What is tax risk management?

'Tax risk management" is a fairly recent term first used by large accounting firms to underscore to businesses the opportunities and pitfalls inherent within the particular tax positions taken by a business at any point in time. The collapse of Enron and WorldCom, and Congress's response through Sarbanes/Oxley legislation, have elevated corporate tax departments from what were once sleepy backroom operations to key participants in corporate bottom-line performance. Tax reserves and other tax forecasts now take a more prominent role in SEC-required disclosure and their resulting impact on shareholder value. Corporate boards and top executives are now held directly responsible for tax-related mistakes.

In tandem with tighter legislative rules, the corporate tax world itself has become more complicated. From state and local tax considerations and a growing federal tax code to aggressive audit positions by the IRS on tax-shelter type transactions to the growing body of international tax rules that a global business must follow, the tax world for many businesses has become considerably more dangerous. Like a juggler trying to keep too many balls in the air at once, businesses are feeling more pressure on the tax side of their operations. The greater the number of balls (or tax risk situations) in the air, the greater the need is for preventive management of them.

Tax risk management, however, is no longer confined to large public companies listed on a major stock exchange. The "trickle down" of tax problems from public corporations to private businesses, run as corporations, partnerships or LLCs, to small businesses is evident. Lenders, take-over prospects, and co-owners are all acutely concerned with the financial health of a business. Tax considerations now play an increasingly vital role in determining whether any particular business can receive a clean bill of health. Past positions taken on open-year tax returns, the likelihood of the success of any ongoing tax strategy, stepped up IRS audits, changing tax accounting rules and the growing complexity of the tax code itself, not to mention state and local tax law considerations and the increasingly large penalties that taxing authorities are free to assess if a tax position turns out to be incorrect, make tax risk management essential for the smaller business as well.

How much tax risk is your business carrying? The first step to finding a solution to a problem is determining the extent of the problem. Do you know how many "dropped balls" on the tax-side of your business it would take to bankrupt your operations or set them back several years? If you have neglected this side of managing your business, or if you want some reassurance that you are prepared for "worst case" tax scenarios, please feel free to give this office a call.