Year-End Income Tax Provision – Are Your Tax Internal Controls Ready for a Virtual Close?

The ongoing repercussions of the COVID-19 pandemic continue to disrupt the work lives of many professionals. While pockets of the nation begin to reopen, some companies are opting to have their employees continue to work from home for the foreseeable future. At the same time, companies that have reopened offices at reduced capacity have many employees choosing to continue to work from home. With the calendar year-end income tax provision process fast approaching, companies will need to consider what changes may be necessary to tax internal controls to address these shifts to virtual situations.

Tax is generally the last area of the financial statements to be completed and tax departments are often squeezed for time even in normal situations. In addition, tax continues to remain one of the top reasons that companies restate their financial statements. This article offers high-level insights into certain areas where additional consideration should be given to ensure that tax internal controls are operating properly in a remote environment.

Are changes necessary to certain controls, or are new controls needed, to address the virtual environment? If changes to controls, or new controls, are necessary, companies will need to ensure that their attest firm is aware of these control modifications to confirm that such changes are appropriate and sufficient.

What changes or new controls may be needed to address the ASC 740 considerations related to the impact of COVID-19 and tax law changes such as the CARES Act? Companies have responded to actual or potential impairments of assets resulting from COVID-19 since the beginning of the pandemic. Likewise, some companies have been forced to address potential going-concern issues. The ability for tax departments to respond to significant transactions or other business developments, and appropriately reflect the tax accounting impacts, should be an area of focus to ensure that all aspects of these events can be addressed and accounted for in the correct period.

Tax law and financial measures have been implemented in the U.S. and in many countries worldwide. Ensuring that the company’s controls are designed and operating effectively to react to these changes and account for any impact in the proper period is critical.

Will certain processes be handled differently in the work-from-home environment and how will companies’ attest firms deal with the changes? There may be instances where certain controls may not function properly in a virtual environment. Companies should consider what supplemental procedures or reviews should be performed to address any gaps identified in the tax internal controls.

What additional level of documentation is necessary to validate the operating effectiveness of controls? Documentation of the internal tax provision review is a manual exercise in many companies. Consideration should be given to how the evidence of review will be sufficiently documented to ensure that the tax controls are working properly. In addition, companies will need to ensure that their attest firm will be satisfied through inspection with the level of documentation.

How will you address the observation of the control walkthrough with your attest firm? Observation may be one of the most impacted elements of the work-from-home environment. Companies should begin discussing with their auditors how observation will be conducted when meetings cannot be conducted face-to-face. Virtual meeting platforms have become the go-to norm as a replacement for in-person meetings. How the observation will be conducted and documented virtually must be agreed upon in advance of control testing.

What are the company’s contingency plans should key members of the tax function get sick? Companies were addressing this issue even before the COVID-19 pandemic; however, additional planning and communication may be necessary in the current environment especially if assistance is needed from third-party tax advisors.

These are just a few key considerations that companies should be addressing now to ensure that the year-end close process goes smoothly and that controls remain effective. Each company will have to address these challenges in its specific circumstances. Ongoing communication between the tax department, the finance function and the external auditors will be critical to ensure that internal controls over financial reporting maintain their integrity.