A Case Study in Cutting Edge Audit Automation (and Notices)

Monday, May 20, 2013 9:45 - 11:00 AM

Presented by: Blake Martin - Vice President, Head of Tax at Lincoln Financial Group and

Kelley Lear – Managing Director, Red Moon Solutions

Case Study in Automation

Financial Services

The Audit Beast Has Mutated

Cash Hungry Treasury and States…

Preparing for and responding to tax examinations is growing more challenging every day

More information in shorter response times

Global tax authorities are streamlining their processes and expanding resources

Requirements on the Rise

Federal/state/province and local tax enforcement is on the rise (as is the sophistication of these taxing authorities)

Reporting requirements are expanding: FBAR, FATCA, transfer pricing disclosures, SOX rules, global developments around Uncertain Tax Positions and other tax related contingency reserves, withholding requirements (B Notices) and more…

What are your peers saying?

• States are hiring more auditors.

• All states trying for reducing audit aging.

• Voluntary disclosures are getting pitched more by the jurisdictions.

• States like NY are getting more and more automated. They even have online service accounts.

• Referrals to state taxing authorities from other tax types have ratcheted up.

• MTC audits can last forever…

What are your peers saying?

• Getting auditor to commit to closing audit.

• Extensive, lengthy audit questionnaires

• Extensive invoice and sales documentation (e.g. sales contracts) required by auditor

• Auditor-prepared monthly reconciliation of tax return data vs. workpaper/G/L data.

• AZ, TX Sales & Use nightmares

• Stunningly large preliminary assessments – double what I expect!!

• I am seeing a lot of "divergences" from IRM, procedures, and even taxpayer rights

Who is Lincoln Financial Group?

• Provider of life insurance, annuities, retirement plans, mutual funds and other financial services

• Fortune 500 company with over 8,000 employees

• Headquartered in the Philadelphia region– Principal operations also in Indiana and North

Carolina

We consider the “Tax Function” to be throughout the company:

• Corporate Tax Department

• Law Department• Accounting• Actuarial• Business

Operations

What Does our Tax Department

Look Like?

How we are structured:• Over 30 tax professionals

in 3 locations• Other stakeholders in

many more locations• IRS Team located in

Indiana

What Does our Tax Department

Look Like?

What made us take the leap into automation?

• Why we did we decide to automate?– Multi-location tax function with many

parties– Desire to increase delivery and

resolution time for audit inquiries– Mail being received in multiple

locations with propmpt replies required

– Desire to improve controls and accountability

What was our tipping point?

• Goal to make all tax examinations more collaborative and much faster

• Reduce exposures• Reduce conflict• Consider “Continual Audit

Program” (CAP) for federal audits

Managing the Insanity…

• Federal Income Tax:– Federal tax examinations, Appeals and Litigation– Tax and interest re-computations– Statutes of Limitations and extensions

• State Income Tax:– Delinquency notices (unfiled returns) & notices of

assessment– Tax payer requests for change of tax information– Notice of adjustment to corporate income– Notice of late filing

• Premium Tax (State and Muni):– Notice of Class B Assessments– Underpayment and Overpayments– Tax payment process and tracking– Special Assessments and delinquency– Incorrect withholding

• Sales & Use Tax:– Letters of Inquiry with respect to a jurisdiction

(corporate business tax, state business tax and seller’s use tax)

– Underpayment and Overpayments• Information Reporting

– 1099’s, B Notices, Other..

Managing the Insanity…

• Federal W/H, FICA, FUTA, SUTA:– Overpayments and underpayments (interest and penalties)– Unemployment Insurance

• State W/H:– Notice of W/H tax due– Tax payment confirmation and tracking– Refunds requested

• Personal Property Tax:– Demand for Personal Property Tax Payment– Payment documentation and tracking– Assessment and invoices

• Real Property Tax:– Returns– Payments– Assessments and invoices– Payment documentation and tracking

• Guarantee Fund Assessments• State & Local Business Licenses

People, Process and Technology to the Rescue

• Goals• Accountability• Control• Transparency

• Designed an overall process• Identified entry points (mail, tax authorities,

etc.)• Identified actions required• Identified roles and responsibilities

• Provides online control and visibility for every tax type, notices, full

audit cycle and results!

• Full end to end automation and tracking of all notices• Utilizing eTaxPortal – NoticeTracker• Can link to audit projects as well

• Full end to end automation and

tracking of audit inception through

payment, protest and appeals

(as applicable): IDR RAR NOPA or NPA 6662 Tax Claim Protest & Appeals

People, Process and Technology to the Rescue

Log and respond to IDR’s

Automate back and forth

responses

Respond to RAR’s

Automate responses to NOPA’s and

tracking

Finalize, and/or pay, protest or

appeal

IRS Audit Notices

Notices Rec’d in GSO Mail

Notices Received in Mail

Enter into Notice Log (date stamped)

Attach Scanned Copy of Notice

Automatically Assigned to Leader

Notice Automation

Leader Reviews and Assigns to Staff (system date stamp)

Staff Prepares Resources

Staff Reviews and Responds (system date stamped)

Attach Copy of Correspondence Sent to Taxing Authority (system

date stamped)

Audit Automation

Attach Response if Final Notice and Mark “Closed”

Request for Addit’l Info / Staff Reviews and Responds (system

date stamped)

Attach Final Notice Indicating Closed and Mark “Closed”

Attach Copy of Correspondence Sent to Taxing Authority (system

date stamped)

Audit Automation

Now What Does the Process Look Like in the eTaxPortal?

Notice Types are set up already and have default routing to “Assign To Leader”

012

What are we learning through this process?

• Process has to be designed for your organization– Identify population to be managed– Communicate initial process and

roles– Be prepared to change the design

quickly• There are many small issues you won’t

initially identify that will seem to continually pop up

What are we learning through this process?

– Design a change process to maintain controls• Emphasize that this is the

new (and only) process• Slow reaction to

problems will build disillusion and resistance

– Review frequently with Red Moon

– Plan for the future

Step 1

Step 2

Step 3 Review

What are we learning through this process?

Results:• Better relations with tax

authorities• More accountability• Single control, no more

individual spreadsheet controls

• Fewer errors• Reduced interest and

penalties

What are we looking forward to further

automating?

Next Steps:• Tax Projects• Tax Developments• Tax Records Management• Governance of Tax Processes• Use of Tax Calendar

Thank you for reading!For more information, contact me at:

Kelley LearKelley.Lear@redmoonsolutions.com

941-379-7108Blake Martin

Blake.martin@lfg.com484-583-1471

www.redmoonsolutions.comblog.redmoonsolutions.com

www.twitter.com/redmoonsolution