While larger corporations like Apple, Microsoft, Amazon, and Facebook face recurring scrutiny for avoiding tax liability, small to mid-sized businesses face other tax liability issues. Regardless of the size of your business, it is imperative for businesses to implement safety nets and instill proper tax compliance best practices. To help combat the scrutiny, potential penalties, and noncompliance of tax liability, industry experts suggest incorporating tax planning into risk management strategies.
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Understanding Risk Management
Risk management is the process of identifying potential exposure to damage, injury, illness, liability, loss, or negative impact to a business and mitigating it through preventive action. According to the American Accounting Association – Management Accounting, developing a board of directors to oversee a company’s risk management results in balanced tax planning risks and rewards.
According to a 2014 annual proxy disclosure statement, board of directors who proactively participate in risk management oversight tend to experience lower taxes on average and lower risks of damaging the company reputation.
The board should utilize risk management’s identification and evaluation of the business’s risks to inform strategic decisions to achieve growth goals. Boards that are effective establish a culture founded in maximizing positive outcomes (i.e., lower tax payments) and mitigating negative outcomes (i.e., higher tax risk).
To help businesses incorporate tax planning into risk management strategies, here are three factors to consider.
How to Incorporate Tax Planning into Risk Management Strategy
1. Own the risk oversight responsibility.
Instead of delegating risk oversight to other organizational members, integrate risk oversight into board of directors’ overall governance. This promotes risk management as a critical component of company leadership and best practices.
To integrate risk oversight into board of directors’ overall governance, the board should formally and publicly acknowledge such governance in its annual proxy statement. A formal and public statement sets the tone for management and integral stakeholders that risk oversight is top of mind. Additionally, it holds the board accountable to include risk management into evaluations and decision-making strategies, including tax-related policies.
2. Regularly monitor risk-related activities.
Taking a holistic approach to risk management allows boards to identify, evaluate, and improve business strategies based on strategic decisions that may cause risks in other areas of the business. Developing regular board discussions about identified risks, evaluation of new risks not yet under management’s review, and proactively reviewing risk management policies and procedures help businesses develop best practices and ensure processes are in place to address risk exposures, including tax-related issues. This is vital to taxes because tax laws are constantly changing, which requires regularly monitoring and updating tax compliance to prevent tax-related risks. Adding consistent, systematic monitoring of risks can help the board navigate tax-planning initiatives.
3. Develop a risk mindset.
Board of directors oftentimes set the tone for appropriate risk-taking and ensuring decisions are based on well-informed strategies. The board should evaluate potential tax saving strategies against tax-related risks. By keeping risk top of mind during tax-planning initiatives, risk management and tax planning can work simultaneously.
From tax compliance and risk management strategies, to business basics 101, partnering with a PEO like VensureHR can remove the burden from business owners and allow them to refocus on what matters most: growing their business. To speak with a risk management specialist, contact VensureHR today!
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Harvard Business Review
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