as business acquisitions/dispositions and geographic changes.

• Understand and consider changes in tax rules and regulations.

4. Disconnected from the Business

We see tax accountants who are unfortunately disconnected from the business. They are too often buried in detail, which may lead to making false assumptions in tax accounting calculations.

Errors or omissions in tax accounting frequently lead to finger-pointing among team members. This can be particularly problematic with valuation allowances and nexus determinations, where surprises can arise due to false assumptions or miscommunication.

To avoid these pitfalls, tax accountants need to be connected to the business’s current state. This involves regular communication with the CFO or controller to understand what’s happening in the business. Tax accountants should ask open-ended questions about the business’s performance, any significant changes during the year and specific details like income tax obligations in multiple states due to Internet sales. They should also review company press releases and U.S. Securities and Exchange Commission (SEC) filings if the company is public and understand the states and other geographies where the company operates and employs people.

By realizing how common these mistakes are and correcting them before problems arise, companies can better prevent costly errors, maintain auditor and investor confidence and ensure accurate and compliant financial reporting. Staying proactive and informed, and leveraging people and organizations with the right expertise, will help corporate tax leaders steer their organizations through the intricate related landscape of tax regulations and GAAP reporting effectively.