The rising cost of corporate income tax compliance: A deep dive into increased complexity
The landscape of corporate income tax compliance has become significantly more demanding, marked by increased complexity and heightened transparency requirements. As large companies grapple with new regulatory changes, the cost of compliance has surged 32% from 2017 to 2023. While factors like increased complexity and a push for transparency are well-recognized, there are several specific elements contributing to the heightened burden.
The evolving global tax framework
For multinational corporations, the complexities of international taxation have grown exponentially, with U.S. tax filings now heavily influenced by global operations. The push for harmonization across tax jurisdictions, coupled with disparate national tax systems, creates multiple layers of complexity. Managing cross-border income reporting, transfer pricing adjustments and foreign tax credits has become significantly more intricate.
Impact of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA), despite its introduction several years ago, continues to create ripple effects. Provisions such as the interest deduction limitation under IRC section 163(j) have added complexity by linking the interest deduction to adjusted taxable income calculations, which require ongoing refinement and scenario modeling. This has forced tax departments to revamp compliance procedures and invest in recalibrated tax planning tools.
Corporate Alternative Minimum Tax
The reintroduced Coporate Alternative Minimum Tax (CAMT) presents a complex overlay, requiring a comprehensive view of global income and fair allocation of taxes. The allocation of profits involves interpreting ambiguous indicators that are still under review, complicating compliance efforts and adding uncertainty to corporate tax forecasting. Multinationals will need to adopt a strategic approach to CAMT calculations, which demands new expertise and significant internal coordination.
Increased reporting and form complexity
Legislative changes have led to a surge in reporting requirements, particularly for U.S. taxpayers with international operations. For instance, enhanced documentation requirements for Controlled Foreign Corporations (CFCs) on Form 5471 have dramatically increased the paperwork burden. A Baker Tilly client company saw a federal Form 1120 swell from 281 pages in 2017 to over 1,000 pages in 2022, primarily driven by international reporting needs. Additionally, the TCJA U.S. requirement increases, such as the interest deduction limitation Form 8990 and Global Intangible Low-Taxed Income Form 8992 are contributing factors in the increased page count.
The additional forms not only demand more resources but also require additional review processes to ensure compliance.
Technology integration and compliance automation
Tax departments have increasingly turned to technology to manage the evolving compliance environment. While digital transformation has provided more robust internal controls and streamlined processes, the initial phases—particularly training, implementation and transition—have led to higher short-term costs. Furthermore, the sophistication of tax technology requires continued investment to remain aligned with regulatory updates.
Adapting to consistent regulatory changes
The pace of regulatory change has accelerated significantly, with tax departments expected to remain agile in the face of new laws and interpretations. Adapting processes and compliance strategies in response to these changes is critical to mitigating risk. Tax professionals must be proactive, not just reactive, in aligning planning strategies with an ever-shifting legal framework.
Impact of global tax initiatives
Global tax initiatives, such as the OECD’s Base Erosion and Profit Shifting (BEPS) project, continue to shape compliance requirements. These initiatives require granular data analysis and comprehensive reporting, pushing tax departments to integrate international considerations into U.S. filings. This broad scope demands more sophisticated tax planning tools, analytics and interdepartmental coordination, which, in turn requires more resources.
Anticipating heightened IRS scrutiny and audits
The Inflation Reduction Act's expansion of IRS enforcement—adding 87,000 new agents over the next decade—signals an increase in compliance scrutiny and audit activity. Tax departments should prepare for more frequent and rigorous audits, which will likely require improved documentation, proactive compliance strategies and a deeper understanding of complex reporting requirements.
Costly penalties for non-compliance
The stakes for non-compliance have never been higher. Failing to file required forms like the 5471 correctly can result in substantial fines, with penalties reaching $10,000 per form. Similarly, inaccuracies on the new Form 8990 can yield fines of up to $10,500. Given these high penalties, a proactive approach to compliance is essential, with a focus on accuracy, timeliness and rigorous review processes.
High demand for specialized expertise
In today’s environment, there is often a need for specialized expertise. Many companies are turning to external advisors not only for compliance but for strategic insights into the evolving tax landscape. These experts provide critical “bench strength,” offering guidance on complex regulatory issues, tax planning optimization and interpretation of new laws. The reliance on external consultants reflects the growing need for in-depth knowledge and the importance of strategic compliance management.
The current tax compliance landscape is both complex and rapidly evolving, requiring businesses to adopt more sophisticated tools, deeper expertise and a strategic mindset. With increased demands from both domestically and globally, tax departments will need to balance agility with precision to stay ahead of compliance challenges and avoid costly penalties.
If your business is navigating these complex changes and seeking to enhance its tax compliance strategy, connect with Baker Tilly’s tax evolution and automation team. Our specialists have experience in aligning technology solutions, regulatory insights and strategic planning to help your business achieve compliance and gain a competitive edge.
Contact us today to learn how we can support your tax transformation journey.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
