As I presented at the Worldwide ERC Global Workforce Symposium (#wercgws), one message that stood out was risk tolerance. 100% compliance is not impossible, but it’s not practical.

Regulatory Agencies want to inhibit illegal behavior. Most taxpayers strive to do the right thing. Therefore, in most cases, when a tax authority engages a taxpayer during audit, they simply want to confirm information that was volunteered in the tax filling. The majority of problems arise when the individual approaches the audit with a high level of anxiety that the tax agent begins to question the integrity of the individual because they come across as if they were hiding information.

So, just as businesses constantly assess risk tolerance in terms of compliance, it’s equally critical that individuals do the same. I stressed the importance of our firm to approach each engagement with a risk tolerance that is “more likely than not.”

If a tax authority were to challenge a tax position, we want our rate of successful litigation to be 51% and higher. We discourage driving creative tax solutions. We encourage tax effective and tax efficient solutions.

Here is an example of cost management versus risk tolerance.

Employee A, who is tax equalized, receives a letter from the tax authority that additional tax and penalties are due. The employee provides us, the tax provider, with a copy of the letter. The total balance due is $500. We believe that an exemption or deduction was incorrectly disallowed and that our case has a greater than 50% chance of prevailing. Our cost to challenge the tax authority’s position is estimated to be $600.

Most companies that manage assignment costs effectively will choose to pay the tax bill because it makes business sense. $500 is less costly than $600.

Don’t let risk tolerance bias blind opportunities for cost savings. There are times when it is better to settle a fee or charge than to challenge the government agency just because you are driven to prove that your position is right. In many cases you will save time and money by simply settling the bill and moving on.

In the same light, if you are facing a high cost compliance dilemma, estimate what the possible tax and penalties may be for noncompliance and consult a tax professional to assess if the noncompliance is negligent or not. If the noncompliance dilemma is not negligent or fraudulent in the sight of regulatory enforcement and the cost to comply to the regulation in a one-off case is greater than the estimated penalties, you may want to consider documenting you position to not comply from a cost management perspective.