Excise tax reconciliation: Reducing risk through automation

Tax reconciliation is an essential part of excise tax management. It helps uncover errors prior to an audit, allowing your tax team to provide a remedy before incurring a penalty or fine. It can also help prevent overpayment, which can be an extremely long and difficult process for recovery.

Reconciliation typically requires the team to determine whether the correct taxes have been assessed and paid throughout the entire the supply chain. Needless to say, it can be a tedious process. This places a tremendous burden on the tax team to track every fuel transaction, including exemption certificates, while also closely monitoring tax rule and rate changes to ensure correct payment and filing.

The result is tax and accounting teams must spend hours reconciling excise tax payments and monitoring for any tax changes — instead of working on urgent financial issues that are core to the success of their companies, or spending time on strategic projects that can reduce risk and create value over the long term. 

If reconciliation reveals excise tax underpayments or overpayments — or when mistakes made during reconciliation allow these mishaps to go undetected until revealed by an audit or a state authority — tax managers and their teams face an additional long and complex process for tax recovery or dispute resolution. Tracking down the error usually means having to find a needle in a haystack, which requires teams to pore over old records and review complex and vague tax regulations. Further, the business will need a strong argument to prove to the state authority why it’s owed relief for an overpayment or shouldn’t pay more (including penalties) for an underpayment.

Today, businesses have several options for effectively managing reconciliation in the hopes of avoiding the errors and misunderstandings that lead to overpayments and underpayments:

• In-house expertise: Relying on in-house specialists to address excise tax reconciliation has often been the preference. However, it’s time-consuming and tedious, and can be error-prone even for specialists. Depending on the volume of transactions, it may not even be feasible. In addition to taking resources away from more strategic projects, this approach also leaves the business at major risk if the specialists suddenly exit the company.
• Outsourcing: Many organizations opt to outsource reconciliation to a consulting firm with excise tax expertise. While the expertise is certainly a plus, this option can be extremely expensive and inefficient since consultants lack the internal team’s knowledge of the company’s customers and market. It also doesn’t transfer liability — if the consulting firm makes a mistake, the liability is all still on the business.
• Automation: Automating excise tax reconciliation is a more reliable, long-term solution that minimizes the risks associated with manual solutions or outsourcing to those with limited knowledge of your business. An automated solution can integrate calculation, form preparation, and certificate management to provide a comprehensive, closed-loop solution to assist with excise tax reconciliation. Risk of over- or underpayment is greatly reduced, so dispute resolution and tax recovery requests are greatly diminished. However, if needed, documentation is much more easily at hand.

If you’ve experienced a costly audit outcome or have gone through a lengthy dispute resolution or tax recovery process, Avalara’s tax reconciliation tools can help. Learn more about Avalara solutions for excise tax management.