TAX RECORDS AND PROCEDURES

TAX ORGANIZATION
The responsibility for the tax activities should be placed with a financial executive
who understands the relationship of the accounting function to the tax
compliance and planning function. Because the tax function affects cash flows
and accounting determinations, it is generally considered to be a controller’s
function.
Depending on the complexity and challenging nature of the tax issues, the tax
department may be organized per the types of taxes:

• Corporate Income Taxes

• Local taxes

• Value added taxes

• Property taxes

• Payroll taxes

In other cases, companies use a functional breakdown such as:

• Tax compliance

• Tax planning and research

• Tax counsel

CENTRALIZED TAX DEPARTMENT

For a tax department to be effective, it must relate to all geographic locations and
departments of the business, including subsidiaries, divisions, branches, plants,
and local offices. It also must be privy to key transactions of the company before
they occur. A top policy decision must be made about the degree of
centralization of the corporate tax function. Normally, a centralized tax
organization will exercise control over all tax policies and procedures within the
company. In addition, it will manage the home office tax organization and in
some cases, direct the day-to-day activities of the decentralized tax people.
However, in any event, functional control over the field tax organization should be
vested in the corporate tax manager or executive.

Some of the advantages in centralization of the tax responsibilities include:

• More economical

• Permits a higher degree of specialization

• More efficient use of tax resources—library, services, and the like

• Promotes uniformity

• More flexibility in handling a workload

In some circumstances, a centralized tax organization may be at a disadvantage

because of lack of sufficient contact with local taxing authorities or the local
operating entities. This can be overcome by proper planning and making the
effort to achieve the proper relationships with the local taxing authorities and the
local operating personnel. As in many other areas, good communication is a key
ingredient in making the relationships work well.
FUNCTIONS OF THE TAX MANAGER

The functions of the tax manager will vary with the organization. However, the
following is an indication of the extent of responsibilities assigned to the tax
department in a generic large company:

• Develop, recommend, and implement approved plans for an effective tax

management program applicable to all elements of the corporation. Insure that
the company complies with all applicable laws, rules, and regulations related to
all applicable taxes.

• Select personnel, assign duties, and establish appropriate control over tax
department activities.

• Plan for the administration of local or branch office tax functions.

• Maintain organized and adequate tax records, prepare forms and working
papers, and establish an adequate filing system.

• Prepare a complete tax manual establishing procedures and responsibilities.

• Evaluate the effect of tax laws, regulations, rulings, and court cases on the
company’s tax liabilities and potential business activities.

• Develop policies and procedures to minimize the company’s overall tax liability.

• Determine that the company has filed all tax returns, reports, and declarations
required by law.

• Review and recommend action concerning all tax adjustments proposed by the
various taxing authorities or by the company’s independent public accountants
and represent the company, or cause the company to be represented, in all
negotiations affecting the company’s tax liabilities.

• Initiate action, as directed, to obtain IRS approval, when required, with respect
to changes in accounting methods, and procedures and matters pertaining to
retirement or savings plans.
• Prepare and prosecute in cooperation with tax accounts and/or attorneys as
appropriate, or cause to be prepared and prosecuted, formal protests, claims,
petitions, or court actions with respect to disputed tax matters involving the
company, coordinating all such activities with other concerned functions, such as
legal and accounting.

• Initiate action when required, to obtain Internal Revenue Service (IRS) rulings
regarding the company’s tax liability.

• Analyze the tax implications of proposed acquisitions to determine present or

potential problems and examine tax carry back or carry over possibilities.

• Provide information concerning federal, state, local, and foreign tax matters,
based on the advice of counsel, where necessary.

• Analyze the tax effect of legal documents affecting the company and render
advice regarding appropriate action to minimize the company’s tax liabilities with
respect thereto.

• Review the annual and strategic plans to develop the tax liabilities for each
period and incorporate the results into the approved plan.

• Prepare, analyze, and review book accounting for income taxes

TAX COMMUNICATIONS

It is imperative that the tax department communicate with all units of the
organization. The tax manager must have an intimate knowledge of the company
and its products, services, and general business operations. To achieve this, he
must be in touch with all concerned and develop a network of communications
sensitive to situations having potential tax implications. Success is when the tax
department is consulted before, during, and after the fact on transactions
involving tax matters.
TAX RECORDS IN GENERAL

The relative complexity of the tax issues will govern the nature of the records.
Broadly speaking, however, certain records are needed for administrative control
purposes, to support the tax returns, and to meet the requirements of the law.
Tax records may be grouped into four major classifications:

1. Tax calendar

2. Information records

3. Working paper files

4. Supporting ledgers

TAX CALENDAR

An administrative tool needed in most companies is a tax calendar. It is a

schedule that serves as a reminder to those responsible regarding the due dates
of filing tax returns, preparation of various reports, payment of tax bills, hearing
dates, audit dates, assessment dates, and any key tax event.

