Three Things to Do Now for Success During Tax Season

After the holiday season, many people go back to work refreshed and ready to take on a new year. However, for banks and their vendors, January is one of the busiest times of the year.

Tax season kicks off every January. Customers must receive tax documents for reporting income, loan interest payments and other financial data required by the IRS. The process of collecting the proper data, building the documents and sending them to customers can often be stressful, unorganized and prone to mistakes. Banks have the charge of getting their customers the right information, at the right time, designed in a familiar way. This process is crucial to reinforcing the trust institutions actively work to build each day with their customers.

Many banks accept this stressful process as “just the way it is.” However, there are things leaders can do now, before the federal government even releases the annual tax data fields, to prepare for the January rush.

Create a Game Plan
Banks know that the biggest frustration with tax documents is that the IRS typically does not release the current year’s data fields and form requirements until late fall. While the forms do not typically change dramatically year-to-year, there are always some changes that must be mapped from the core into any document generation processes. Banks must then match that form with their individual system.

To begin taking a more proactive approach to tax season, the first step is to treat tax preparations like any other project. Identify what your team can control and what it cannot. What worked well last year, what didn’t? It is important to think critically — remember, the goal of this exercise is to streamline the process.

Work through the process and timeline step by step with your team, including all key employees who work closely on this project. Discuss pain points, things you can control and possible action items that can be taken ahead of time.

Once you have successfully identified all dependencies, fill in your project timeline. It is important to start sooner rather than later. Luckily there are two vital steps you can take right now.

Contact Your Core
Get in contact with your core provider as early as possible to discuss any changes. Discuss timelines and deadlines that can be shared internally and added to your project timeline. If your bank can receive test data from the core to proactively work through the process, that can prove incredibly valuable.

One of the larger obstacles of the tax process is the data matching and correct application of the data on the form. Janine Specht, senior vice president of business applications and innovation officer at Kearny Bancorp in Kearny, New Jersey, makes a point of coordinating with her core as early as possible to avoid these pain points.

“We have experienced missing data and wrong boxes which leads to the files being received by our core processor getting input incorrectly,” says Specht. “Then we realized we weren’t ready to print and send.”

Specht recommends creating a calendar with alerts for when to expect certain steps, so nothing is overlooked.

Contact Your Document Vendor
Once the core data is set and properly mapped, your team should prepare document vendors for a smooth workflow. If possible, coordinate any changes with vendors ahead of time. Securing the test data from your core will help with this; however, there are still steps you can take to prepare with your vendor if you cannot get any test data.

Communicate the deadlines and timelines you received from your core to the vendor, and be sure to get any deadlines or important steps from them to add to the internal project timeline.

Discuss any design issues that need to be solved outside of data fields. It is important to send customers a form that looks like the tax form they will be filling out, since the familiarity makes it easier to figure out what they need to do with the documents and reduce calls to customer service.

Tax season is stressful, but there are steps bankers can take ahead of time to ease some of those pain points. The more bank leaders can work through and plan for, the more prepared their employees will be. As banks are working through the process and create the project timeline, remember to think critically and outside of the box. This proactive mindset will make the New Year start more efficiently and reduce the stress associated with tax season.

Can a Capital Raise Jeopardize Your Tax Assets?


Crowe_1-30-13.pngThe short answer to the question of whether a capital raise can jeopardize your tax assets is yes. In the wake of the worst financial crisis in decades, many financial institutions are still looking for capital to satisfy regulatory demands and improve their balance sheets. But this new capital might come with a price – namely, loss of deferred tax assets due to Internal Revenue Code Section 382.

Section 382 in a Nutshell

In simple terms, Section 382 prevents corporations from trafficking in unused tax losses and credits. Take, for example, a hypothetical money-losing corporation that has been struggling for several years and has accumulated tax losses of $20 million, which at a 40 percent tax rate represent an $8 million tax benefit, or deferred tax asset. The money-losing corporation is nearly insolvent, with bleak prospects of generating future profit and, absent these tax benefits, almost zero value to a prospective buyer. Enter a hypothetical profitable corporation, which might be willing to pay $4 million for the stock of the money-losing corporation in order to use the $20 million of tax losses to offset its future taxable income and reap the $8 million benefit.

Not so fast, according to Section 382. While the $20 million in tax losses technically are available to the profitable corporation, Section 382 limits how much of those losses can be used in any one year to an amount equal to the value of the money-losing corporation immediately before the deal—let’s say that is $50,000—multiplied by a specific rate published monthly by the IRS, which currently stands at less than 3 percent. Based on these facts, the annual limit is only $1,500 ($50,000 x 3 percent). Because unused tax losses expire in 20 years (earlier in some states), at best $30,000 of the losses could be used ($1,500 annual limit x 20 years), providing a tax benefit of roughly $12,000 at a 40 percent rate. That is hardly worth a $4 million price tag.

In the previous example, we assumed a 100 percent turnover in ownership of the money-losing corporation. However, Section 382 applies any time there is a greater than 50 percentage point increase by major shareholders in their ownership of a money-losing corporation’s stock during, typically, a three-year period. Therefore, even a corporation raising capital from new or existing shareholders can run afoul of Section 382 and trigger substantial limitations on the use of its existing unused tax losses and credits, and even on the use of what is known as built-in losses.

Section 382 and Built-In Losses

Let’s take another simple example. A hypothetical bank raises capital via the issuance of new common stock and triggers a Section 382 ownership change. At the time of the ownership change, the bank has no unused tax losses or tax credits, but it has total assets with a fair market value of $200 million and a tax basis of $225 million. The tax basis in excess of fair market value, or $25 million, is a built-in loss. If the bank sells any of these assets during a five-year window (beginning from the date of the ownership change) and generates a loss from the sale, Section 382 may limit the deductibility of that loss. In addition, Section 382 also could limit the deduction of loan charge-offs claimed within a one-year period following the ownership change.

Planning for Section 382

What can be done to avoid the onerous results of a Section 382 ownership change? Planning is the key. Here are some ideas that might help avoid an ownership change altogether or mitigate its consequences:

  • Raise capital from both new and existing shareholders.
  • Execute a tax benefits preservation plan to guard against future stock acquisitions that might trigger an ownership change.
  • Issue stock for cash, versus converting existing debt to stock, due to specific Section 382 provisions on the deemed allocation of cash-issued shares to existing shareholders.
  • Dispose of certain assets in advance of an ownership change, or accelerate recognition of taxable income to potentially reduce losses subject to the Section 382 limitation.

If any of this seems confusing, that’s because it is. Section 382 is complex, but it must be considered in any capital-raising scenario where a corporation has unused tax losses, unused tax credits, or built-in losses. While it might not always be possible to structure a capital raise to avoid the limitations of Section 382, a methodical, well-thought-out strategy could preserve some or all of your tax assets.