A 2007 KPMG tax risk management survey of U.S. corporate tax managers highlighted the reasons that companies should maintain a qualified corporate tax risk manager on staff.
"Increasingly, tax risk management is becoming a heightened priority to those outside the tax function-especially senior management and the board," concludes the study. "Although the e-survey shows that many organizations do not have a formal tax risk management strategy in place, many of them likely will take steps to establish such a strategy, given the enhanced regulatory pressures for greater transparency."
Yet a surprising 60% of the tax managers responded that they had no documented tax risk management strategy, while 31% of respondents did not even consider a tax risk management strategy a top priority.
Given this, companies should prioritize hiring a competent tax risk manager now and put a vigilant audit committee in place. Without such initiatives, many companies will fall victim to the Seven Habitual Tax Mistakes.
Habitual Tax Mistake #1: Taxpayers tend to be reactive to tax risks. This often translates into additional tax exposure through the imposition of tax penalties and interest, and can lead to a poor relationship with the IRS. Proactive tax risk management can eliminate additional exposure, improve IRS relationships and place control of the process back in the hands of the corporation, where it belongs.
Habitual Tax Mistake #2: Tax compliance departments in businesses try to cover their tax risks without outside professional assistance, except on a reactive basis. This contributes to mistake #1 and tax risk management becomes reactive. By creating a tax team that participates proactively in the process, a business can potentially expand its tax risk cover from 40% to 100%.
Habitual Tax Mistake #3: Most businesses do not have a road map indicating where they are going with their tax risk management, other than blindly ensuring that they are "fully tax compliant." Without a properly formulated strategy in place, the objectives to minimize tax risk cannot be achieved.
Habitual Tax Mistake #4: Insular tax compliance from an ivory tower can only mean that corporate tax compliance is probably at its lowest, despite attempts to ensure. All key stakeholders must be involved, including the CEO, CFO, board members, the audit committee, the outside legal team and tax advisors.
Habitual Tax Mistake #5: Maybe the leading cause of bad tax compliance and unnecessary mistakes that could have been avoided is a lack of facts, facts and more facts. Getting to the bottom of a stack of facts takes time and effort, and is the most important starting point in any implementation strategy.
Habitual Tax Mistake #6: Financial accounting supplies the numbers on which tax compliance is based. Simply relying on these numbers-as is usually the case with most tax managers-is not enough. Internal audit procedures must be expanded to self-audit the higher tax risk areas in a business, in order to "self expose" any mistakes and noncompliance before the IRS does.
Habitual Tax Mistake #7: The lack of communication between the tax manager and the rest of the company, and an over-reliance on number processing to compile tax returns are the major reasons why tax compliance in most businesses only covers 40% of the total tax risk in those businesses. The other 60% of tax risk is hidden and can only be exposed through a systematic process of people-to-people communication. Naturally, one must verify the other and this calls for new communication systems in many companies to put an end to the bad habit of limited people communication.
Daniel Erasmus is the founder of DE Professional Consultants. He is also author of Seven Habitual Tax Mistakes, founding editor of the magazine TAX Talk and host of the TV show Tax Issues