Tax Work Bolts for Bombay (John Ervin Commentary)

Your next income tax return may be prepared in Northwest Arkansas but, it’s just as likely to be prepared in Bombay or New Delhi, India. No, I’m not kidding.

Outsourcing, the trend of sending jobs overseas, which has primarily affected high-paying manufacturing and information technology jobs, is now starting to sweep through the accounting profession.

The accounting industry is in a crisis. Many CPA firms do between 40 to 60 percent of their annual revenue from mid-February to mid-April. The workload continues to increase but the supply of new CPAs coming into the profession has declined in recent years. According to the American Institute of Certified Public Accountants, there is more accounting work than there are accountants. Ten years ago, approximately 4 percent of college graduates entered the accounting profession; three years ago it was slightly more than 2 percent.

Outsourcing, by some observers, is the wave of the future. It reduces the time staff has to spend on returns and dramatically reduces the need to hire temporary staff during tax season.

CCH, Xpitax, SurePrep, and Outsource Partners are the four primary vendors offering outsourcing capabilities, and all four follow a similar process. Clients typically meet with their income tax preparer to go over the various tax-related items. The local tax preparation firm then scans the W-2s, K-1s, 1099s, and other source documents. The scanned documents and other tax files are uploaded to a data center in the United States where the outsourcing company can access the documents via a Web browser and organize the documents into a Web-based file. Once the files are digitally organized the Chartered Accountants in India access the documents and prepare the return using the firm’s preferred tax software package. Once the returns are completed, the local tax preparation firm can access and review the returns.

Most accounting firms derive more than 80 percent of their annual net profits from preparation services during the tax-filing season. But the ability to generate a profit is often dependent on the ability to hire and retain qualified tax preparation personnel. The Wal-Mart approach to income tax preparation applies. What if you could prepare five hundred more income tax returns without adding any additional staff? The typical processing fee to outsource a return is just over $100 for federal and state 1040s, whereas the average cost to prepare the return in-house is substantially higher. Sometimes it’s as much as four to five times the cost of outsourcing. The turnaround time is generally less than 48 hours (often 12 to 24 hours), thereby improving client service and satisfaction. Staffing levels and costs are reduced. Workflow improves while all documents are captured and stored in a digital format; providing a ready backup.

Acceptance of the practice, concerns about security, and compliance with laws and standards remain hurdles.

How will your local preparer be able to maintain privacy and comply with IRS standards? Wrongful disclosure of confidential information protected by tax laws is a criminal offense. There isn’t any geographical restriction to the application of the tax preparation laws, but foreign enforcement is another question. Is enforcement even possible?

Identity theft has increased in recent years and costs billions of dollars in losses annually. Tax preparers, as well as others sending sensitive information offshore, will have to be well versed in the myriad of laws being proposed to protect the consumer.

Its time may not have yet come, but the reality is that economics will force the issue. The consumer wants the best possible product at the least possible cost. Wal-Mart has proven that. In response to the outsourcing movement, the American Institute of Certified Public Accountants has recently issued two new standards and revised one previous rule spelling out the responsibilities AICPA members now must meet when outsourcing their clients’ work to third-party providers. They have also expanded the definition of third-party service providers beyond an outside tax service bureau to also include any independent contractors used by the CPA firm. The new standard requires AICPA members to inform their client, preferably in writing and before providing the confidential client information to the 3P service bureau that the firm will use a 3P provider when providing professional services. The new rule also clarifies that AICPA members are responsible for all work performed by the service provider. The new rules also require AICPA members using 3P service providers to enter into a contractual agreement with the 3P firm to maintain confidentiality of the client’s information, and to be reasonably assured that the provider has appropriate procedures in place to prevent the unauthorized release of confidential client information. Although these rules do not go into affect until July 1, earlier application is encouraged.

Accounting Today, a New York based biweekly industry publication, reports that it expects outsourcing to grow. Some of the larger firms could outsource more than half of their tax preparation work, while smaller firms could do as little as 10 percent. The qualifications of India-based accountants are equivalent to certified public accountants in the United States. As for the preparation and knowledge about American tax law, Indian tax law is similar and conceptually the same. It may not be this year, or even next, but don’t be surprised if some day very soon your local tax preparation firm has an Indian connection.

(John Ervin is a CPA and owner of Ervin & Co. CPAs P.A. in Fayetteville.)