Exception Reporting in Excise Tax

In an ideal world, operations run smoothly, and tax compliance is effectively completed. Sometimes, though, things break, or something goes wrong. When this happens, you want to identify and fix it quickly and seamlessly. Exception reporting is the net that catches errors before they wreak havoc on the business.

What Is exception reporting?

An exception report sifts through a significant amount of data, and alerts to data that is out of tolerance. This can be a manual or automated process, depending on the software utilized.

For example, fuel distributors buy and sell millions of gallons below the rack annually. That is a significant amount of transactional data points to analyze for risk. With an exception report, data is extracted, analyzed, and generated to create a visual representation of any discrepancies that need to be reviewed and fixed. A fuel distributor would only be alerted to inconsistencies in data. This may be if data for receipts and disbursements don’t match up. If a transaction is flagged, the distributor can dig into the other transaction details to resolve the issue quickly, avoiding inaccurate reporting and fines.

This type of report can be run daily, weekly, or monthly, depending on how critical the data is to the business. In excise tax, exception reports should be run before tax returns are generated since it is crucial to have visibility into errors or anomalies throughout the business.

How does exception reporting benefit the business?

A study by Experian Data Quality found that the average company loses 12% of its revenue annually due to poor data. Exception reporting helps solve the bad data crises by signaling when data is not as it is expected to be. In highly regulated industries, having clean data is especially important since inconsistencies can come with hefty fines and penalties.

Some other benefits of exception reporting include:

• Enhanced team productivity
• Quick problem identification and correction
• Improved tax compliance process
• Decreased operational and financial risk
• Reduced number of fines, penalties, amendments, and audits

In excise tax, exception-based reporting includes extremely detailed data that may have close to 30 data points per transaction. This creates an immense amount of data to stay on top of. Having the functionality to identify and solve inaccuracies at the touch of a button significantly increases productivity and decreases the need for people resources while also slimming down on risk.

Why do organizations skip exception reporting?

Companies not currently doing any exception-based reporting or only performing it occasionally are opening themselves up to risk, especially those in highly regulated industries. So why skip the exception reporting? Some common hurdles to exception reporting are below.

Teams at Total Capacity

Sometimes exception reporting gets overlooked because teams are over their heads just trying to keep up with the day-to-day. This can happen, especially if their exception-based reporting software is manual and takes a lot of effort to pull correctly.

Time-Consuming

As mentioned above, sifting through thousands of rows of data and doing VLOOKUPs manually in multiple sheets is incredibly time-consuming and inefficient. Some teams might skip this step or only perform occasionally to add time back into their day.

Lack of Long-Term Planning

Part of having a sustainable business strategy is considering the past, present, and future. The tactics and strategies that are established should contribute to achieving both short-term and long-term goals. When you skip exception reporting, you may not be thinking about the future implications of doing so.

For example, not performing an exception report appropriately may put time back into the day, but three years down the road, when an auditor comes knocking, the business could be at risk for expensive fines or just a time-consuming audit process. Both of which could have negative impacts on the business’s goals.

“It Won’t Happen To Me” Mentality

About 1 in 100 businesses get audited every year, so dismissing the threat of an audit is easy. However, it doesn’t matter how detail-oriented your tax team is, human error is bound to occur throughout the tax compliance process. When it does, you want to be able to diagnose and solve the issue quickly. If you aren’t taking this step in your compliance process, you could risk getting fined or audited.

Some businesses think, “It won’t happen to me” until it does, and it often comes with a hefty penalty.

Exception-based reporting tips

Exception reporting is important to all businesses, especially those in highly regulated industries. Here are some ways to get started or optimize your current process.

Research

The first step to successfully performing exception reporting is researching how and when you will perform it. If you are already performing exception reporting but it is ineffective or infrequent, it might be time to re-evaluate also. Having a good grasp of “how” you will make this happen is essential. This could be utilizing sophisticated templates in Excel or implementing a software solution.

Get Buy In

Getting buy-in for new software implementation can be daunting. It doesn’t have to be, though. Think like the decision-maker. This may be the tax director or CFO. They may not place as much value on the day-to-day efficiencies as you do, but they will take notice if it saves them from a million-dollar penalty or extensive audits.

Stakeholders want to see data, so be prepared. For example, “we can reduce reconciliation time by 92% if we automate our exception reporting process – reducing the need to hire additional employees”.

Automate

Automation changes how the business operates by digital transformation. Work smarter, not harder by automating your exception reporting. Imagine never having to do a hundred VLOOKUPs in spreadsheets ever again! Automating this process allows visibility into what is and is not working in a system. It also quickly alerts if there are any errors, which helps tax teams be more productive while decreasing burnout.

Customize

The number one functionality to look for in a software solution for exception reporting is if it is customizable. The more control you possess to design and make the software exactly how you need it, the better. For example, having the ability to configure data so you can set the tolerance of exceptions is essential for companies in highly regulated industries.

Easy Implementation

People don’t look forward to change, but if the change is easily implemented, intuitive, and helps efficiency, it will be less daunting to make the big switch. Ensure the software will integrate with your other solutions and back-end systems seamlessly.

This analysis is intended for informational purposes only and is not tax advice.  For tax advice, consult your tax adviser. See the full disclaimer here.