Tax Provision Automation

Can the tax provision process be automated?

Despite its complexity, the income tax provision process is ripe for automation because it:

• Demands a high level of human involvement
• Requires several systems and steps
• Is time sensitive
• Is highly definable, rules-based, and data-driven

The tax provision process is one of the most scrutinized tax compliance processes that tax departments are responsible for. Because it is an essential part of a company’s financial statements and related disclosures, accuracy is crucial.

Calculating the income tax provision requires adherence to ASC 740 and a deep understanding of federal, state, and international tax law and rates, which can vary by jurisdiction and change over time.

Understanding the tax provision process

The tax provision process includes several key steps. Given their complexity and detail-oriented nature, these critical tasks are susceptible to errors when managed manually and are therefore prime candidates for automation.

1. Determining temporary differences

The first step in calculating income tax provision is to identify the differences between book income and taxable income that will result in taxable or deductible amounts in future years.

2. Calculating current and deferred tax liabilities

Next, assess the actual federal, state, and international taxes payable for the current period and estimate future tax effects of current temporary differences. Be sure to account for any uncertain tax positions.

3. Documentation and disclosure

Finally, prepare detailed schedules and notes that outline the basis of the tax calculations and the factors affecting the company’s tax position.

The benefits of automating the tax provision process

Automating elements of your tax provision workflow is not only feasible, but also increasingly necessary due to the complexity of the process and the demand for accuracy and compliance in financial reporting. Here’s how automation makes a difference:

Accuracy and consistency

Tax automation software reduces the risk of errors by calculating current and deferred tax liabilities based on the latest tax laws and rates. An automated tax solution can pull actual tax rates – rather than using a blended rate – to ensure consistent calculations based on the same rules and data inputs.

Efficiency

Automation speeds up the calculation process significantly. What used to take days or weeks with manual spreadsheets can often be completed in a fraction of that time. This is particularly valuable during tight reporting deadlines and fiscal closing periods.

Compliance and risk management

Automated tax solutions are updated with the latest tax regulations and standards to ensure compliance and reduce the risk of penalties associated with noncompliance or inaccurate reporting.

Scalability and integration

Modern tax provision software integrates with existing financial systems to pull data directly, reducing the need for manual data entry. This way, your tax provision process can scale to keep pace with company growth.

How automation solves common provision process challenges

The ASC 740 income tax provision process is integral to a corporation’s financial health and compliance, but there are often challenges that impact the efficiency, accuracy, and reliability of provision reporting. Here’s how automation can solve common workflow issues to minimize risk.

Compliance with FASB ASU 2023-09

Corporate tax departments face the challenges of complying with the Financial Accounting Standards Board’s updated requirements on income tax disclosures. The ASU 2023-09 requires that companies provide detailed reporting and transparency around effective tax rates and cash income taxes paid.

The ASU 2023-09 changes will require significant additional time and resources, and corporate tax departments need time to integrate the new standard into their processes.

Tax provision technology alleviates many challenges associated with adapting to ASU 2023-09, especially in a resource-constrained environment. By automating essential tasks, integrating data systems, and enhancing reporting capabilities, corporate tax departments are better prepared for compliance.

[Get ahead of the changes to income tax disclosures under ASU 2023-09. Download our explainer, FASB’s New Income Tax Disclosure Requirements.]

Data sourcing and management

Gathering, standardizing, and cleansing data are among the top challenges for tax provision professionals. Many times, data are received in inconsistent formats from varying source systems, requiring the tax team to spend a lot of time manipulating it into something usable.

An automation tool like Bloomberg Tax Workpapers helps users extract, transform, and load data directly from multiple ERPs and other sources. It can send cleansed data to your provision through a strategic integration with Bloomberg Tax Provision software, saving significant time, avoiding manual data entry, and eliminating duplicative processes.

Internal controls

Maintaining effective internal controls over the tax provision process helps ensure compliance and the reliability of the reported figures. Traditional manual processes often lead to inconsistencies and a lack of standardization. For example, it might be easy to delete data or change a spreadsheet formula, either accidentally or intentionally. Spreadsheets often don’t provide a reliable way to track these changes, document who made them, or lock down reviewed calculations.

Tax provision software can provide built-in controls that standardize processes and reduce the likelihood of fraud or error. Automating workflows and approvals ensures that all data is processed consistently, adhering to predefined rules and protocols – leading to enhanced internal governance and greater auditability.

Manual work and error risks

Relying on spreadsheets and manual calculations introduces a high risk of error. Inaccurate entries, formula errors, and misinterpretations of tax laws can cause discrepancies in tax calculations and reporting – potentially resulting in financial restatements and damage to reputational integrity.

By replacing manual calculations with an automated solution, forward-thinking accounting firms reduce the risk of human error. These tools can process large volumes of financial data and consistently apply the correct tax rules and rates across all calculations. This improves accuracy while allowing tax professionals more time and flexibility to focus on more strategic work.

Limited functionality of traditional tools

While versatile, tools such as Excel often fail to handle the complexity and volume of data typical in corporate tax environments because they’re not inherently designed to handle tax-specific compliance and reporting needs.

Tax automation tools are designed to address the specific needs of tax professionals. They come equipped with features that aren’t available in more traditional nontax-specific tools that make them far more suitable for the complex corporate tax provision process, such as:

• Integration with financial systems
• Real-time data processing
• Compliance checks

Tax provision software is also more adaptable to various regulatory environments, ensuring that the tax provision process complies with country-by-country reporting requirements. This flexibility provides scalability, which is essential for growing businesses that need their tax provision processes to keep pace with expansion.

How to incorporate automation into your provision process

Incorporating automation into the tax provision process improves efficiency, accuracy, and compliance. However, to fully leverage automation’s benefits, tax and audit professionals must understand how to integrate it into their provision process.

Integrate workflows to eliminate manual data entry

One of the primary benefits of automation is eliminating manual data entry, which can be tedious and error-prone.

Provision software, like Bloomberg Tax Provision, can seamlessly integrate with existing financial and accounting systems and other tax software platforms to extract necessary data automatically. This integration ensures all relevant data is pulled into the tax provision system without manual intervention, including information from the:

• Trial balance
• General ledgers
• Income statement
• Balance sheet

By automating data collection and entry, companies can reduce errors, save time, and ensure data consistency across all financial processes.

Automate account reconciliations

Reconciling tax accounts is a critical part of the provision process and ensures entries are accurate and reflect actual tax liabilities or assets.

Automated reconciliation tools can compare data from different systems and flag discrepancies for review, facilitating faster and more accurate reconciliations. These tools can also maintain an audit trail, which is essential for financial audits and compliance reviews, making it easier to trace any issues or discrepancies back to their source.

Compute journal entries

Journal entries for tax provisions are complex and need to align precisely with the company’s accounting policies and relevant tax laws.

Automation simplifies this process by automatically calculating the required entries based on data inputs. This includes:

• Entries for current and deferred taxes
• Adjustments based on temporary differences
• Changes due to tax rate adjustments

Automation ensures these entries are accurate and applied consistently across all applicable financial periods.

Manage rate reconciliations

Rate reconciliation involves comparing the effective tax rate with the statutory tax rate and explaining any variances. This process is vital for transparency in financial reporting and for internal analysis.

Automated tools can handle rate reconciliation calculations, analyzing fluctuations in tax rates and their impact on the tax provision. Automation allows for real-time updates and adjustments to rates, which can be crucial when dealing with multiple tax jurisdictions.