If you’re hearing a lot about tax managed services (TMS) these days, you’re not alone. This approach to outsourcing tax responsibilities is gaining traction because of its many advantages. You probably know that TMS can improve your tax performance, increase efficiency and boost your bottom line — in theory. But what would TMS look like in your organization, and how would you realize its benefits in a practical sense?
While managing tax obligations may seem like a relatively minor aspect of running your business, the consequences of this inescapable responsibility permeate the entire organization and its processes. That’s why so many business leaders are surprised when they discover the far-reaching ramifications of a better approach.
This form of focused outsourcing allows the TMS provider to deliver all the benefits of a fully staffed in-house tax department, with specialized expertise and software to meet your organization’s entire spectrum of tax needs, both routine and exceptional. However, you accrue these important benefits without the large investment normally needed for cutting-edge technology that delivers a seamless and efficient experience — or the intensive internal resources typically involved in scaling staffing levels up and down as the organization’s needs evolve.
You can achieve transformative benefits because the TMS provider essentially becomes your organization’s tax department, handling everything from day-to-day tax functions and communicating with third parties to addressing IRS notices. Tax performance often improves since, instead of relying on legacy systems, the TMS provider uses an advanced tech stack that can enhance tax processes and help eliminate mistakes.
Here are five real-world scenarios that illustrate where TMS can improve your company’s high-value finance operations.
A family-owned manufacturing company relied on outdated finance technology that required significant manual data entry and manipulation. This caused the well-trained and committed staff to spend so much time on off-cycle spreadsheet processing and duplicative work that they struggled to keep up. The finance team knew the extra pressure added to the risk of tax errors with stiff penalties.
The stumbling block: Prohibitive costs to acquire an optimal tech stack
Bringing in more staff to perform inefficient and error-prone processes didn’t make sense; the company needed to make a significant technology investment. However, upgrading systems and software would mean a major financial outlay the business wasn’t prepared to handle.
The transformation: Advanced technology without the steep upgrade cost
With TMS, the manufacturing company had access to modern tax systems without hurting cash flow, which improved compliance and empowered its hard-working staff to perform more meaningful work.
After 20 successful years, the CEO of a private equity firm was familiar with ebbing and flowing staff resources to manage the firm’s tax function. The need for tax staff mirrored the flow of attractive investment opportunities. However, keeping a fully staffed tax department meant overspending on personnel in some economic conditions; at other times, the same team couldn’t keep up with the increased workflow.
The stumbling block: Wasted resources to scale tax staff when demand shifts
It had become nearly impossible to hire and retain enough qualified employees with the expertise to identify and take advantage of all available tax credits and other savings tied to the firm’s varied investments. Incomplete tax work was piling up, and vain attempts to bring on and train qualified staff were wasting far too much time.
The transformation: Reduce the need to add ancillary staff with TMS
Instead of wasting resources on adding staff during high-flow tax times, the CEO hired a TMS team to perform labor-intensive tax functions to match the firm’s cyclical needs. Now, the size of the tax team always meets the size of the job, no matter how much venture capital is in play.
A rapidly growing technology company focused on artificial intelligence quickly adopted the latest systems and software for streamlining tax processes. They knew their business, invested heavily in R&D and were growing fast, with a steady stream of technology products and services that made a splash with consumers. Unfortunately, the company’s performance wasn’t nearly as good when it came to taxes.
The stumbling block: Costly consequences from relying on a “single point of failure”
The company’s professionals were experts in tech, not tax, and the partner in charge of taxes couldn’t keep up with filing deadlines and routine reporting, much less the ever-changing regulatory requirements that impact tech companies. And as the entire tax team, he also represented a “single point of failure” that left the company in a highly vulnerable position.
The transformation: A TMS team that knows the rules and stays on top of tax obligations
By adopting a TMS model, the growing company gained access to actionable insights that reduced its high tax burden. Now, instead of incurring tax penalties, they can rely on their TMS team to meet deadlines, keep up with new regulations and continuously refine their tax approach.
Leading a small tax team was just one of many responsibilities for the CFO of a chain of nursing homes that had grown significantly and was now the largest regional group of long-term care facilities, with nearly $1 billion in annual revenue. Between staffing concerns, insurer agreements, new healthcare regulations and ensuring high-quality patient care, there were many demands on his time, even without tax issues.
The stumbling block: Tax issues kept the CFO from focusing on strategic priorities
It seemed like a tax situation always required the CFO’s urgent attention to remedy or resolve. From fixing spreadsheets and cleaning up data to following up on filing errors, he was spending way too much valuable time on manual tasks.
The transformation: Time savings helped the CFO focus on improving profitability
With a trusted TMS team managing routine and exceptional tax obligations, the CFO knows these responsibilities are completed properly without his constant involvement. Rather than putting out daily fires, he can proactively address important issues that impact patient care and affect the company’s bottom line.
A large real estate organization had accumulated too many lines of business to function efficiently; the overly broad set of operational demands was hurting profitability. Company leaders decided to divest a small tranche of assets to improve the company’s overall performance, fully aware that future divestitures might be appropriate later.
The stumbling block: Complex tax demands exceeded internal team’s skills
The company’s in-house tax team was smart and competent but didn’t possess the specialized knowledge and experience to advise leadership on how to structure the divestiture transaction for maximum tax efficiency — nor did they understand how to correctly complete the short-period returns and meet other tax obligations.
The transformation: Instant access to in-depth expertise
By bringing in TMS experts who understand the nuances of divestitures and other complex business transactions, the real estate firm gained a strategic partner in determining future asset sales and merger & acquisition activities and the tax implications. From short-period filings to the net gain (or loss) that the company could see from a potential spinoff or sale, their TMS team delivers niche expertise to advise on all aspects of the tax landscape so leaders can consider everything before moving forward.
No matter what your specific tax stumbling blocks are, TMS can provide the staff, expertise and technology you need without draining resources or distracting you from your core business. Use our TMS checklist to see how you can potentially improve your tax performance, and explore how Armanino’s Tax Managed Services experts can help increase your organization’s efficiency, effectiveness and profitability.
