How organizations can improve customer tax reporting requirements

The last several years have highlighted challenges in the back-office tax operations function responsible for tax reporting and withholding.

The last few years have taught us that organizations would be prudent to focus on potential reputational risks of customer tax reporting and withholding as well as how to make their process more efficient and effective.

The IRS has signaled plans to increase the volume of audits of Forms 1099 and 1042-S reporting, shifting focus back to evaluating compliance of domestic organizations after several years of international focus. Regulators are enhancing their processes for identifying financial institutions and taxpayers for enforcement activity through automation. Some of these changes are going to make it much more likely that customers may be negatively impacted by tax reporting failures and inaccuracies.

Even when you report accurately, you may create negative customer experience if one does not take a customer centric view of customer tax reporting. So, what can be done to make sure you don’t create a negative experience for your customer while at the same time reduce overall firm risk and improve efficiency?

Identify gaps and inefficiencies. A first step is taking a critical look at your tax operations processes and measures to evaluate their efficiency and effectiveness. Organizations need to reconsider their use of automation and predictive analytics to respond early to data quality issues before they accumulate. Options may include adding automated quality tests throughout the year or instituting certain metrics monitoring to allow for continuous assessment of the data that will be used in your tax process to minimize rework required at year-end.

In a recent survey EY performed of 47 banks in the US and Canada, focused on operational risks, 69% cited data quality issues as the top driver of excess time spent in their operational processes, and less than 50% indicated that they had predictive analytics to help in early identification of potential issues¹. Consistent data input errors, incorrect data mappings and high volumes of manual interventions in automated processes can be primary drivers of reporting anomalies that could be identified through year-to-year comparisons.

Reevaluate firm risk. There are financial penalties for noncompliance, with penalties up to $270 per form for failures to file, but many current evaluations of risk stop at these fines, because in most cases the fines are capped at $3.3m per entity. That underweights the risks in two critical ways.  In severe cases where there is intentional disregard on the part of an organization, those fines rise to $550 per form with no cap. Perhaps more importantly in the current environment, the risk of fines significantly underrepresents the potential reputational risks to the organization and impact to customers, especially in situations where corrections to statements are required².

Failure to adequately consider the client impacts may lead to significant dissatisfaction and ultimately client defections over a poor process. Late, incorrect or amended forms being supplied to clients can result in clients having to amend their own income tax returns, incurring additional charges from their accountants. If they don’t amend their returns, clients may receive automated audit notices from IRS systems.

Regardless of if the reporting is completed accurately, if clients are receiving information returns without adequate communications, there is a risk that they may disregard them. For example, recent increases in customers receiving Forms 1099 for incentive programs and other promotions without sufficient advance communications have created confusion and dissatisfaction.

Failure to adequately consider the client impacts may lead to significant dissatisfaction and ultimately client defections over a poor process. Late, incorrect or amended forms being supplied to clients can result in clients having to amend their own income tax returns, incurring additional charges from their accountants. If they don’t amend their returns, clients may receive automated audit notices from IRS systems.

Regardless of if the reporting is completed accurately, if clients are receiving information returns without adequate communications, there is a risk that they may disregard them. For example, recent increases in customers receiving Forms 1099 for incentive programs and other promotions without sufficient advance communications have created confusion and dissatisfaction.

Increase efficiency through automation. The proliferation of highly configurable automation tools, typically referred to as “robotics,” creates significant opportunities to increase efficiency in your customer tax reporting operation. These tools can improve operational functions leading to standardized and consistent performance. The result is a simultaneous increase in efficiency, with a reduction in the risks of human errors associated with data entry and manual processing.

Robotics can fully automate repetitive steps and complex reporting and withholding rules. Automated tools can also facilitate the review of data to identify issues and inconsistencies, either as a part of routine ongoing testing or year-end reporting checkouts. This reduces the burdens associated with resource intensive and time-consuming processes.

The views reflected in this article are those of the author and do not necessarily reflect the views of the global EY organization or its member firms.

This article originally appeared on Bank News.