Society Looks at Outsourcing Tax Services

Society Looks at Outsourcing Tax Services
Getting a Handle on a Hot Issue

NEW YORK—Members of the New York State Society of CPAs have begun to formally weigh the advantages and disadvantages of outsourcing tax services to foreign preparers.

“This is one of the hottest issues facing us right now,” Alan Frankel told the Society’s Tax Division Oversight Committee in December. The oversight committee had charged Frankel, a partner with Frankel Loughran Starr and Vallone LLP and a member of the committee, to research outsourcing and help find a way to tackle the controversial issue.

“The fact that you have all this information going out of the country is big for different reasons,” he said.

Outsourcing pits the loss of control over client information and questions about the patriotism of firms that seemingly export jobs overseas, against cheaper overhead and labor costs and difficulties of hiring temporary staff during peak seasons. The committee consequently opted to take a relatively neutral approach, with a coalescing “multidimensional game plan” that would communicate the pros and cons of outsourcing without taking sides.

The plan would likely include an official white paper on the advantages and disadvantages of outsourcing, evening technical sessions on the issue, related articles for submission to The CPA Journal and a list of best practices culled from firms that have outsourced tax services in recent years.

An Emerging Issue

While the outsourcing of tax preparation services has been around for some time, Frankel noted that increased media awareness and competition has brought the issue into focus.

“I think the first few years that it was being utilized, it was more of an experiment,” Frankel said. “Now firms are getting scared that if their competitors are using it, they could have less overhead…(and) a better margin to increase profits;…that gives them an advantage. On the flip side, if the competitors pass that savings on to their clients, that becomes a price-structuring issue.”

In effect, competition means firms don’t want to be left behind, Frankel said. But, he noted, the media has played a major role in drawing attention to the competitive advantages of outsourcing.

“Everywhere you look, it’s popping up,” Frankel said. “It’s popping up all over the place, and that’s why it’s hitting the radar screens of accounting firms.”

The Good and the Bad

A top concern among CPAs, according to Frankel’s report, is how to control and preserve the privacy of personal and financial information as it is transmitted overseas.

The typical practice, the report states, begins when a firm scans source documents (W-2s, 1099s, brokerage statements) and transmits them to a data center through which outsourcing companies access documents and tax files via the World Wide Web. Chartered accountants (typically in India) prepare the returns, which are then returned to the firm for review.

“Larger firms may set up their own offices,” Frankel said. “But small to mid-sized firms aren’t likely to make this transition.”
Without close control over the outsourcing companies, firms fear potential identity theft issues, a loss of security when sending data over the Web, and even the possibility that outsourcing companies will sell client information to marketers.

Other concerns include worries over the quality of the service, the limitations of outsourcers to only simple returns (at least for the time being), additional review time by CPAs at home, and a public relations problem for CPAs who may be deemed unpatriotic as they ship staff jobs overseas.

Advantages include decreased input time, reduced fees for other comparable tax services, expanded capacity for U.S. firms, less of a need for extra staff at peak times, a more conducive atmosphere for firms to transition to the “paperless” office, and the possibility that as more firms turn to outsourcing, the competition will force prices down even more.

Frankel was expected to return to the committee at its January meeting with a general plan for discussing outsourcing, including a list of the pros and cons.