Tax reform and the role of tech, two years in
How to transform your operations
September 2020 Footnote
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Editor's note: Updated August 31, 2020
With two years’ worth of U.S. tax reform on the books following the Tax Cuts and Jobs Act, tax technology is evolving to help companies meet new requirements in such areas as data management and analytics, calculations and reporting.
The uncertainty that followed the passage of tax reform in 2017 quickly gave way to larger challenges for tax professionals. Organizations began working to interpret the new legislation, even as IRS guidance was still rolling out. In the past two years, the tax code, IRS guidance, and systems and technologies have evolved significantly. While the previous tax compliance cycle was challenging for many organizations, tax technology providers are now releasing features and enhancements that should help ease compliance in 2020.
Deloitte tax leaders have explored tax reform lessons learned so far, including an overview of how tax technology has changed to better support new requirements.
Tax reform in the trenches
Given the inherent uncertainties of any major new tax law, many organizations delayed tax planning and tax technology investments during the initial year of tax reform. Following the completion of the tax year 2018 compliance cycle, many organizations are now investing substantial effort to incorporate tax reform into operations. Operationalizing tax reform requires updates to tax technology and systems reflecting changes in four key areas: source data, data management and analytics, calculations, and reporting.
Source data considerations
, including defining what data is required and where to find it, have moved beyond the general ledger/account level in enterprise resource planning (ERP) and consolidation systems. Post-tax reform, organizations must collect additional layers of data, including more in-depth transactional-level detail. Identifying source data that meets the requirements of tax reform calculations is an ongoing challenge. Many factors can trigger reevaluation or refinement of data sources, including regulation changes, reinterpretation of the law or form instructions, tax software updates, changes in the business or tax structure, or updates to ERP and consolidation systems.
To support evolving source data requirements, tax teams will need to work closely with IT and finance to find solutions that enable them to gather this tax data in a timely manner and useful format.
Data management and analytics
, and the related activities of gathering, wrangling, aggregating and storing data for computation and reporting purposes is now more complex because of additional data requirements.
Tax reform triggered a large increase in data volume, leaving many organizations to address data formats that were incompatible with downstream calculation and reporting processes. Where spreadsheets bridged the gap last year, internal help from an organization’s IT department or external help from specialists in this area may help tax teams leverage data management tools for consolidating data in usable formats to perform calculations and import data into tax systems. Additionally, tax departments are now looking for access to analytical tools (and assistance on how to use them) to speed up data analysis, review and validation. The good news is that many organizations already have licensing arrangements for these relatively inexpensive, easy-to-use tools; the challenge has been that many tax teams do not realize these tools are readily available to them.
Tax teams will need to work closely with IT and finance to find solutions that enable them to gather tax data in a timely manner and useful format.
Performing and automating calculations
under the new tax law proved challenging last year. Form instructions did not always clearly explain how numbers should be reported on forms, and guidance from other sources was either limited or released late into the filing season. Additionally, the actual computations may have resided in multiple places — for example, in models, supporting spreadsheets and tax software — and these sources may have had interdependencies. Integrating them proved a challenge.
To improve the calculation process in the next compliance cycle, tax teams will need to develop a clear road map detailing where calculations should reside. Step one is to gain a clear understanding of current tax software capabilities. Step two is to determine which calculations will need to remain outside of the tax software. Finally, the process of integrating external calculations with the tax software can be automated using tax software connectivity tools (e.g., add-in tools and wizards). Over time, as tax software companies develop additional calculations and functionality, tax departments can work to phase out external calculations and replace them with those that reside inside the tax software.
challenges with tax reform stemmed from complications related to tax law interpretation and the significant downstream impact to reporting requirements on 2018 tax returns. This year, tax software companies expect to deliver additional functionality to ease these tax reform reporting responsibilities. Tax teams should not only educate themselves on current functionality, but also stay abreast of near-term updates to their tax systems by reviewing published guidance on releases, attending product training and reaching out to the software company’s support staff as necessary.
Additionally, while tax law changes due to the COVID-19 pandemic are currently less significant and complex than those related to tax reform, software companies are addressing them as well, providing tax teams with another important reason to ensure they fully comprehend the updates and enhancements included in this year’s tax software.
As tax teams understand the new landscape, they can respond to the latest in technology and tax systems. IT may need to provide support as the tax organization evaluates alternatives in meeting its reporting obligations.
Looking ahead: Compliance 2020
Most tax departments are evaluating and implementing process improvements in their compliance cycle in 2020, in part because of new functionality and enhancements in technology and tax systems.
Perhaps the biggest lesson learned the past two years is that timely access to usable, high-quality data is necessary. Locating and automating data flows out of source systems for calculations and reporting will be a continual improvement area for tax organizations, especially as source systems evolve and finance systems are upgraded. IT will play an important role in making this evolution successful.
Emily VanVleet, partner; Brett Smith, retired managing director;
Lisa Covelli, managing director, Cristin Boynton, senior manager; and Stacey Knevitt, senior manager are with Deloitte Tax LLP.
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