In today’s ever-changing tax world, managing the organization’s tax risk is no easy feat. Demands for tax compliance and financial reporting are soaring in complexity, number, and scope. Tax teams face pressure to provide highly granular a as regulatory bodies like the Securities and Exchange Commission and the Internal Revenue Service intensify scrutiny. As companies expand their global and digital presence, increased tax management brings additional risks. Compounding the problem is the fact that many of these risks exist in a black box—that is, they are hard to see but are still very real.
Bridging the Divide
Layer on today’s hiring challenges, and day-to-day responsibilities dominate daily agendas. Chief financial officers tend to focus on high-level strategy and gauge the tax department’s success by its ability to optimize tax and safeguard the organization. Conversely, tax associates concern themselves with operational aspects, such as meeting deadlines and ensuring timely filings. This disconnect underscores the need for a tax risk management strategy that prepares for unknowns and unifies all stakeholders.
Limitations of Traditional Approaches
Many tax teams have a framework in place aimed at managing tax risk, and from what we’ve seen, about fifty percent of tax departments use a formal system. Traditional methods compartmentalize steps and procedures around data, processes, people, and technology. This siloed approach prevents a holistic view of the tax landscape, making risks hard to anticipate and respond to. Treating these areas as separate entities can also lead to redundant work and a higher chance of errors.
When we think about the broad definition of success—whether it applies to individuals, teams, or organizations—we know that hard work, efficiency, and attention to detail are crucial. But they don’t tell the whole story. Success also stems from the environment; think culture, stability, continuity, and leadership. The same goes for tax risk management—because risks are so broad, complex, and amorphous, a set of steps alone won’t do it all. We need to look closely at our environment.
The Importance of Strategic Decisions
Consider the analogy that comes from personal finance: It’s harder to accumulate wealth by taking small steps such as coupon-clipping. It’s easier to build wealth by getting the big decisions right—living within your means, making smart decisions about major purchases, and consistently saving and investing. Similarly, you don’t transform tax risk management with small steps only; you do so with large-scale decisions about your tax environment. The real question we should ask is, What decisions will have a profound and lasting impact on our tax organization’s environment now and in the future?
Let’s discuss two ways tax departments can make transformative changes in their environment and greatly improve their tax risk management strategy: implementing tax technology and owning the data.
The Critical Role of Tax Technology
Effective tax risk management begins with the right technology. Consider these common sources of tax risk:
- working with incorrect or compromised data;
- late, missed, or inaccurate filings and financial statements;
- business disruptions such as employee turnover and data breaches;
- variance between expected and actual results; and
- unaccounted-for or misunderstood tax law changes.
While not exhaustive, this list highlights issues we can trace back to time constraints. Given more time, less risk would exist. That’s where tax tech comes in.
Automation, structured data, built-in calculations, transparency, centralization, and standardization—these are the pillars of effective tax technology. They not only save tax preparers and reviewers considerable time but also promote accuracy and empower analytics necessary for meaningful planning. The best part? These benefits compound over time—continually improving process efficiencies and planning activities. A bonus: tax technology attracts top-tier talent.
Why Tax Technology Should Come First
If you implement technology too late in the game, you may end up forcing yourself into risk mitigation steps you’ve already set up around your data, processes, and people. This can drive inefficiencies and potentially increase costs to address any gaps.
Think of the modern tax organization as a vehicle: data is the fuel, people are the drivers, processes are the controls, and technology is the engine. Without a good engine, the vehicle goes nowhere. Advanced technology that aligns with your goals is like a Ferrari. Anything less is like a horse-drawn carriage—you may eventually get there, but it’s going to be a slow, bumpy ride.
Own Your Data
Some organizations may enlist a firm’s help to define, implement, and monitor policies and procedures around tax risk. Should that be your path, understand the necessity of owning your data and staying involved. For a tax risk management framework to maximize value, it needs to be carried out by those with an intuitive understanding of the organization’s business model, strategy, risk appetite, and chain of command—and it should be understood and respected at all levels of the organization, not just by the C-suite or the board of directors.
Outsourcing tax compliance, financial reporting, or tax planning can lead to an “out-of-sight, out-of-mind” mentality, and tax teams lose touch with the bigger picture. Tax risks have a way of falling through the cracks—they don’t present themselves as items to check off a punch list. Owning your data helps you recognize and address risks and gives you oversight, understanding, and the ability to communicate with and educate colleagues—services third parties rarely prioritize.
In Closing
In today’s volatile tax environment, traditional approaches to tax risk management no longer suffice. As data volumes grow, processes change, and people come and go, flexible, scalable tax technology is your route to efficient, effective risk management. Evaluate your current processes and consider how tech can help you manage risks with confidence.
Carter Butler is product marketing manager at CSC Corptax.
