Outsourcing Tax Prep: A Time- and Money-Saver?

More accounting firms are looking abroad in hopes that outsourcing certain tasks can streamline their business and free up time to focus on more important work.

One of the more popular tasks to outsource is tax return preparation, and larger CPA firms have been taking advantage of lower labor costs in India and quick turnaround times. Outsourcing part of a business, however, has many ramifications and firms have had varied success in making outsourcing work for them.

The process of outsourcing tax work is fairly straightforward. The CPA firm in the U.S. scans client tax documents into a .pdf file saved in the network. The offshore service provider then uploads the scanned documents to a U.S. data center, where they can be accessed by outsource workers. The tax return is prepared, sent electronically to the U.S. firm, which reviews the work.

Lower labor costs is one of the big drivers for outsourcing tax prep work. The June 2005 CPA Journal reported that a staff accountant earning $45,000 a year in the U.S. costs about $39 per billable hour. The same cost is $20 per billable hour if the work is outsourced.

Quick turnaround time is another motivator. Because of the time difference between the U.S. and India, a tax return sent overseas in the afternoon can be completed in time to be downloaded by the U.S. firm in the morning.

For Fred Shapss, partner at the New York firm of Rosen, Seymour, Shapss, Martin & Co., offshoring tax work relieves the pressure during the busy season. He told the Journal of Accountancy in its June 2005 issue that the firm outsourced 600 of its 4,000 returns to India last year. “We get a 48-hour turnaround. But – like anything else – you have to monitor and manage the process.”

However, the very speed that attracts some firms to outsourcing also raises security concerns since confidential client information is posted to a facilitator's website. Even if all the data-encyrption techniques and other security features are in place, some clients are uneasy about a third party preparer examining tax information if that person is not directly supervised by their CPA.

Even the CPAs themselves are concerned. According to a 2003 Accenture study, 52 percent of firms that outsource were worried about proprietary data falling into their competitors' hands.

CPAs are ethically bound to maintain confidentiality of clients' personal information, outlined in a written contract, and to oversee the work of third parties involved in the tax preparation. They must also disclose their use of third-party vendors to clients. CPA firms are still responsible, whether the work is outsourced or not, and liability rests there. Find more information at www.aicpa.org/download/ethics/2004_1028_outsourcing.pdf

Another concern about outsourcing tax work is that training of young employees suffers. Solid experience in tax return preparation translates into efficient reviews of completed returns years later. “How can you train seasoned tax professionals unless they do the work early in their career?” Michael Cohen, a New Jersey CPA, said in the Journal of Accountancy.

His firm, J.H. Cohn, determined that outsourcing tax returns was not difficult when it came to federal returns, but the variety of state tax rules drastically lowered efficiencies and the firm didn't save much money. “I suppose we could have made it cost-effective by firing 20 people, but – patriotism aside – that didn't seem like a sensible move,” Cohen said. “To outsource to another country we needed a very good reason. And we didn't see one.”

Too many companies have found outsourcing to be a case of “marry in haste, repent at leisure,” MIT Sloan Management Review said in its Spring 2005 issue. One senior executive of a third-party supplier told the journal, “Outsourcing contracts are agreed to in concept but delivered in detail, and that's why they can break down.”

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