Article
Common tax pitfalls when implementing an ERP system
March 31, 2025 · Authored by James T. Hedderman, Nathaniel Pease
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Article
March 31, 2025 · Authored by James T. Hedderman, Nathaniel Pease
Implementing an Enterprise Resource Planning (ERP) system is a significant undertaking for any organization. While the primary focus is often on streamlining operations and improving efficiency, it's crucial not to overlook the tax implications. Failure to address tax needs during the ERP implementation can lead to costly and time-consuming issues down the line. Here are some common tax pitfalls to be aware of and strategies to mitigate risk during your implementation process.
One of the most common pitfalls is the failure to adequately assess and integrate tax needs into the ERP system. ERP implementers may not be fully aware of the specific tax requirements, leading to missed opportunities to tag data elements appropriately. This oversight can result in significant data gathering and wrangling post-implementation. To avoid this, it's essential to outline current alignment concerns with ERP results and ensure that the tax department's requirements are clearly defined and integrated from the outset.
Tax strategy alignment is another critical area that can be overlooked. It's important to determine the level of detail needed by the tax department and align processes for tax reporting. Often, data elements are implemented at the U.S. generally accepted accounting principles (GAAP), divisional or operational reporting levels, which may not meet tax needs. Post-implementation enhancements can be costly and burdensome, so we recommend including tax considerations during the initial implementation phase to avoid missing critical tax requirements.
ERP systems must include granular functionality for forecasting and reporting purposes. For example, the system should allow for adequate reporting at critical interim periods, such as monthly or quarterly reporting. Aligning on entity-level reporting for U.S. GAAP records, transactional activity and intercompany transactions ensures accurate reporting and timely validations. Proper alignment upfront can free up resources for less manual efforts and more value-add opportunities.
Implementing an ERP system often requires a reevaluation of skills, changing processes and adapting from the familiar. This can be a struggle for team members who are resistant to change. Empowering the tax department to be a driver of change and aligning "tax champions" to lead alongside the financial and ERP teams can foster a better understanding of needs and develop skills to ensure future tax and accounting reporting is more than adequately provided. We recommend partnering with internal stakeholders, transitioning from any resistance TO empowered team members who champion an enhanced reporting future.
Organizations may find themselves frustrated with their ERP solution years after implementation, often unaware that updates have enhanced older processes. Keeping up with the ever-evolving technology landscape is crucial. Conducting real-time validations of historical results from both the old and new ERP systems can help align tax and ERP requirements, ensuring that any discrepancies are identified and resolved during the transition phase rather than after implementation.
With ERP improvements, trial balance accounts may be "enhanced" or "simplified" for the finance team's benefit. However, improper mapping that goes unvetted can create more issues. The mapping of "many to one" or "one to many" accounts is a consistent result of not including a tax champion on the implementation leadership team. Real-time validations of historical results can help ensure proper mapping and alignment.
Training is often provided for the end user, allowing each team to do "their job." However, the overall financial reporting team, including tax, should consider the needs of the broader organization rather than individual needs. Providing basic ERP training to each finance team (tax, accounting, etc.) can ensure that the needs of each team are discussed, and the implications of changes are proactively plotted.
Additionally, enhanced financial reporting functions often require additional training and continued career evolution for financial professionals. Establishing a budget that fosters such growth can empower the team and create a risk-averse environment.
ERP implementations often have a budget that is significantly larger than the related budget for the tax team. To ensure comprehensive compliance and optimized financial operations, it's imperative that the ERP implementation budget adequately covers the integration of robust tax solutions, addressing all tax-related requirements and complexities.
As implementations are underway, it’s important to understand the increasing reporting demands and tax complexities with tax law changes. Thinking ahead and making the financial reporting process more visual for the C-Suite can allow for even more collaboration across the entire team of financial reporting professionals.
Addressing these common tax pitfalls during the ERP implementation process can save organizations significant time, money, resources and headaches. By proactively considering tax needs, aligning strategies and fostering collaboration across departments, organizations can ensure a smoother and more successful ERP implementation.
Baker Tilly specialists from the tax evolution and automation and enterprise packaged solutions teams are ready to help you meet the evolving needs of your business. Our customized services allow us to meet clients wherever they are on their technology transformation journey and propel them forward to meet their goals.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
