Direction? Compile a Tax Risk Management Strategy

Executive Summary

ANY BUSINESS GOAL that is set without a carefully thought out and planned strategy will often end in failure. It is a common problem in many businesses that the people involved in tax compliance , other than in the area of traditional tax compliance, don’t know what to do when they encounter a problem. As a result a tax team should be assembled to create cohesion and communication in the process of devising a set tax risk management TRM strategy.

It is simple enough to devise a strategy that will provide the direction. However, there is no quick remedy; a proper process must be put in place. Of importance for this process, and the information divulged in this process, to be subject to legal privilege.

The basic strategy is for the organization to undergo a SWOT (strengths, weaknesses, opportunities, and threats) analysis from a tax point of view. Focus primarily on the weaknesses and threats; this is the area where the majority of your liability will lie. Two broad types of issues must be identified: those  on-the-radar screen and those off-the-radar screen. These risks that are on-the-radar screen are those that are known to the organization as well as the IRS. They are issues that are ongoing and that have some history behind them. However, a strategy of how to deal with these problems must be established, and a strategy must be developed in order to limit the risk of these problem areas. For instance, a tax manager may be aware that the IRS has raised a significant assessment in respect of outstanding VAT . It may be apparent that there is real risk of a liability; and in an effort to clear the problem as quickly as possible the taxpayer pays the full amount of the assessment, including interest and penalties, without looking at other aspects of the assessment raised by the IRS, such as the procedure employed by the IRS in raising the assessment, or entering into negotiations to reduce the amount of interest and penalties.

The off-the-radar screen risks are those risks that the business is aware of and has noted but has not done anything about them. That is to say that the IRS has no clue of the existence of these tax risks. The strategy in this instance must be clear and effective. All the risks must be identified and prioritized. Bear in mind that once the business has started dealing with these various risks, it is important that the IRS be involved at the appropriate point of time in the future to minimize the cost of compliance through a carefully implemented plan of self-disclosure to them, averting penalties and some interest. If no disclosure to them is required, the matters are simply filed away, where accessible, with all the facts and opinions intact.

Don’t forget the strengths and opportunities that have been identified. On the positive side of tax risk management a business can look at its effective tax rate in comparison with other similar businesses and determine whether it is paying more or less tax in its country of origin or abroad. f the tax paid is significantly higher then something needs to be done!

Start by scrutinizing the expenditure and allowance for assets to ensure that you can take advantage of any benefits allowed by legislation.

In accordance with Circular 230 Disclosure