Corporate tax technology advances: with the pace of change can you afford not to jump on board?

• Author: Prow, Greg R.

Today's corporate tax department bears little or no resemblance to its counterpart of 25 years ago. New regulations, disclosures, justifications, and reporting requirements have created a complex and difficult-to-manage environment. Unfortunately, many organizations have taken an "ignorance is bliss" approach--a method that, although once sustainable, today may bring serious penalties to both the business and the administrator.

Enterprises have two potential solutions for dealing with these fast-paced changes: adding expensive technical employee resources or increasing the tax department's use of technology. In the light of tax resource scarcity, the former is generally not possible. Instead, organizations must turn to tax technology to help solve the problems related to regulation, disclosure, reporting, and justification. To succeed, corporations must be aware of the pace of change hitting the corporate tax enterprise, avoid the trap of being paralyzed into doing nothing, understand the arguments for taking some risk today, and educate themselves about what is available and why now is the time to move forward.

Doing More with Less

Today, corporate tax departments are facing a business conundrum in which the complexity of the tax is growing as quickly as the availability of resources is declining.

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Tax codes, for example, are becoming substantially more complex. Since the last major tax reform in 1986, there have been more than 100 substantial changes to the Internal Revenue Code. The average is a little more than four per year, although there were seven laws affecting tax passed in 2002 compared with only two substantial changes each made in 1995 and 1999. While many of these changes have been related to non-corporate taxation, most of the laws contained at least some provisions related to business taxation. (The major tax laws passed since 1986 are set forth in Appendix I.)

Meanwhile, Congress has been busy putting in place legislation to stop the abuses associated with the financial scandals discovered at WorldCom, Enron, and other noteworthy companies. Perhaps the most sweeping example of these fixes was the landmark Sarbanes-Oxley Act. The 2002 legislation created the Public Company Accounting Oversight Board (PCAOB) to supervise the public accounting profession and imposed additional disclosure requirements, which carry significant personal criminal and civil fines and penalties, on company management.

Sarbanes-Oxley law has affected corporate tax enterprises more than any legal change since 1986. The disclosure, completeness, and accuracy requirements created for corporate tax departments the concept known as "material control deficiencies." Companies were required to focus on the provision for taxes contained in the company's Statement of Activities (Income Statement) and uncertain tax positions included in those provisions. The cost of complying with these laws proved astronomical. Large companies, for example, found themselves spending millions of dollars to perform the appropriate tests on audit. A brief look at how the income of many larger accounting firms increased from 2003 to 2005 confirms the effort and time spent bringing American corporations into compliance.

Making Things More Complex

Not to be outdone, the Financial Accounting Standards Board (FASB) got into the act with a new Financial Interpretation (48) of FASB Statement No.109, related to the Accounting for Uncertainty in Income Taxes. FIN 48 landed on the scene for most companies in 2007. Many corporate tax departments have spent considerable hours complying with the new rules. Within six months of the new guidelines, five tax software companies introduced software solutions to try and streamline the process.

Emboldened by Congress, the Internal Revenue Service joined in the efforts to curb potential misdeeds in large corporations with additional disclosure requirements. In its effort to close the gap between the tax paid and the tax the IRS should have been paid, the IRS announced that it was adding disclosure requirements to make the corporate enterprise more transparent. Thus, the IRS created a new tax schedule, the "Schedule M-3," which corporations are required to file each year as part of its corporate tax return. The Schedule M-3 requires tax departments to provide details on all book to tax differences and reconcile those differences to other corporate reporting documents, such as financial statements and worldwide reporting information.

Additionally, the IRS intensified its efforts to become much more current in its audit cycles. Using its Large and Mid-Size Business Division, the IRS introduced new initiatives to facilitate earlier and more comprehensive audits. As part of that initiative, the IRS spent billions on acquiring specialized technology to increase its efficiency and accuracy. In addition to decreasing the time to complete audits, these initiatives put significant pressure on corporate tax departments to create contemporaneous documentation and make the information available more immediately than ever before. Lastly, the IRS and Treasury Department embarked upon a number of initiatives--such as the Compliance Assurance Process (CAP) program, the currency program for issuance of regulations, and many forms of advanced reviews--to provide better guidance and understanding between taxpayers and the government.

A New World

These legislative and administrative changes have put the tax enterprise on the precipice. At the same time, enterprise tax departments are striving to understand and adapt to a new set of accounting standards known as International Financial Reporting Standards (IFRS). These standards are already being followed by companies outside the United States. Generally, IFRS is more principles based, while the more traditional GAAP method is more ruled based. GAPP-IFRS convergence can be justified as a natural byproduct of globalization, but it will require corporations and their accounting firms to review an increasing number of projects and activities in order to adopt IFRS.

The Resource Problem

This myriad of challenges is good news for the accounting and legal profession, but for companies, it exacerbates a looming resources crisis. Clearly, if resources were unlimited, increasing complexity would pose little challenge. Unfortunately, current competent tax professionals are in short supply.

A recent KPMG publication, "The Rising Tide," contains this statement: "[T]the results reveal tax...