Top Tax Risks
Domestic and global companies alike face the challenge of complying with ever-changing and evolving tax rules and guidelines. The passage of the 2017 Tax Cuts and Jobs Act (TCJA) added further uncertainty to already risky territory.
While companies race to keep up, the internal control environment in many organizations has lagged. The result is an alarming risk profile, internally and externally.
Here are seven areas that are especially prone to errors. Auditors will often inspect these items in detail to ensure that you have very clear processes and good controls in place. Each of these is worth a careful review.
Deferred tax assets and liabilities. There are a variety of circumstances that allow for deferred tax assets and liabilities. The many differences between GAAP accounting and tax accounting, however, require very thorough tracking of these items. Pay close attention to fixed assets, accruals and reserves, and intangibles.
Valuation allowance. A business must create a valuation allowance for a deferred tax asset if there is a more than 50 percent probability that the company will not realize some portion of the asset. Deferred tax assets should be consistently reviewed at the jurisdictional/filing group level for each of the company’s entities to determine if a current valuation allowance is required and to evaluate existing valuation allowances to determine if a portion or all should be released.
Purchase price adjustments and detail related to business combinations. When an acquisition takes place, GAAP requires a revision of assets and liabilities of the acquired business to their fair values at the time of their acquisition. Tax regulations differ from GAAP when it comes to purchase price adjustments, however, and your team must understand the complexities involved and ensure that these adjustments are evaluated year over year.
Foreign currency translation. Fluctuating exchange rates can lead to considerable changes in foreign asset values or income streams. This makes it extremely important to check fundamental accounting assumptions.
Uncertain tax positions (ASC 740-10). Unresolved uncertain tax positions should be reassessed at each balance sheet date. In addition, tax law changes, expiration of statutes of limitations, new regulations, and interactions with taxing authorities should be closely monitored so appropriate changes can be made. Remember, uncertain tax positions requiring reserves must be reported to the IRS on Schedule UTP.
Accounting method changes. When an organization changes its method of accounting and it affects the tax return, the changes must be reported to the IRS. GAAP Revenue and lease accounting standards recently became effective. Additionally, the TCJA significantly changed tax accounting for several items including revenue recognition, OID, etc. It’s imperative that your team stays on top of changes to GAAP accounting and changes in tax law and tracks them well for reporting purposes.
Transfer pricing. Transfer pricing across multiple jurisdictions has grown in importance and the definition of the arm’s length standard—a key element of transfer pricing—has evolved as well. The arm’s length standard requires that transactions between two subsidiaries of the same parent company be priced as if the transaction took place between two unrelated companies. This is difficult to implement from a tax perspective. It must be well documented and updated frequently to reflect business changes.
While this list highlights important areas of risk, it’s certainly not all-inclusive. The experienced tax professionals at True Partners Consulting can help you address problems before they arise and create safeguards against potential tax risk. Let us help you. To learn more about tax risk management contact Ryan McKenzie at Ryan.McKenzie@TPCtax.com