As if having to fork over taxes to federal, state and local governments weren’t enough in these tough economic times, experts are warning companies that they can probably expect more audits by strapped governments looking for ways to scare up extra cash to help them avoid cutting back on needed programs.
That’s the conclusion of a new report by the Tax Governance Institute and accountancy firm KMPG, which in March and April asked the institute’s 14,000 members to rate what they considered their biggest tax risks going forward.
KMPG principal Hank Gutman, who is also executive director of the Tax Governance Institute, says 30% of the responding firms rank increased tax audits as the biggest tax risk they face, ahead of both increased regulatory risks (27%) and accuracy of tax provisions (26%).
“This means that companies have really got to pay close attention to being able to document and to defend what they’re putting in their returns,” says Gutman. “That goes for foreign countries too. Multinational firms are going to find those governments also getting more serious about compliance–and they may not have the same documentation and procedural rules.”
Gutman points out the contradiction that even as strapped governments are likely to work harder to collect every tax dollar they can find, strapped companies have been holding the line or even cutting back on their tax department staffing, meaning fewer people have to accomplish more. Even though 37% of surveyed companies say they are seeking to improve cash flow by looking harder to find and use tax refunds, credits and incentives, 47% of those same companies say they are holding staffing budgets steady, while 28% are actually cutting staffing. “It may not make sense,” says Gutman, “but that’s the way the world works.”
In case ramped up audits aren’t enough, a second study by Vertex, a Berwyn, Pa.-based enterprise tax solution vendor, reports that the economic crisis has spurred a record 554 U.S. municipalities to increase tax rates, or add new sales, transit or use taxes, and that 2009 is shaping up to be another big year for tax changes.
“For companies, the real hassle is keeping track of all the changes, up or down,” says Don Fuga, principal research analyst at Vertex. “It gets even harder for companies that don’t have an actual presence in a particular jurisdiction, but have to do business there and collect the taxes from customers.” Vertex, which provides calculating software that “bolts onto” a company’s existing software platform, he says, keeps its clients informed of rate changes with a monthly report.