Outsourcing of Tax-Return Preparation
Promising Business Opportunities and
Jesse Robertson, Dan Stone, Liza Niederwanger, Matthew Grocki,Erica
Martin, and Ed Smith
JUNE 2005 - Outsourcing
business processes overseas is increasingly common in the
banking, financial services, retailing, insurance, and telecommunications
sectors. Economists and accounting professionals expect this
trend to accelerate; Deloitte Consulting LLP expects two million
financial services industry jobs to relocate overseas during
the next few years. Many large CPA firms have begun shifting
tax-compliance work overseas, through outsourcing facilitators,
to Chartered Accountants (CA) in India.
tax-compliance work overseas can enable CPAs to focus on
higher-margin services such as tax consulting, to reduce
labor costs, and to increase the speed of tax-return processing.
With such potential benefits, CPA firms will likely join
other segments in increasingly outsourcing tax-compliance
argue that outsourcing U.S. jobs overseas is un-American.
Others rightfully point out that some overseas labor markets
can be exploitative and contrary to American sensibilities—to
the extent of exploiting indentured workers or child labor.
On the other hand, some economists argue that outsourcing
jobs overseas improves world labor market efficiency and
U.S. labor productivity, and also reduces both world and
U.S. inflation. CPAs that outsource appropriate work overseas
can contribute to the economic efficiency of the United
States and the world economy, and aid in the economic development
of developing countries with high rates of poverty.
Outsourcing for Tax-Compliance Services
tax-return preparation offshore involves partnering with
an outsourcing facilitator that provides the Internet interface
and the access to overseas expertise, such as CAs in India,
needed for offshore outsourcing. Four prominent facilitators
are Commerce Clearing House (CCH), Outsource Partners International
(OPI), SurePrep, and Xpitax (see Exhibit
basic process of tax outsourcing involves six steps (see
The outsourcer gathers the client’s tax information
and scans it into electronic files.
The outsourcer uploads these files to the facilitator’s
facilitator encrypts the files and makes them available
to the outsourcing partner in India.
The outsourcing partner prepares and reviews the return,
and then posts the return, workpapers, notes, and reconciliations
to the facilitator’s website.
The outsourcer downloads the completed return and documents
from the facilitator’s website.
The outsourcer reviews and signs the return, and forwards
it to the client for filing.
largest CPA firms pioneered outsourcing tax preparation
and other accounting services. Economists expect smaller
CPA firms to follow their example. Mergers and consolidations
of CPA firms will also likely increase outsourcing as firm
size and client market shares increase. Businesses in the
outsourcing industry also forecast significant growth of
outsourcing. According to Robert W. Scott, Carly Lombardo,
and Richard McCausland, in “Is the Sun Setting on
Desktop-Based Tax Preparation?” (Tax Software Special
Focus, The Practical Accountant, December 2003),
Mike Sabbatis, vice president of business at CCH, predicted
that about 100,000 tax returns would be outsourced in 2004,
and David Wyle, president of SurePrep, predicted 200,000.
outsourcing offers several potential benefits to CPA firms.
It frees tax professionals’ time from performing perfunctory
duties such as form filing and data entry; that time savings
can be used more productively in tax and estate planning.
Tax outsourcing lessens the need for temporary professional
staff during the busy season. Labor rates provide a cost
advantage to outsourcing tax services overseas. For
example, a staff accountant earning an annual salary of
$45,000 (plus 20% of salary in benefits) costs a firm about
$39 per billable hour (assuming 1,400 billable hours per
year). According to Carly Lombardo, in “Outsourcing
Tax Prep Is In, In, In” (Accounting Technology,
May 2004), some sources suggest that the current costs of
outsourcing through a facilitator can be expected to result
in tax-preparation costs of about $20 per billable hour.
new accounting staff is increasingly competitive. For example,
the number of undergraduate and advanced degrees awarded
to accounting majors declined by 20% from 1996 to 1999.
In addition, the number of candidates sitting for the CPA
examination has been declining since 1993. Although there
are encouraging signs of increased enrollment, temporary
shortages of available U.S. tax professionals can be alleviated
tax-preparation services overseas can also improve service
by speeding the delivery of completed returns. Tax information
can be transmitted instantaneously around the globe. In
addition, the differences between U.S. and Indian time zones
means that a return sent overseas for preparation in the
afternoon can be completed after hours (daytime in India)
and downloaded by the U.S. CPA the next morning. Finally,
because outsourcing overseas moves tax preparation to a
mostly web-based system, it can significantly reduce the
volume of stored paper files.
against outsourcing overseas. One concern
about outsourcing is the privacy and security risk of posting
confidential client information (e.g., Social Security numbers)
to a facilitator’s website. For example, some clients
may not want their information sent to a third party that
is not directly supervised by their CPA. Fortunately, the
growth in e-filing of tax returns has spurred tighter security
controls, which are also available from facilitators. Secure
data facilities, private networks, firewalls, and sophisticated
data-encryption techniques now mitigate online privacy and
security concerns about outsourcing. Although
no electronic transmission of data, including the e-filing
of tax returns, can ever be completely secure, outsourcing
overseas can increase privacy and security concerns because
of the interjection of a third-party preparer not directly
supervised by the outsourcer.
concern about outsourcing is that it limits the tax-preparation
experience of entry-level accountants. Veteran CPAs may
remember similar concerns in the 1960s and 1970s, when electronic
systems replaced manual accounting systems. Newer staff
accountants in offices using outsourcing may require new
or expanded training to replace experience preparing returns.
