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Kelley: As we all know, federal coffers are in dire need of tax revenue. And with federal funding for states all but dried up, the audit beast we have been talking about for the past year, is mutating into a whole new beast. That beast has a suit and tie, but has a hunger that just can’t be quenched. And in some cases, doesn’t seem to be playing fair!
Kelley: In fact, I ran across a survey recently given by Ernst & Young, LLP (EY), which is their Tax Risk and Controversy Survey which examines the fact that the greater uncertainty out there is posing new financial and reputational risk for leaders of global companies. The survey expounds further by sharing that 77% of respondents in their 541-company survey said managing tax risk and controversy will become even more important to them in the next two years, and this figure increases to 88% for large companies. Yikes.
Kelley: As you already know I’m sure, tax enforcement is on the rise (as is the sophistication of these taxing authorities) – and in some cases however we are hearing the direct opposite which includes a lack of skilled and /or sophisticated examiners or agents as they are scaling up so quickly that skillsets are not a priority. In addition, phasing in last year and even heavier this year, more reporting requirements than ever before. FBAR, FATCA and other withholding requirements and documentation. It should prove to continue to be a challenging environment.
Kelley: Given these global challenges, I thought I would also share what some of your peers are saying out there. I often converse and ask questions out there through social media and on LinkedIn and this is what folks have been saying…these are focused on states.Illinois hired 50 new auditors by the beginning of December. So, further proof of ‘ramping up”.As far as sophistication…NY- created what the taxing authorities are calling an “new sophisticated” transparent audit selection process that is almost wholly computer driven, in a hope to uncover fraud and underpaying taxpayers more easily. Even the IDR process will be automated.State transfer pricing – some states are hiring transfer pricing consultants to review state corporate tax return data to identify taxpayers with “thin transfer pricing” based on narrow profit margins or continuing losses. This is a great quote on MTC audits…”I think the one thing I am most concerned about with audits is getting a call from the MTC. Their audits consume vast quantities of time, resource, and paper, only to be delivered results that are significantly wrong. The one size fits all doesn't work for any state and neither do their sloppy audits. They will do 8 to 12 states at a time. They do both state income tax and sales / use tax audits together. Unfortunately their auditors do not seem to know the individual state laws and will apply what they think the law should be across the board to all the states under audit.
Kelley: A stunningly large preliminary assessment. The assessment was almost $1 Million! To put this into perspective, such an assessment, if any, should have been approx. $50,000! at most.. Another several tax pros said that Tennesse had it’s sales/use challenges - Getting auditors to commit to closing the audit is really challenging. An auditor sent annual waivers 3 times in the past 3 years rather than close out a relatively nominal $30,000 audit.Lengthy audit questionnaire. Easily the most extensive listing of questions that I had ever seen from an auditor. At 1 point I asked the auditor if he was going to apply for a job with us!Arizona and Texas are the worst right now for sales/use issues. There are an extensive volume of invoices required for auditor sampling + resolving auditor-prepared monthly reconciliation of tax return data vs. work paper/G/L data. I am seeing lots of “divergences” from IRM, procedures and even tax payer rights in some cases!--
Blake – any help from Kelley?
Blake – any help from Kelley?
A case study in cutting edge audit automation (2)
A Case Study in Cutting Edge AuditAutomation (and Notices)Monday, May 20, 2013 9:45 - 11:00 AM
Presented by: Blake Martin - Vice President,Head of Tax at Lincoln Financial Group andKelley Lear – Managing Director, Red MoonSolutionsCase Study inAutomationFinancial Services
Cash Hungry Treasury andStates… Preparing for andresponding to taxexaminations is growingmore challenging everyday More information inshorter response times Global tax authorities arestreamlining theirprocesses and expandingresources
Requirements on the Rise Federal/state/provinceand local taxenforcement is on therise (as is thesophistication of thesetaxing authorities) Reporting requirements are expanding: FBAR,FATCA, transfer pricing disclosures, SOX rules,global developments around Uncertain TaxPositions and other tax related contingencyreserves, withholding requirements (B Notices)and more…
What are your peers saying?•States are hiringmore auditors.•All states tryingfor reducing auditaging.•Voluntary disclosuresare getting pitched moreby the jurisdictions.•States like NY are gettingmore and more automated.They even have onlineservice accounts.•Referrals to state taxingauthorities from othertax types have ratchetedup.•MTC audits canlast forever…
What are your peers saying?•Getting auditor tocommit to closing audit.•Extensive, lengthyaudit questionnaires•Extensive invoice andsales documentation (e.g.sales contracts) required byauditor•Auditor-prepared monthlyreconciliation of tax returndata vs. workpaper/G/Ldata.•AZ, TX Sales &Use nightmares•Stunningly large preliminaryassessments – double what Iexpect!!• I am seeing a lot of"divergences" from IRM,procedures, and even taxpayerrights
Who is Lincoln FinancialGroup?• Provider of life insurance, annuities,retirement plans, mutual funds and otherfinancial services• Fortune 500 company with over 8,000employees• Headquartered in the Philadelphia region– Principal operations also in Indiana and NorthCarolina
We consider the “TaxFunction” to bethroughout the company:• Corporate TaxDepartment• Law Department• Accounting• Actuarial• BusinessOperationsWhat Does our Tax DepartmentLook Like?
