Whether you’re an investor or business owner, tax law can be hugely complex. The bible of United States federal statutory tax law is the Internal Revenue Code (IRC), which is implemented and enforced by the Internal Revenue Service (IRS). The IRC contains 11 subtitles, covering income taxes, employment taxes, health benefits, group health plan requirements, and more.
There have been rumors as to how long the IRC is, ranging from close to 7,000 pages to more than 40,000. No one really knows the length. But changes in the tax code—or operating under different countries’ jurisdictions—can lead to an increase in a corporation’s tax risk.
Clarifying the Concept
The challenge of potentially reducing tax risk is that there are multiple definitions for what it actually is. Sometimes known as taxation risk, tax risk is the potential for changes in the code or tax rules, which could result in higher-than-expected losses due to increased taxes. It can also refer to changes in a tax environment that might impact a company’s operation results, business, and even financial standing, as well as taxable income to investors.
In some cases, tax risk defines potential tax errors that could lead to increased and unexpected expenses. These might include foreign currency translation, accounting method changes, transfer pricing, or valuation allowance. Tax risk can be especially high for a company with international operations; each jurisdiction has its own tax laws and requirements. Failure to understand and adhere to those regulations could lead to a higher degree of financial exposure and even criminal sanctions.
Regardless of the exact definition, tax risk can mean unanticipated expenses for businesses and corporations, with unintended negative consequences.
Taking Care of Possible Risk
While tax risk can be part and parcel of business operations—especially multinational business activities—experts have some suggestions as to how the risk can be reduced.
For example, EY analysts note that corporations should prevent tax disputes from occurring in the first place by using controls and technology that help analyze active real-time and global tax risks. EY also suggests putting into place a “rapid, effective resolution” at once, rather than dragging it out.
An article in the Tax Journal also recommends advanced preparation, including an analysis of potential tax risks. Corporations should also undertake ongoing reviews, reports, and checks to potentially minimize risk and to handle the risk if it should become reality. Finally, Deloitte points out that an overall control framework with a focus on identifying, assessing, and understanding potential task risks can go a long way toward prevention.
Planning Is Power
As corporate and business taxes are a fact of life, so is tax risk. Changes in rules, regulations, jurisdictions, and codes can lead to unexpected expenses. However, engaging in planning and advanced assessment could help a business entity keep an eye on task risk, potentially reducing its impact.
