The Risks And Opportunities Of [Not] Automating The Tax Function

In their rush to digital, companies may be leaving opportunities on the table. Areas like tax and accounting are often overlooked, creating potential for costly risks down the road.
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The move to digital is typically associated with the customer experience through an external-looking lens. But along this transitional journey, the finance and tax departments are often left behind.

A Corporate Board Member survey of 223 U.S. public company board members, conducted in partnership with RSM US LLP, shows only 14 percent of directors reported that their company had implemented new technologies to improve the tax and/or accounting processes. A third (34 percent) said they hadn’t discussed the idea or had chosen against it, at least for the time being.

This can be a significant missed opportunity—and significant added costs—when considering the implications of relying on shadow accounting systems still today. Elizabeth Sponsel, leader of the national tax technology consulting practice at RSM, says in America, tax is often left behind the journeys that the other functions have taken. The main reason for this, she says, is that the inner workings of the tax department—and how they tie into the rest of the organization—are often less understood by technology vendors and corporate IT teams.

“Tax really hasn’t been at the table as the wave of low-code no-code and bots have proliferated around corporate America,” Sponsel said. “Because of that, figuring out where to start and mapping out the automation plan can be a significant challenge for organizations.”

Of those directors who said, in the survey, that digital is being implemented in their tax systems, the majority said they’re focusing on automating manual or labor-intensive tasks. Yet, according to Sponsel, the greatest opportunity in digitizing the tax department starts with how it can support the company’s disclosure and compliance with regulatory requirements—which only 15 percent of directors polled selected.

“We continue to see companies’ finance and tax departments working in silos, exacerbated by the virtual working environment brought on by Covid-19,” she said. “Breaking down these silos is a critical starting point of an organization’s transformation journey to avoid communicating conflicting data to reporting authorities, thus triggering audits or sometimes larger tax bills than necessary.”

For instance, direct tax and indirect tax are often assessed and reported by two different teams and data coming from two different systems that don’t actually speak to one another. While that may have worked decades ago, companies today need to ensure their information aligns prior to remitting to both the income tax authorities and the sales and use tax authorities because as we all know, in 2022, these tax agencies are communicating and comparing notes.

Companies that operate on a global scale have an even great risk of conflicting data. Global companies must put care into designing and architecting their systems to enable access to information despite differences in currencies, year-ends, GAAP vs. Non-GAAP, and US GAAP vs. local GAAP. Connected systems that allow teams to pull information for their own unique reporting and analysis needs enable greater insights and less time spent reconciling data across various systems. Tax teams that have the access to the data they need, when they need it are more likely to have greater impact and the ability to position themselves as strategic partners to the business.

When approaching digital transformation at the tax or finance level, companies should focus on the manual, labor-intensive processes that often have teams thinking “there has to be a better way.” However, obvious as this seems, less obvious is the time and effort teams continue to place on managing and executing these labor-intensive processes, ultimately pulling their focus away from the automation they are trying to achieve. These resources are critical. Not only must they be involved, but their time must also be freed up to drive the change journey. Building new efficiencies on a broken foundation, or one that hasn’t been optimized or modernized, is a recipe for disaster.

Sponsel offers four key pieces of advice:

  • Don’t automate what’s broken
  • Recognize there will never be a perfect time for change
  • Adopt a risk-based approach
  • Engage with business stakeholders early and often

Directors can engage tax leadership teams in discussions to develop an operating model that regularly applies concepts such as reverse audits to critical, high-profile tax concerns, thus surfacing possible challenges before others do. This is particularly important for a tax function, whose focus has historically been retroactive rather than forward-looking. Adopting this approach could result in cost-savings, highlighted in a recent example with one of RSM’s clients: nearly $10 million in overpaid taxes were identified with the root cause being a break in processes between collecting and remitting sales tax.

When looking at the technologies that can best support the tax and finance departments, directors are looking forward to harnessing the power of artificial intelligence (AI), machine learning, neural networks and natural language processing technologies in their upstream core business processes. Using these technologies, companies can intelligently automate their processes from the start, avoiding downstream band aids, re-work and, ultimately, lost time and money for tax.

An example RSM has advised clients on is leveraging machine learning software on the front-end of procure-to-pay processes to capture all the necessary line-item expense data and detailed sales tax and jurisdiction information, instead of trying to use these tools to solve the problem on the backend.

Low-code, no-code tools, such as Alteryx, are another powerful automation tool to enhance incomplete or uncleansed data, especially when solving the root cause (e.g., through changing ERP systems) is not feasible or practical in the near term. For companies in this position, Sponsel says Alteryx acts as the automation “Swiss Army knife,” containing all the components needed to reliably clean, map, sort and load data, replacing the countless Excel spreadsheets on which many continue to rely.

“Companies may also want to assess the value of robotic process automation (RPA),” she said “It’s a great tool for companies that have a high volume of repetitive tasks that can emulate human keystrokes.”

Where to next?

The board plays an important role in the automation decision—and automating the tax function is no different. Delaying the automation of the department can mean taking on greater, more costly risks than choosing to move forward with a plan to bring tax into the digital era.

She offers some questions to consider bringing up at the next board meeting:

  • What business priorities have a tax impact that we might not be completely looking into because we
  • lack access to quality information?
  • What level of investment can we commit to make now to explore digital transformation opportunities?
  • How do we embed automation skillsets within our team? Is it critical that we enable our team to
  • successfully sustain these new automation technologies after they are implemented, and if so, how will
  • our workforce of the future look different than today?

To read more about this research and some of the best practices in the field, download your complimentary copy today or visit RSM’s special webpage dedicated to these findings.


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