Once the Rage … Outsourced Tax Preparation on the Rise
Is Your Tax Return Outsourced By Your Tax Preparer … and Does It Matter?
A decade ago, there were consistent reports of a variety of accounting functions being outsourced to third-party providers in another country. India was at the top of the list. Then reports of outsourcing waned. Now there is an apparent resurgence of overseas outsourcing especially for tax preparation services.
In this article we’ll take a look at what propels this outsourcing trend … and most importantly what are the benefits and potential pitfalls for both individual and business taxpayers in the U.S.
Scalability as the Driver
An important driver for U.S. tax preparers to adopt foreign outsourcing is one of scalability. That means that the pressures of the compressed few months of tax season create short-term staffing burdens that must be planned for well in advance. The challenge is to find tax professionals willing to come aboard seasonally. The alternative is to be overstaffed and carry significant excess payroll overhead during the “slack” times of the year.
Outsourcing delivers a scalable solution to supplement existing staff during the peak period of tax season plus convert a fixed staffing budget to a variable cost. When the busy season is over, the incremental staff may be scaled back.
First of all, Federal law requires that you, the taxpayer, must consent to your tax data being shipped to a tax preparer outside the United States. You are well advised to ask your U.S. tax preparer whether that consent is included in the engagement letter you are asked to sign.
Another issue is the credentials of the outsourcing resource. If you don’t object to your personal data being sent outside our country … including your Social Security number … at least seek satisfaction that it will be in the hands of an entity with a proven track record of safeguarding the privacy of U.S. client data.
Cost as the Driver
Without a doubt, employee costs are a major element of U.S. tax preparers concern when considering the benefits of outsourcing to a third-party provider in a foreign country. It is common that savings will be well in excess of 50 percent of the cost for U.S. based tax professionals.
Your question must be, “Who benefits from the savings?” Are they passed on to you, the taxpayer, in whole or at least partially? If so, it may influence your decision to accept an outsourced provider to complete your tax return.
Personal Data Risk Exposure
When considering the risk of exposure of personal data to unauthorized people, two primary threats come to mind.
The first is the potential for third-party outsourcing employees not thoroughly vetted by their employer regarding background checks to ensure a history of honesty. Short of that, compromising personal data is as handy as an email, phone call or copy machine. When opportunity presents itself, some deceitful people will take advantage … which effectively voids the intent of Non-Disclosure agreements that they may have signed as a condition of employment.
The second is one that we all see on an ever-increasing basis pretty much daily … data breeches. Many outsourcing providers have data security measures that are exceptional and comprehensive. Today there is increased acceptance of software migrating to a cloud-based platform with a Software as a Service (SaaS) subscription model. All of that is fine, but remember the bad actors have not been sitting on their hands. They are diligent in discovering how to prevail in the face of firewalls and other technology access barriers.
Certainly it’s worth asking about the third-party resource hiring practices, i.e. pool of employees they recruit from, what pre-hire screening is conducted, proof of competence, and how are staff monitored. Additionally, it’s valuable to know the security measures initiated to protect the workplace..
While it may be more technical than you want to pursue, the sources of software, hardware and encryption methods used are critical. That is so particularly if the source countries are known for intellectual property and data theft.
Your U.S. based tax preparer remains responsible for ensuring the accuracy and completeness of the services rendered by the third-party provider. If there’s a problem, the liability will rest with the U.S. firm. However, depending on the outsourcing firm’s insurance coverage and/or financial resources, you may have considerable frustration in being made whole … financially as well as securing your data.
Start with asking your U.S. based tax preparer whether an outsourced entity will be involved in the preparation of your return. Remember, that can only happen with your consent … so consider the options.
Bottom-line is whether you are comfortable with your data being shipped a continent away to be in the hands of an unknown, third-party outsourcing resource with unlimited access to all of your financial, tax and personal information … including your Social Security number. The “wild card” in that scenario is the perceived level of risk that you are exposed to vs. potential cost savings you may enjoy in the preparation of your tax return.
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We never outsource your sensitive, private, financial information. All work performed for you is conducted in our office right here in Richmond.
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