TAX INFORMATION RECORDS

Another basic type of record may be called a “tax information record” and
represents a summary of the tax law and related matters as they affect the
business. Such a record is used as a reference when preparing the tax return.
The information may be stored in a computer or filed on cards, loose-leaf sheets,
or even as part of the tax manual. Information to be available concerning each
tax are:

• Name of tax

• Description of tax

• Basis

• Tax rates

• Exemptions from tax

• Time of filing return

• Return form number and name

• Approximate time required for preparation

• To whom return is sent and when

• Source of data for return preparation

• Why company is subject

• The tax accounting

• Procedure, including any special

TAX WORKING PAPERS AND FILES

The central theme is a complete and orderly record of how the amount of tax was
determined each year, the payment dates, and so on. These files may include
information such as:

• Record of payments

• Record of assessments

• Reconciliations of tax data to the records

• Copies of the return

• Refund record, including basis

• Correspondence on the tax

• Research supporting the tax position or positions taken Such files must be
prepared based on the judgment of the tax manager based on the needs of the
company.

INTERNAL REVENUE CODE AND RECORD REQUIREMENTS

Under any tax law, the challenge is to set up records that will provide the
necessary data with the minimum cost and effort. In considering recordkeeping
requirements under National Internal Revenue code, the principal source of data
is the latter and corresponding regulations. The law is very general regarding
records, and Congress has specifically granted to the Commissioner of the
Bureau of Internal Revenue the power to prescribe records that are under any
tax law, necessary to determine the liability of the tax or will properly reflect the
taxable income of the business. There are, however, various record keeping
requirements, especially where foreign owned companies are involved. Care
should be taken to ensure that these record keeping requirements are met.

DIFFERENCES BETWEEN INCOME TAX ACCOUNTING AND BOOK

ACCOUNTING

The principal source of information required for federal income tax returns is, of
course, the regular accounting records of the company. Although tax accounting
and book accounting are similar in many respects, there are three important
respects in which these two differ:

1. Income and expenses specifically excluded for tax purposes.

2. Differences resulting from the recognition of time when losses or income may
be recognized. The reserve positions and related charge-offs are included in this
group.

3. Differences in cost bases. This general category would include differences in

depreciation rates and bases, treatment of maintenance and repair costs, and
inventory valuation.

A vital schedule for the controller’s review is the reconciliation of net income
contained in the income tax return. This schedule reveals the major differing
points between tax and book accounting.

TREATMENT OF THESE DIFFERENCES IN THE RECORDS

he controller and tax manager are faced with the problem of how these
differences should be treated in the records. It is necessary to maintain a running
record of these differences and to reconcile book and tax figures if a company is
to secure the maximum tax benefits. The maintenance of such records is
essential to ensure that the company will not overlook a tax deduction to which it
could properly be entitled to in a subsequent year. However, it does not follow
that a completely independent set of books need be maintained for tax purposes.

PROPER CLASSIFICATION OF ACCOUNTS

When designing the accounting records and account structure or chart of

accounts, the controller should be aware of and consider the accounting data
required for the preparation of tax returns. If provision is made in the
establishment of the accounting records, it can facilitate the tax work and protect
the interests of the company from a tax viewpoint.

INCOME TAXES AND BUSINESS PLANNING

Management must consider the tax consequences in its business planning for
the future. The tax manager should be involved in the detailed planning process
so that business arrangements or contracts include the proper provisions to
maximize the tax savings. This may be in the form of reduced taxes or deferred
tax payments that can enhance considerably the cash flow for the company.

SPECIAL TAX REPORTS

The controller or tax manager has a responsibility to see that the significant tax
burden placed on the company is communicated to all concerned. most key
people in the company are not always aware of the significant amounts paid out
in the various forms of taxes assessed to the company. In some companies, the
tax manager prepares an annual report for management detailing the amounts of
all the taxes paid during the year. It is also sometimes prudent to include in this
report how much taxes have been saved using planning ideas