Fund Accounting and Tax Preparation
Tax season can be a serious challenge for fund managers. The right fund accounting and tax preparation architecture along with experience-based planning ahead makes an enormous difference. What kind of headaches do funds experience during tax season? And how can a full-service fund accounting partner help in simplifying and expediting the process while making sure that all the bases are covered? The right fund accounting partner changes the game during tax season. At the center of the tax document production process, fund accounting is in a position to make the experience easier for everyone.
There is often a lot of back-and-forth during tax season: the fund sponsor, the CPA, the operations group, fund accounting, custodians and others requesting and trading information to fill in gaps in order to complete their various roles. Meanwhile, outsourced tax preparers are more stressed than ever. They have more clients than ever before with more complexities in their tax needs. Tax season stresses are not only a significant distraction for fund management but represent a significant risk that can be avoided. A solid fund accounting partner solves for both.
A lot has been added to the tax season burden in recent years. Americans are living outside of the country but still file as US taxpayers. This often brings up questions on required tax reporting. There are K-1s, K-2s, K-3s to consider. How much of the necessary data does your fund accounting team have at its disposal to help the tax teams get through all these types of issues? Is fund accounting thoroughly collecting all the documentation that’s required not only to fulfill their own role but help expedite other roles: custodians, auditors and tax preparers, etc?
Often overlooked in the preparation for tax season is vendor 1099s. Vendors employed by funds throughout the year, consulting firms, architects, brokerages, that are paid as an expense of the fund must be issued a 1099. Does the fund accounting team capture the data for expediting this task, provide up-to-date demographic information, coordinate all the contribution and distribution activity, manage the mailing addresses?
Fund Accounting Data Management
There is a lot of data to capture and hold correctly for tax season to run smoothly. It is important to make sure that the data is being held correctly. If fund accounting is working with investments through custodians, are they filing with custodian tax IDs? Are K-1s being sent to the custodians or directly to investors? Are any of the investors Single Member LLCs or Disregarded Entities? If so, fund accounting needs to report this on their K-1s and specify the owner. Managing and reporting all this data requires fund accounting to have the systems, experience and inclination to do what is required.
A valuable alternative to your CPA, your in-house operations team and custodians bouncing information and communication back and forth is a single fund accounting provider managing of all the information with the systems and work-flow necessary to streamline and standardize the process for everyone during tax season.
A tax preparation provider may be able to understand and process taxes for a fund but their system may not be able to ingest the necessary data from fund accounting, such as long investor names.. For qualified investments, an investor name might be ‘XYZ custodian for the benefit of… ‘ followed by a long hyphenated investor name. Systems used by tax preparation providers frequently have issues ingesting names of this character length from fund accounting. During tax season, participants trading data often run into character limits and other types of system field requirements.
Sometimes one system keeps the address in a single field, while another keeps address, state and zip codes each in separate fields. Sometimes systems maintain zip codes with the four-digit code on the end, other systems are unable to ingest that format. Does your fund accounting team have the ability to anticipate these issues, manipulate the data for the needs of each participant (while still keeping it accurate) and send it securely where it needs to go?
Often there can be conflicts between the tax software employed by the provider of tax services and the operational software of the fund sponsor. The ability to pull out necessary information in a timely manner can also be an issue. A goal-oriented fund accounting provider at the center of this process utilizing a robust and versatile fund accounting software can sidestep these issues.
Planning Ahead with Fund Accounting
The bottom line is that a fund accounting team that is able to plan ahead, anticipate the needs of all parties and line up systems and processes to capture, hold, manipulate and deliver data effectively makes tax season a whole lot easier.
Tax season can be faster, less expensive and more efficient. But an experienced, equipped and capable fund accounting provider, focused on the needs of all participants, needs to be at the heart of it. Speed, accuracy and efficiency in data flow are always important in fund accounting and back-office operations but never more so than during tax season.