Tax Accounting Financial Reporting Mistakes Are Costly In or Out of Crisis

June 2021

BY

Daniel NewtonTax Partner, ASC 740 Technical Practice Leader

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Remaining compliant with income tax accounting rules can be challenging for tax executives. Failure to comply could result in costly remediation efforts especially where there are material misstatements. However, findings from the 2021 BDO Tax Outlook Survey left us surprised. While close to a third of respondents identified recruiting and training professionals and staying up to date on accounting standards changes and proposals as top compliance challenges, only 16% identified avoiding material misstatements as a top issue.
 
These statistics are all the more striking since income tax accounting has been one of the top areas for a restatement of a public company’s financial statement for the past several years. Based on a report published by Audit Analytics (“2019 Financial Restatements – A Nineteen Year Comparison,” July 2020), while the overall number of restatements for public companies has declined in recent years, income tax accounting, as a percentage of overall restatements, has remained relatively constant. According to the report, many of the restatements relate to foreign taxes, specialty taxes, tax planning issues and the inability to identify appropriate book and tax differences.
 
The Tax Outlook Survey polled 150 senior tax executives at companies with revenues ranging from $100 million to $3 billion. The 2021 survey reveals that during a crisis, tax executives know they can implement strategies aimed at preserving cash. That’s all the more reason to pay attention to costly financial reporting mistakes, especially since these same executives expect their tax liabilities to increase as jurisdictions worldwide face diminished tax revenues as a result of the COVID-19 pandemic.
 
The survey also reveals that 55% of respondents have been involved in a tax dispute in the last 12 months (64% of which involve federal taxes) and 92% expect the federal income tax rate to increase within the next year. Considering that the Biden administration is pushing for changes to the tax rates and other federal income tax rules, along with the increased support for a global minimum tax both in the US and globally, it’s clear why paying close attention to tax accounting rules is essential. Additionally, increased compliance challenges, and the complexities associated with them, could lead to more tax disputes. One way to help avoid disputes is by strengthening internal controls, which can reduce reporting errors, risk and the need to restate the financial statement.