By Tara Ferris, Justin O’Brien and Paul Frasco
The last several years have shown a dramatic increase in the volume and complexity of customer tax information reporting (i.e., Forms 1099), highlighting challenges in the back office tax operations function responsible for tax reporting and withholding. These 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 one reports accurately, one may create negative customer experiences 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 reducing overall firm risk and improving 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 operational risk-focused survey that EY performed with 47 banks in the U.S. and Canada, 69 percent cited data quality issues as the top driver of excess time spent in their operational processes, and less than 50 percent indicated that they had predictive analytics to help in early identification of potential issues (EY ORM survey June 2018). 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.
Re-evaluate Firm Risk
There are financial penalties for noncompliance, with penalties of 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 $3.3 million 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.
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 as well as 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 current climate presents numerous opportunities to generate significant change within your customer tax reporting process. The increase in scrutiny and complexity means that waiting until you have a problem to make changes will carry significant regulatory, financial and reputational costs.
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.
Tara Ferris is a principal in the Financial Services Office of Ernst & Young LLP. She advises multinational financial institutions and asset managers on customer tax reporting and withholding, focusing on process and control improvements to create efficiencies and reduce risk. She is a principal draftsperson of the FATCA regulations, notices and forms, chapters 3 and 61 coordination regulations, FFI Agreement, QI Agreement (including the compliance requirements and requirements for QDDs under section 871(m)) and WP/WT Agreement as well as a contributing draftsperson to the withholding aspects of the regulation under section 871(m), FATCA Model 1 and Model 2 intergovernmental agreements, and competent authority arrangements.
Justin O’Brien, is a principal in the Financial Services Office of Ernst & Young LLP, specializing in tax technology transformation. He focuses on both domestic reporting and withholding issues (Form 1099 and back-up withholding) and non-resident alien reporting and withholding issues (Forms 1042 section 1441 withholding) as well as qualified intermediary issues. Justin concentrates on assisting clients with large implementation projects including FATCA, CRS, Cost Basis, 305(c) and 871(m).
Paul Frasco is a New York-based executive director with more than 15 years of experience in the financial services industry serving clients in banking and capital markets. He leads technology enablement development efforts for tax reporting and operations change and has developed and implemented methodology for executing current state processes and system diagnostics, designing and planning large scale tax implementations, accounting and process conversions, and implementing finance technology regulatory compliance tools.