The role of these staff will likely involve less routine
preparation work and more client interviews, expanded tax-planning
engagement responsibilities, and an expanded apprenticeship
period working with veteran tax consultants to review processed
tax returns. Some are concerned that it will take longer
for new staff to understand the tax effects of transactions
because they will miss the learning that takes place when
someone actually works with and comes to understand the
internal logic of the forms.
staff morale and staff concerns about layoffs are also important
challenges to any firm considering outsourcing. One strategy
to mitigate such concerns may be to commit to not downsize
existing staff as a part of an outsourcing strategy. Outsourcers
may also be concerned about the quality and reliability
of facilitator services and the ability to quickly correct
tax-return errors. Selecting a reputable, experienced facilitator,
along with negotiating a contract that ensures timely service,
correction of errors, and a contract-termination provision
period, can help reduce these risks.
outsourcers may also be concerned that political instability
in the country of the facilitator may interrupt processing
operations, such concerns have not prevented many large
financial-service organizations (e.g., Citibank, American
Express) from outsourcing operations.
barrier to effective outsourcing is technology capability.
Hardware, data storage, software, and knowledgeable staff
are required to move tax preparation from manual processing
to a web-based processing system.
both clients and CPAs may have concerns about the quality
of outsourced services as well as the patriotism of overseas
and Professional Standards
CPA Code of Professional Conduct has implications for outsourcing
tax work overseas. Two issues are of primary importance
in considering CPAs’ ethical obligations in an outsourcing
Disclosure of the use of a third-party service provider
to the client; and
Supervision of the third-party service provider.
CPA Code of Professional Conduct states that members “in
public practice shall not disclose any specific confidential
client information without the specific consent of the client.”
The recently issued Ethics Rulings 112 (under Rule 102)
and 1 (under Rule 301) clarify these responsibilities when
CPAs use third-party service providers. Ruling No. 112 states
disclosing confidential client information to a third-party
service provider, a member should inform the client, preferably
in writing, that the member may use a third-party service
provider. If the client objects to the third-party provider,
the CPA should provide the service without the use of
the third-party provider.
1 states that the CPA should have a client confidentiality
contract with the third-party provider:
using a service provider, the member should enter into
a contractual agreement with the third-party service provider
to maintain the confidentiality of the information and
be reasonably assured that the third-party service provider
has appropriate procedures in place to prevent the unauthorized
release of confidential information to others.
issued Ethics Ruling 12 (under Rule 201) addresses CPAs’
obligations to oversee the work of third-party professional
service providers. The obligation to ensure that professional
services include due professional care is no less when a
third-party provider is used. At the same time, CPAs have
no additional responsibilities in cases of third-party providers
beyond those identified in existing standards. Pragmatically,
this ruling suggests the necessity of documenting the adequacy
of the provider’s confidentiality, security, and privacy
controls, as well as compiling evidence demonstrating the
competence of the provider’s professional staff. Similarly,
though less explicitly, IRS Circular 230 (www.irs.gov/pub/irs-pdf/pcir230.pdf)
requires tax preparers that rely on the work of third-parties
to exercise “reasonable care in engaging, supervising,
training, and evaluating.”
CPAs’ patriotism or concerns about client reaction
might prevent them from outsourcing tax-preparation work.
Such choices are a consequence of living in a free-market
democracy that participates in the global economy. CPA firms
that participate in the emerging market for outsourcing
parts of professional services can expect in many cases
to reap significant financial benefits themselves and to
participate in the economics of the global market.
Robertson, MBA, is a doctoral student at the Culverhouse
School of Accountancy at the University of Alabama.
Dan Stone, PhD, is a Gatton Endowed Chair
in the Von Allmen School of Accountancy at the University
Liza Niederwanger, MAcc, is a staff accountant
Matthew Grocki, MAcc, is a staff accountan
Erica Martin, MAcc, is a staff accountant
at Crowe Chizek and Co., in Lexington, Ky.
Ed Smith, MAcc, is a recent graduate of the
master’s of accountancy program at the University of
authors are grateful to Cyndi Vines, David Hulse, and Teresa
Stephenson, of the University of Kentucky, and to Deborah
Harrington, of Deloitte LLP, for comments and suggestions
on this article.
additional discussions of ethical issues in outsourcing,
see “The Ethical Dilemmas of Outsourcing,” by
Steven Mintz (The
CPA Journal, March 2004), and “Outsourcing Income
Tax Returns to India: Legal, Ethical, and Professional Issues,”
by Richard G. Brody, Mary J. Miller, and Michael J. Rolleri
(The CPA Journal, December 2004).