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FAS 109 and FIN 48 are an undeniable part of the landscape. The typical tax department has had to adapt to numerous changes as these pronouncements have matured and the reporting requirements have evolved to a higher level of complexity.

The need to release numbers for the earnings parade has placed considerable pressure on all the players in the financial reporting business. Reporting times for accounting groups are shorter, which in turn shortens the turnaround time for the tax provision, which must be accurate, or at least free of material flaws. It is understood that the final true-up will contain some differences, but changes are expected to be minor, made only in the spirit of refinement. When the oversight of the SEC is added to the mix and the requirements of Sarbanes-Oxley are considered, the need for more effective controls, better strategies and enhanced data gathering processes is readily apparent.

The Excel environment is an “old friend” to the tax community, but shortened reporting times, the emphasis on accuracy and the requirement for accountability in data modification all argue for a more appropriate solution. In order to accomplish all of the new tasks, the tax department needs to move to a new paradigm in which the entire process of information gathering, analysis and delivery are integrated.

Software solutions like FasTrac 109 are a key component in the paradigm shift. When implementing a software solution, the tax department is often encouraged to review the entire provision process. How is data is being gathered? How is that information communicated and dispensed within the department? How is the information utilized within the department for the production of the provision?

Under the most expansive view of the provision process, the entire trial balance would be presented to the tax department and each account would be fully analyzed to determine its sustainability. This optimal approach may be possible within the context of a small enterprise, but it becomes unworkable when there are several entities to be considered, making the approach impossible for a significant number of companies. The other end of the spectrum would be if the tax department simply used book income as a starting point and only reviewed the “usual suspects” for the provision. While the latter format provides an acceptable framework for expediency, new items that could be revealed in a more detailed trial balance review can be overlooked too easily.

Most companies strike a reasonable balance between the two extremes by taking advantage of commonplace account groupings whenever possible, such as sub-totals for sales accounts, and maintaining a more detailed listing for reserves. This approach enables them to focus quickly on the areas that could generate issues without devoting time and effort to less critical areas. In a software environment, this type of “data triage” lends itself well to automation. For example, software automation can be set up to effect certain account balances in a predefined fashion, such as subjecting meals and entertainment to the statutory 50% exclusion automatically.

Not every provision item is a candidate for automation. Some areas, such as Unicap and vacation pay, require more than simple A x B = C calculations. The overall objective of any provision software is to relieve the tax department of the burden of mundane calculations so that the more nuanced items of the provision that require expert intervention can be given their due without distraction.

Upping the ante with FIN 48

The Internal Revenue Service has long maintained that the examination of tax accrual work papers is an essential element of the audit process. This position continues to thrive and will be further emphasized with the advent of FIN 48. The Service is training agents on reviewing both the FAS 109 and FIN 48 work papers.

FIN 48 represents a new challenge for the tax department in that it goes well beyond the standard M’s into uncharted areas, presenting serious issues for some. Increased federal vigilance for companies that are possibly engaged in listed transactions adds renewed significance to the review of provision workpapers in general and to the FIN 48 analysis in particular. The state area is also fraught with potential exposures. While PL 86-272 has been with us for decades, there remain issues on the question of presence in a state that crosses the nexus line.

The tax department walks a fine line in its analysis work. While it must maintain reasoned and reasonable records to satisfy the attest function, it does not want to create the ultimate audit trail for the various taxing authorities. From this perspective, it’s clear that while software allows for much greater accuracy in the preparation of the provision, it will never be a substitute for the experienced tax professional!