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Principal, Leader, Tax Risk Management & Tax Controversy, PwC US
Victoria Torchen
Partner, State and Local Tax, Insourced Solutions for Tax (IST), PwC US
Tax audits and disputes continue to be a priority for companies, but more recently, they’ve caught the attention of the C-suite and board. Many tax executives are taking a fresh look at their current approach and concluding that it can be more cost- and resource-effective to build a robust strategy and related processes upfront, rather than waiting for an audit to commence — which is not a matter of “if” but “when.”
Tax examinations and controversy continue to escalate globally. US federal, state and foreign governments are aiming to ramp up audit activity to address revenue needs. Coordination and information exchanges between taxing authorities continue to expand. We now expect up to 140 countries to enact new minimum taxes and related rules as a result of the OECD’s Pillar II initiative — creating an entirely new interconnected global tax regime that could lead to a higher number of disputes.
But here’s the challenge: The right in-house resources and skills to focus on a proactive audit strategy may be sparse or nonexistent, while budget pressures and lack of digital tools make it difficult to efficiently resolve audits and disputes. Tax teams may not have the capacity or experience to dedicate to controversy and may be distracted with other challenges such as increasing compliance obligations and higher regulatory complexity. And while using a service provider can provide relief after a steep learning curve, doing so once the tax audit cycle already has commenced can be a reactive approach that may not achieve efficiencies gained with a proactive strategy.
The result is that tax controversy managed services are gaining momentum. This solution offers a powerful alternative beyond building a purely in-house team or simply hiring a professional advisor for a specific deliverable.
Below are some common concerns and pain points we’re hearing from tax and C-suite executives and how tax controversy managed services can help companies get the most value from their bottom-line spend:
Risks relating to audits and disputes have widened exponentially
The potential for large, unexpected tax bills and nondeductible penalties from revenue authorities has increased, along with the resulting drag on earnings. And now public reputational damage is another consideration for C-suites. An adverse dispute also can raise higher scrutiny from tax authorities going forward and create strain on relationships with nontax regulators.
Many companies want to reduce risk by becoming a more current US taxpayer with sustainable positions under the IRS’s Compliance Assurance Program (CAP) — a cooperative pre-filing program for large corporations. Acceptance into the CAP allows the IRS to audit and close back tax years, which can result in significant benefits such as reducing reserves, eliminating the costly process of amending state tax returns every year due to prior-year audit adjustments and potentially avoiding a costly appeals process.
Mitigating risk typically requires stepping up the tax function’s operational efficiency. But it’s not just about revamping a process to more quickly respond to inquiries from revenue authorities. A tax controversy managed service can deliver a strategic approach across the entire tax life cycle, including planning, provision and compliance — such as coordinating audit-ready documentation during each of those phases. The business then can face a tax examination with more confidence that its tax processes should yield reliable and expected results, thus strengthening its relationships with revenue authorities and resolving disputes more quickly and positively.
PwC’s proactive approach to controversy adds value and can help reduce risk at every step — from planning opening conferences to building a working relationship with the taxing authorities, as well as setting C-suite expectations.
Resources are sparse and the need is often underestimated
The commencement of a tax audit can throw a wrench into the often intricate operational workings of a tax function. Many tax teams may not have the budget to embed dedicated controversy specialists, so defending examinations and controversy tasks need to be performed by current in-house team members that are already busy with their day jobs. Often it takes significantly more time than expected to effectively resolve an audit or dispute from start to finish, with audits sometimes lasting for years. In addition, scaling up resources can be difficult to address this workload, especially for those tax functions that rely on one key person working with manual spreadsheets.
Acute pain points can arise quickly in a state and local tax audit that triggers a pressing need for a specific state tax specialist — not often available within the in-house team given the number of states and the intricacy of the rules for each state.
Resource readiness is a core reason to utilize a tax controversy managed service, which can more easily scale up and down as needed when new audits and disputes arise, the business grows organically or an acquisition occurs. The burden of attracting, hiring and training additional in-house resources is lowered — as the needs grow, so can the company’s dedicated managed services team.
The combination of in-house talent (rebadged to PwC or not) with PwC’s technical and industry specialists across the globe creates a cohesive team that can hit the ground running when an audit or controversy arises, similar to other targeted Tax Managed Services. Strong people strategy, cutting-edge technology, and proven transition and governance cadence can inject immediate strength into your tax audit strategy — and at a cost that typically can be lower than a solely in-house team or reactively engaging a new service provider.
Certain technical know-how may not be available in-house
Successful resolution of audits and disputes requires not only resources with in-depth industry and company knowledge, but also more extensive tax technical skills than ever before. And compliance complexity keeps increasing. For example, the complexity of US federal tax laws rose sharply after new international-related rules were enacted in 2017. Each year states continue to expand their nonconformity with federal tax law with more intricate state-specific rules — not to mention the many global tax policy changes occurring at a record pace.
This needed technical know-how is not just about understanding the practical impacts of complex tax regulations across all 50 states and the globe (a spectrum of knowledge many in-house tax functions may not have), it also requires digital know-how, such as how to tailor technology tools to build robust controversy processes.
A tax controversy managed service delivers a broad network of professionals around the globe with specialized technical experience. This network can both navigate through convoluted tax regulations and help avoid common and costly pitfalls, and also can leverage the power of digital to build efficiencies.
An advanced digital ecosystem is a cornerstone of a tax controversy managed services. A suite of leading-edge tax technology tools can be leveraged to efficiently gather large volumes of data, enable seamless coordination, create audit-ready documentation, and track issues and risk on a global basis.
Our tools can deliver both a bird’s eye view and detailed visibility into controversy processes end-to-end. For example, the tools can help manage day-to-day relationships with revenue authorities and support audit readiness following significant M&A transactions. At the same time, PwC’s investments in generative AI may be utilized to reinvent and deliver better outcomes.
The bottom line? Companies want to be “resolution-ready”
No business wants to be caught flat-footed during an audit. It causes burdens for all involved and creates potential for adverse consequences, financial or otherwise. Preparedness now is expected by tax authorities, as well as by C-suites, company boards and other stakeholders. Leading tax functions want to be proactive and bridge the gap between what’s reported on tax returns and what’s confirmed.
Getting prepared may not happen overnight but can be viewed as a journey. Shifting to a more proactive mindset can help the tax function contribute even more value to the business’ bottom line.
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Tax controversy managed services can help lead the way for quicker, sustainable, and trusted results. Our team is dedicated to tax controversy — all day, every day. We step outside of the one-off issues and consider the broader business to identify opportunities. Contact us to discuss how our team can help your company reach its risk and value goals.
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