This blog was last updated on October 16, 2023
Banks and credit unions typically use core banking systems that house customer data and other tax information related to customer accounts. When tax information reporting season arrives, these are the back-end systems that data is pulled from. However, there are challenges in utilizing just these systems and not also utilizing a tax information reporting solution layered on top.
Core banking systems are good with extracting data, generating original print files and filing original filings. Even so, they are often lacking when it comes to the downstream work associated with tax information reporting. We’ve highlighted four top challenges for businesses when they utilize just a core banking system for tax information reporting.
Unable to generate correction files
Financial institutions will often have typewriters in their office to generate a corrected form and will type information out in an updated form. For filing corrections, some will even mail in corrections to the IRS. However, this will no longer be accepted as the IRS requires corrections to be filed in the same manner as originals starting in tax year 2023 (if you filed originals electronically, you must file corrections electronically). This will leave many organizations dependent on their IT teams to generate corrected transmittals because their core system will not generate corrections and they can’t file those corrections on paper.
Unable to host real-time e-statements
A typical process for statement delivery is done with printing and mailing, conducted in-house or through a print vendor. Organizations could also upload original print file images to create e-statements. However, utilizing static images instead of real-time e-statements delays the time customers can access corrected forms. This approach also requires many resources to keep statements up to date and can create an inconsistent statement output approach and appearance when done differently by various departments.
A decentralized/siloed process
Banking institutions often have varying divisions that all require tax reporting. For example, there could be interest bearing accounts (e.g., savings accounts, bonds), mortgage accounts and retirement accounts. One bank offers all three, but they have different back-end systems to support these accounts and where data needs to be reported from. This siloed approach can create numerous redundancies in the tax information reporting process. An organization would then have to take the time to eliminate any redundancies, which takes valuable employee resources away from other – revenue-generating – tasks.
Having siloed processes also does not give an accurate view of your customers and what’s actually reportable. A customer could have multiple accounts with a financial institution, so the organization would need to look across accounts to apply accurate reporting thresholds and requirements.
Mounting compliance risk
Having either a delayed response or a lacking response when it comes to implementing compliance changes is also a top challenge. When using a core banking system, or another system for information reporting, that is not agile or doesn’t have a regulatory team keeping up with requirements, the non-compliance risk will grow. Agility is important because regulators (both the IRS and states) can enact regulatory changes at the last minute. In many cases, this happens in January, which gives organizations a very short window to react and ensure compliance in their reporting.
Manual cleansing processes or relying on source systems and IT departments for regulatory compliance updates run the risk of human error, which ultimately leads to penalties and audits.
What’s the answer?
Layering a centralized tax information reporting and withholding system that is agile and is the business-to-government and customer reporting source of truth onto your core banking system(s) will help ensure regulatory compliance. Organizations can eliminate redundant and manual processes, ensuring they can better scale their approach to tax reporting. Your business will continue to grow, technology will keep evolving and regulations will also change. Ensure the right system is in place for a smooth – and compliant – journey.
Take Action
Reach out to our team to learn more about how layering a tax information reporting solution on to your core system can help.