How we are structured:• Over 30 tax professionalsin 3 locations• Other stakeholders inmany more locations• IRS Team located inIndianaWhat Does our Tax DepartmentLook Like?
What made us take theleap into automation?• Why we did we decide toautomate?– Multi-location tax function with manyparties– Desire to increase delivery andresolution time for audit inquiries– Mail being received in multiplelocations with propmpt repliesrequired– Desire to improve controls andaccountability
What was our tippingpoint?• Goal to make all taxexaminations morecollaborative and much faster• Reduce exposures• Reduce conflict• Consider “Continual AuditProgram” (CAP) for federalaudits
Managing the Insanity…• Federal Income Tax:– Federal tax examinations, Appeals and Litigation– Tax and interest re-computations– Statutes of Limitations and extensions• State Income Tax:– Delinquency notices (unfiled returns) & notices ofassessment– Tax payer requests for change of tax information– Notice of adjustment to corporate income– Notice of late filing• Premium Tax (State and Muni):– Notice of Class B Assessments– Underpayment and Overpayments– Tax payment process and tracking– Special Assessments and delinquency– Incorrect withholding• Sales & Use Tax:– Letters of Inquiry with respect to a jurisdiction(corporate business tax, state business tax andseller’s use tax)– Underpayment and Overpayments• Information Reporting– 1099’s, B Notices, Other..
Managing the Insanity…• Federal W/H, FICA, FUTA, SUTA:– Overpayments and underpayments (interest and penalties)– Unemployment Insurance• State W/H:– Notice of W/H tax due– Tax payment confirmation and tracking– Refunds requested• Personal Property Tax:– Demand for Personal Property Tax Payment– Payment documentation and tracking– Assessment and invoices• Real Property Tax:– Returns– Payments– Assessments and invoices– Payment documentation and tracking• Guarantee Fund Assessments• State & Local Business Licenses
People, Process andTechnology to the Rescue• Goals• Accountability• Control• Transparency• Designed an overall process• Identified entry points (mail, tax authorities,etc.)• Identified actions required• Identified roles and responsibilities• Provides online control and visibility forevery tax type, notices, fullaudit cycle and results!
• Full end to end automation and tracking of all notices• Utilizing eTaxPortal – NoticeTracker• Can link to audit projects as well• Full end to end automation andtracking of audit inception throughpayment, protest and appeals(as applicable): IDR RAR NOPA or NPA 6662 Tax Claim Protest & AppealsPeople, Process andTechnology to the RescueLog andrespond toIDR’sAutomateback andforthresponsesRespond toRAR’sAutomateresponsesto NOPA’sandtrackingFinalize,and/or pay,protest orappeal
IRS AuditNoticesNotices Rec’din GSO MailNotices Receivedin MailEnter into NoticeLog (date stamped)Attach ScannedCopy of NoticeAutomaticallyAssigned to LeaderNotice Automation
Leader Reviews and Assigns toStaff (system date stamp)Staff Prepares ResourcesStaff Reviews and Responds(system date stamped)Attach Copy of CorrespondenceSent to Taxing Authority (systemdate stamped)Audit Automation
Attach Response if Final Noticeand Mark “Closed”Request for Addit’l Info / StaffReviews and Responds (systemdate stamped)Attach Final Notice IndicatingClosed and Mark “Closed”Attach Copy of CorrespondenceSent to Taxing Authority (systemdate stamped)Audit Automation
Now What Does the ProcessLook Like in the eTaxPortal?Notice Types are set upalready and have defaultrouting to “Assign To Leader”
What are we learningthrough this process?• Process has to be designed foryour organization– Identify population to be managed– Communicate initial process androles– Be prepared to change the designquickly• There are many small issues you won’tinitially identify that will seem tocontinually pop up
What are we learningthrough this process?– Design a changeprocess to maintaincontrols• Emphasize that this is thenew (and only) process• Slow reaction toproblems will builddisillusion and resistance– Review frequently withRed Moon– Plan for the futureStep 1Step 2Step 3Review
What are we learningthrough this process?Results:• Better relations with taxauthorities• More accountability• Single control, no moreindividual spreadsheetcontrols• Fewer errors• Reduced interest andpenalties
What are we lookingforward to furtherautomating?Next Steps:• Tax Projects• Tax Developments• Tax Records Management• Governance of Tax Processes• Use of Tax Calendar
Thank you for reading!For more information, contact me at:Kelley LearKelley.Lear@redmoonsolutions.com941-379-7108Blake MartinBlake.firstname.lastname@example.org/redmoonsolution