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Turning Tax Compliance Data Into Actionable Decision-Support Information

Congratulations to all of you Tax Directors and Operations Teams of Hedge and Private Equity Fund Managers (particularly those managing Funds-of-Funds) and Private Wealth Family Offices who have successfully navigated another Tax Second Season! 

Now that you have recuperated from all the late nights and your blood pressure (and adrenaline rush and stress levels) have reduced to that of mere mortals, those of you who read my earlier article – Making Good Use of the Calm After the Storm of Tax Season – may be conducting (or considering conducting) a post-mortem to either informally reflect on – or more formally conduct an Operations Assessment to review – which processes worked well and which deserve a fresh look.

Today, let me pose the following questions to you, often critical to the retrospective look at the just-ended tax season:

  1. How many times in the last year have you received a urgent request from someone in your organization asking to identify the holdings whose sale would have the least (or most favorable) impact on taxable income?
  2. How accessible (both in terms of time and flexibility in reviewing) are your tax compliance data?

When these questions are posed to Tax Directors and Operations Teams, more often than not the response to the first question begins with a shudder as they recollect the frantic race to obtain that information – often involving having to reach out to their accounting firm to study and revert back with the best options – as the requestor paces back and forth in front of their desk.

The answer to the second question often describes why obtaining those data results in such a frantic fire drill: the necessary data – and the ability to process those data – often resides with the fund administrator and/or tax accounting firm that manages your tax compliance data for you.

Which brings us to what should be part of any fund manager’s Bill of Rights – and core to any Operations Assessment (or as one of my closest friends prefers as more descriptive: an Optimization Audit):

  1. Your Tax Compliance data can (and should!) be leveraged for more than simply filing tax returns
  2. Your process should deliver the ability to transform those tax compliance data into actionable decision-support information on demand and without delay

The good news is that there are a host of newer software solutions that offer some flavor of this functionality, some from commercial vendors and others internally developed by accounting firms and tax departments in fund administrators, offering two ways to avail yourselves of their benefits:

  1. License one of the commercial software products, with the recognition that its implementation will require integration with other components, internal or outsourced, of your tax compliance process, particularly the sources of data that will feed into this software; or
  2. Some accounting firms and tax departments in fund administrators offer similar software. Your due diligence prior to taking this option must include demonstrating that your tax and/or operations team has direct access to this software as well as access to support from your service provider as required.

Regardless of which option you select, evaluate the software to confirm that it offers the flexibility to deliver the analysis and reporting you require to obtain the necessary information from which to base your decisions; for example, spanning investment types, entities, etc. and incorporating the types of analysis (long- vs. short-term holdings, wash sales, constructive sales, etc.) that may apply to your investments.

This discussion has focused on only one of the potential pain points experienced when delivering the processes performed by your Operations and Tax teams: Delays in responding to inquiries received from a portfolio manager or trader regarding the tax impact from trades under consideration, especially when liquidity requirements are time-sensitive.

The rationale for the topic is that, often, firms accept this problem as an irritating cost of doing business rather than a solvable problem. Hopefully, this article illustrates that it is indeed solvable – and may be one of a number of issues, both reactive (pain points) and proactive (planning/updates to address future goals and targets) worthy of your review while those issues remain fresh in your mind.

We hope that this abstract has shone a spotlight on one key, but often overlooked, pain point worthy of review by firms contemplating an Operations Assessment to review their just-ended tax season operations, whether performed internally or by engaging a consultant.


Gary A. Mills is Founder and Consultant at Gary Mills Consulting LLC


The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group

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