How to Report Income Tax Payable - dummies

How to Report Income Tax Payable

By John A. Tracy

It takes an income tax professional to comply with federal and state income tax laws on a business. The manager should make certain that the accountant responsible for its tax returns is qualified and up-to-date.

The controller should explain to the manager the reasons for a relatively large balance in this liability account at the end of the year. In a normal situation, a business should have paid 90 percent or more of its annual income tax by the end of the year.

There are legitimate reasons that the ending balance of the income tax liability could be relatively large compared with the annual income tax expense — say 20 or 30 percent of the annual expense. It behooves the manager to know the reasons for a large ending balance in the income tax liability. The controller should report these reasons to the chief financial officer and perhaps the treasurer of the business.

The manager should also know how the business stands with the IRS, and whether the IRS has raised objections to the business’s tax returns. The business may be in the middle of legal proceedings with the IRS, which the manager should be briefed on, of course.

The CEO (and perhaps other top-level managers) should be given a frank appraisal of how things may turn out and whether the business is facing any additional tax payments and penalties. Needless to say, this is very sensitive information, and the controller may prefer that none of it be documented in a written report.

The chief executive officer working closely with the controller should decide how aggressive to be on income tax issues and alternatives. Keep in mind that tax avoidance is legal, but tax evasion is illegal.

As you probably know, the income tax law is exceedingly complex, but ignorance of the law is no excuse. The controller should make abundantly clear to the manager whether the business is walking on thin ice in its income tax returns.