Reverse income tax audit provides fresh start for global bakery
Cash refunds and compliance process improvements yield sweet return
When a global bakery brought in a new U.S. tax director, it became clear that an opportunity existed to secure cash refunds for past state income tax overpayments and identify compliance process improvements going forward.
A producer and marketer of baked goods had recently hired a new U.S. tax director and was bringing its income tax compliance process in-house. The director needed to review the company’s historical filings and assess the quality of the returns and supporting workpapers but lacked the necessary resources. Furthermore, the bakery had several different accounting firms providing tax services across the globe and at varying levels. The tax director anticipated that the combined lack of resources and multiple cooks in the tax kitchen likely meant that state tax returns had not received detailed attention.
Review historical tax filings and identify areas for improvement.
RSM served as an experienced advisor to the tax director, following our reverse income tax audit process to accomplish the desired review. We provided the tax director with the resources and experience to efficiently and objectively assess the company’s historical state tax filings, secure identified refunds and provide overall observations relating to the quality and risks of the tax return process.
At the tax director’s request, the reverse income tax audit focused on the two prior years’ tax returns. The company supplied state tax returns and supporting workpapers electronically and our team worked primarily off-site, allowing the tax director to focus on numerous other responsibilities related to launching a tax department.
Our state and local tax team paid close attention to several corporations within the structure that had multiple state tax filings and material state tax liabilities. In particular, our review assessed the treatment of several items, including, but not limited to:
- Tax base and required modifications
- Filing methodologies—separate versus unitary or consolidated filing requirements and elections
- Apportionment methodologies and elections
- State tax reporting of unique transactions
- Tax attribute computation and utilization
- Proper filing jurisdictions
- Available credits and incentives
- Net worth tax computations
After approximately 45 days of detailed analysis, our team met with the tax director to review an executive summary of our findings, which included a summary of the potential overpayments and risks identified, commentary on the overall quality and completeness of the returns, planning notes, and pending legislative changes expected to have future applicability. Together, we agreed to pursue two of the identified risks and overpayments, one of which ultimately required no further action.
Through the reverse income tax audit, we identified improvement opportunities for the bakery, including an industry-specific apportionment factor provision that had not been applied. Our team prepared and filed amended returns to reclaim overpaid taxes.
In addition to the dollars returned to the bottom line, the reverse income tax audit process helped the new tax director improve coordination of the tax department worldwide. Further, this collaborative process helped the RSM team develop a deep familiarity with the company, enhancing our ability to provide increasingly valuable client service on future engagements.