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Reducing reconciliation risks with automation and transparency

When it comes to a withholding agent's tax reconciliation, fragmented, manual processes aren't just labor-intensive. They also can be a liability, posing a greater likelihood of keying errors, miscalculations, inconsistencies, and inaccurate interpretations of information.

IRS requirements for reconciling information reporting and withholding are complicated enough. They require Qualified Intermediaries to reconcile payments they receive from upstream withholding agents, match them against the payments they've sent out, and file an annual certification that the firm doesn't have any material breaks or issues.

This task becomes even more onerous for brokers, investment managers, and other Qualified Intermediaries when the data sources reside in disparate systems and require manual processes to integrate. Inevitably, the more complicated the process, the more opportunities to introduce errors, which in turn causes pain points for both the analysts who compile the reconciliation reports and the officers responsible for certifying their veracity.

A lack of transparency

To confidently sign off on annual certifications, Responsible Officers need to have at least a high-level understanding of the substance of what they're attesting to, as well as how their organization sourced the report's data. However, manual processes often lack the transparency to make such assessments easily. They also carry a greater likelihood of leaving gaps unchecked, which in turn could breach regulatory requirements and leave the withholding agent open to interest, penalties, and reputational damage.

One way this can occur is through underwithholding, where the Qualified Intermediary issues payments to beneficial owners but fails to levy the correct rate of tax. For large withholding agents, such a misstep is both extremely embarrassing and very costly. The IRS employs a method known as 'extrapolation,' through which it projects the total amount underwithholding identified to the entire population of similar accounts, potentially raising the figure by severalfold. The Qualified Intermediary must repay this sizeable figure, in addition to any related penalties and interest.

The IRS also considers inaccurately reported amounts on Forms 1042, 1042-S, 1099, or 8966 as a failure by the Qualified Intermediary to properly perform its obligations, and consequentially will issue penalties and interest commensurate to the offence.

Automating the process

IHS Markit has created the Tax Reconciliation Tool in partnership with clients to ensure its effectiveness against real-world challenges. Our solution is designed to streamline organizations' manual tax reconciliation processes into a single, automated system, providing more accurate reports and greater transparency for Responsible Officers and c-suite executives.

The tool improves the reconciliation process in three key ways.

Centralized platform: Using a centralized process, the tool eliminates the pain of manual data integration and allows you to seamlessly consolidate information from disparate platforms with a high degree of precision.

Automated alerts: It provides automatic error warnings and other critical feedback to simplify the review process, saving you time without sacrificing quality or accuracy.

Transparent auditability: The system generates comprehensive audit trails giving compliance officers the quality assurance and confidence they need to make certified submissions to the IRS.

Realizing the benefits

The Tax Reconciliation Tool has become an essential part of our clients' reconciliation process. They now have the capacity to produce high-quality reports quickly and efficiently to meet the requirements of auditors and key stakeholders. For instance, they can use the tool to highlight differences between Forms 1042 and 1042-s reports and provide responsible officers with statements they can easily read and understand, allowing them to attest to the reconciliations with confidence.

As tax compliance rules grow more complex, automated solutions like the Tax Reconciliation Tool will become even more important to Qualified Intermediaries' ability to meet IRS requirements at scale. They enable firms to consolidate and process information quickly and accurately, while offering a level of transparency and auditability that today's tax environment demands.

Posted 18 January 2022 by Simon Edwards, Director, Tax Solutions, IHS Markit and

William Sheridan, Managing Director, Tax Solutions, IHS Markit

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

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