The Evolution of Tax Technology

Implementing innovative tax technology helps companies stay ahead of the curve by improving tax filing workflows and historical record-keeping.

By Shaun Ahn and Amy Oeser

Long before COVID-19 and its devasting impact on businesses, tax departments were urged by senior management to do more with less. This comes at a time when tax laws across the globe have become more complex than ever and governments are spending more time and resources scrutinizing companies’ tax returns and financial statements. This is no coincidence since income tax is one of the main causes of financial restatements. So, how does a tax department do more with less when stakes are so high (and, by the way, have the ability to do it remotely in the event there’s another COVID-19-type of incident)? This article will discuss how tax technology can be used to create efficiencies, strengthen controls and provide accurate and timely data and analytics to help companies succeed in this new, unprecedented environment.

History & Present-Day Tax Technology

Many tax professionals will remember the days of paper filing tax returns. There were many binders, often unlabeled, and buried in stacks of documents in someone’s office or file room. Who among us hasn’t been asked to go through countless boxes (probably in a basement file room) to find old tax workpaper binders from years ago?

"Interactive data visualization tools are setting the course of the future as they help businesses to see and understand Big Data, inform users at a glance with interactive dashboards and increase collaboration between tax teams and other departments."

Moreover, in many cases, the tax return was outsourced then brought back in-house, then co-sourced, etc., so keeping track of history was a nightmare. Needless to say, hours upon hours were spent finding one file that, as it turned out, may or may not have been relevant, or maybe it wasn’t even the final version. Not to mention tax professionals can sometimes be hoarders so finding a file is like finding a needle in a haystack. Naturally, this created inefficiencies and control issues. Unfortunately, the transition from paper filing returns to e-filing was not an overnight task.

On the government front, the IRS implemented the Modernized e-File (MeF) System, which sent acknowledgements to filers immediately. This allowed for quick corrections and re-submissions if needed. This was first seen in 2004. As tax professionals, we were all in the trenches together trying to figure out how to E-File.

In 2006, MeF became mandatory for businesses and exempt organizations with assets of $50 million or more. In 2007, this was lowered to $10 million. As of December, 27, 2019, the IRS had received 155.8 million tax returns for the 2018 tax year and, of those, 138.2 million were filed electronically. On the taxpayer side, e-filing via tax software such as OneSource and CorpTax has now moved to cloud-based systems where users can work remotely. This has proven critical in the current COVID-19 work-from-home environment. However, these systems require at least one full-time employee, if not more, for larger industry firms to manage and keep updated.

To address these new challenges many companies have had to take a new look at how data and documents are managed. Gone are the days of file rooms filled to the brim with bradded press boards full of workpapers that staff had spent countless hours punching holes, stapling, folding and taping. Stickers and labels used to define the entity name, tax year and jurisdiction for each file, if you were so lucky. Entry-level tax staff were kept busy printing, copying and making files. This was transformed somewhat with the introduction of paperless tax environments. However, shared drives became the next crowded and unmanaged file room. Each new tax manager would change the filing system and naming conventions within the shared drive. Files were not kept in order and those tasked with finding documents for IRS audits, legal discovery or due diligence projects would (and sometimes still!) have to use a decoder ring to figure out which file was the latest and greatest. File names such as “20XX Schedule MsFinalVersion2.xls” became the frustrating norm.

Online document management systems, coupled with required naming conventions such as that with Salesforce, have remedied this situation by providing version history and audit trails for each file uploaded to the cloud. In addition, these online document management systems also allow for detailed searching through files across all applications to quickly find the document you need.

The Future Of Tax Technology

So, how can a company stay ahead of the curve, or at a minimum keep up, with this ever-changing environment? For example, how can we better track projects? Who’s working on it? What tasks does each person need to do and in what order? Who has the first task? How long should they spend on this task? When will the item move to review and how long should the reviewer take on the review before the task is finally marked complete? These are issues that every tax department must address to become more efficient and relevant.

Companies should consider implementing data management and workflow software. There are many products on the market today and each have their pros and cons. It’s really up to the company to decide what it needs and select a product and design based on that, always keeping in mind scalability, as no company remains static.

In general, these software applications manage workflow streams by helping companies define and streamline processes by eliminating duplication and unnecessary steps, clearly identifying tasks, and assigning roles and responsibilities. They're able to move the process forward by sending automated e-mail notifications and alerts when tasks become overdue. They also contain links to work product and other resources for quick access and better data management.

"Companies should consider implementing data management and workflow software."

In addition, interactive data visualization tools are setting the course of the future as they help businesses to see and understand Big Data, inform users at a glance with interactive dashboards and increase collaboration between tax teams and other departments. They’re also able to take geographical data and turn it into interactive maps. The next step is for these applications to use artificial intelligence (AI) that can provide relevant analysis to help management identify trends and make better decisions.

From an efficiency perspective, there’s automation. If you haven’t yet seen a demo yet of a Robotic Process Automation (RPA) tool, you are behind! RPA, also called “bots”, are a software application that can automate routine tasks that can run 24/7, 365 days a year. They eliminate manual data entry and allow tax professionals to plan and think strategically rather than work on the mundane.

Examples of tasks bots can perform include:

RPA tools are developing rapidly. They’re indeed the next wave of the tax technology future.

Tax Technology Benefits Everyone

Tax departments today face tremendous challenges and they must be able to do more with less. One solution is to embrace technology. For many of us it will be a drastic shift from what we are used to, but the benefits will far outweigh the costs. To be successful:

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