In 2015, a number of trends will shape how businesses prepare and file their taxes, as well as receive refunds. Many of these trends are driven by one major force— automation. Automation technology has transformed the way businesses operate in many other spheres, from marketing to HR. Now, we are seeing a strong increase in the level of automation on both sides of tax administration.
Businesses are increasingly using electronic tools to track tax data and generate and file returns. The government is increasingly accepting electronic filings and automated transmission of funds. Automation yields many benefits, but it also has its downside. Let’s take a look at how tax automation will affect businesses in the year to come.
Large corporations with over $10 million in assets have been required to electronically e-file federal returns for nearly a decade. Many state and local governments are imposing similar requirements, and each year are moving the filing threshold requirement lower and lower. Now thanks to advancements in technology, as well as widespread adoption of electronic accounting tools, more businesses are choosing to e-file, and more states are actually making it mandatory.
In some ways, automation has a negative impact upon the taxpayer. For example, the amount of data, and accessibility available to tax auditors, makes audit more comprehensive and detail oriented. States have better tools to drill through the data looking for filing inconsistencies and abnormalities. However, the benefits of automation far outweigh these negative side effects.
While automation provides the auditor with more data, it also provides a higher level of correlation between the reported taxes and the supporting data, making it easier to prove the accuracy of the filing.
Automation also simplifies the process for taxpayers, significantly reducing the amount of time they need to invest in preparing and submitting tax returns. By reducing the time to submit and process a return, automation also significantly reduces the amount of time it takes to receive a tax refund.
Accuracy is another major benefit. E-filing also increases the level of detail that taxpayers provide and reduces the amount of errors, such as a misspelled name. Manual data entry leaves so much room for mistakes and delays, from both taxpayers and processors.
According to the IRS, 20 percent of income tax returns prepared on paper have mistakes, such as missing information or taxes calculated using the wrong tax tables. Half of those errors cause overpayment of taxes. However, only about 1 percent of returns prepared electronically contain user input errors, which will result in delayed and erroneous processing, oftentimes leading to assessing fines and penalties for perceived late filings. If there is a mistake on your return, the IRS can detect it and send back an error report in as few as 48 hours so that you can quickly fix the problem.
On the processor side, human error can also seep in. For example, if a tax return is due on the 20th and the return is processed, but the person processing the payments is out sick, then the payment is delayed. The system shows that the return was filed, but without payment, and that triggers an automatic notice. Submitting returns and payments electronically significantly reduces those types of inconsistencies and decreases the amount of input and system errors.
One downside of automation is that there is less opportunity for discretion and exceptions. One example is with sales tax, and the seller who has an occasional sale in a state. Businesses need to register and file tax returns wherever they do business. If the business had random sales in a certain location, traditionally they would not be required to register there and would be allowed to file as “occasional” tax filers. Today, many automated filing systems do not allow for this occasional filer.
In all likelihood, during 2015, the trend will continue where more and more states and local governments will eliminate the option for e-filing and make it a requirement, for companies of all sizes.
As it becomes more prevalent, the sophistication of tax technology will improve as well. Many of the tools available today are essentially just web versions of the paper forms, which still involves manual data input.
That is beginning to change, as platforms emerge that can directly connect accounting systems through a filing tool to a state or agency’s service. Those technical capabilities have increased tremendously over the past 12 to 18 months and will continue to do so.
Businesses want and need tools that automatically take care of the entire filing process, and soon they will have no choice but to use them.
Jonathan Barsade is CEO and founder of Exactor, a company that provides sales and use tax software.
