Addressing Tax Risk: Key Insights and Strategies

As you plan for potential tax policy changes under the new presidential administration, take the opportunity to identify and mitigate tax risk issues. According to the 2024 BDO Tax Strategist Survey, only 40% of respondents had implemented a tax risk mitigation and response strategy, which involves a proactive approach to preparing for changes that affect an organization’s tax risk profile.  

Just over one-third of respondents had leveraged tax technology to mitigate risk of human error and highlight data anomalies, and less than a third reported that their tax teams have a culture of compliance embedded into everyday workflows. More than 80% of respondents identified environmental, social, and governance risks — such as stronger reporting requirements and meeting increased internal and external expectations — as tax challenges. 

Given those statistics, it’s clear why tax leaders have identified their top three greatest sources of tax risk as:

1. An inability to keep up with changing regulatory requirements;
2. Technology challenges and/or outdated tax technologies; and
3. Rapid growth, whether organic or through acquisition.

Tax risk can be heightened by various factors, including failing to adhere to new laws and regulations or undergoing significant organizational changes such as new market expansion or mergers and acquisitions. Relying on outdated technologies or neglecting to automate routine tasks are also potential contributors. Having an under-resourced internal tax team or struggling to train teams and equip them with the necessary tools to help manage risk can further escalate issues. Lastly, failing to seek external advisory services when complex tax issues arise may exacerbate an already uncertain situation. 

When asked how their organizations would respond to increased tax risk, tax leaders in the survey identified three primary approaches: 

1. Upgrading tax technology to reduce errors;
2. Increasing outsourcing or co-sourcing; and
3. Increasing training.

Despite articulating those concerns, only 44% of respondents planned to increase investment in risk management for their tax functions.

To effectively manage tax risks and mitigate potential financial, legal, and reputational consequences, tax leaders should consider conducting a global tax risk review to help them better understand and manage risk by identifying strengths and areas for improvement. Those reviews should involve members from cross-functional teams to anticipate scenarios that could lead to tax risk. Prioritizing those risks and planning mitigation strategies may include implementing tax internal controls, developing contingency plans, and ensuring tax leaders have a seat at the table during business decision-making processes.