Tax outsourcing has come a long way from its nascent beginnings back in the early 2000s. We know that tax outsourcing works - firms that outsource complete anywhere from 8-15% more returns during tax season than those who do not (based on an analysis of firms utilizing XCMworkflow).
Putting it into perspective, for a firm used to a max capacity of 2,500 returns during tax season, with outsourcing, that firm could process an additional 200-375 returns. How do you think an increase in capacity would affect the firm's bottom line and its ability to meet or exceed client expectations?
Increasing quantity doesn't have to mean sacrificing quality. Our clients tell us that returns prepared offshore are of equal or higher quality than what they process internally at their firm. If you've been considering outsourcing some of your tax practice, or you've dipped your toes in the outsourcing waters but aren't quite seeing the same increase in capacity that I mentioned above, here are four ways to ensure your firm is getting the best results from your outsourcing partner.
Start planning early
To have a successful partnership between the firm and your outsourcing partner, planning for the upcoming tax season is necessary. Early planning ensures a better product from your outsource partner and facilitates the decision-making process surrounding the firm's professional staffing levels required to provide tax preparation services for clients. The earlier this planning process starts, the better.
Things to consider during the outsourcing planning process include:
- How many returns you anticipate processing during the season and what types. These two pieces of information are essential to busy season success.
- How many returns you want to send to an outsource provider. Some firms will send a pre-determined number of returns, while others will decide to send a certain percentage of their total returns. There are still other firms who choose outsourcing as their "back-up" – that is, they utilize the outsourcing provider once their staff is at max capacity. Choose the option that works best for your firm.
- What types of returns you will be sending. Will you be keeping your easiest returns for Interns? Will you outsource only 1040's? How many entity returns will you send?
Your outsourcing partner can work with you on most of these key decisions and help guide you through the planning process. It is critical to have your plan in place, communicated to the tax staff, and ready to go prior to February 1.
Keep the lines of communication open
Open lines of communication within the firm, as well as between the firm and your outsourcing partner, are a critical aspect of ensuring a successful outsourcing partnership.
Within the firm, most miscommunication happens during implementation and execution. While the decision to leverage outsourcing as a complement to the domestic practice is made at the partner level, the execution and implementation of that decision occur at the manager and staff level, potentially leading to a loss of information or overlooking tasks. For example, if the firm loses track of which clients have a signed 7216 on file, they will have no way to know which returns can be sent to their outsourcing partner.
We strongly recommend that firms appoint an outsource coordinator to manage communications between partners, staff, clients, and the outsource partner. This person (or persons) will be instrumental in making sure that the firm leverages its outsourcing contract to its fullest while keeping all parties in communication throughout the tax season.
Don’t forget about the 7216 Consent Form
Treasury Regulation section 301.7216, a provision enacted by Congress in 1971, directly impacts the clients a firm can outsource. Per the AICPA, “7216 generally requires tax return preparers to obtain permission (in written or electronic form) from the taxpayer prior to the disclosure or use of tax return information. Some of the more significant parts of the new regulations involve the form of the consents that tax return preparers must generally obtain from taxpayers prior to disclosure or use of tax return information under the 1040 series of federal income tax returns. This series includes Forms 1040, 1040NR, 1040A, and 1040EZ. Moreover, the regulations also have an impact on the disclosures or use of tax return information found on federal business entity forms, such as 1120, 1065, and others.”
The AICPA has several sample consent forms available for download as a benefit of membership.
Even if the person preparing the return is an employee of the firm, any 1040-series tax returns prepared outside the United States require a 7216 consent form signed by the client. Although the regulation is somewhat unclear on entity returns, our advice is to consult with your legal counsel before sending any entity returns offshore without signed consent from that client.
Don't allow the 7216 consent form to become a barrier to outsourcing. In our experience, firms that utilize a digital signature process to obtain signed consent forms are highly successful in getting the needed signatures. Another possibility is making the consent form valid for five years or more, eliminating the need to obtain consent every year.
Take advantage of outsourcing training
All new technology and services have a learning and implementation curve. To offset it, most outsource partners offer training on the process. Take advantage of it, and include anyone who may be involved in the outsourcing process. Don't forget about employees who may not be part of the outsourcing process daily, but could be asked to step in and assist if someone calls out sick.
At Xpitax®, we provide every customer with a "playbook" meeting, walking the firm through each step of the process, covering how to send returns, what information is needed, and what they can expect to receive from us as the final output. We also help our firms make sure that their technology is set-up correctly to move returns from the firm to the outsource provider and back to the firm. Look for an outsourcing partner that performs a similar service to cut down on first-year implementation pains.
Xpitax pro tip: review the first 5-10 returns your outsource partner completes to ensure the returns meet or exceed your minimum quality levels. There may be some slight nuance in a return that requires a quick phone call to clarify; performing this best practice at the beginning of tax season will ensure you don't run into problems in the middle of busy season.
When tax outsourcing was in its infancy, preparation was a constant learning experience for both the offshore preparers and for firms in the US. Throughout the years, outsourcing companies have developed consistent processes, trained their staff on multiple software platforms, and kept up with the ever-changing federal and state tax law landscapes. I have watched as outsourcing tax returns offshore has catapulted from a side hustle into a serious revenue stream for CPA firms.
If your firm has been considering outsourcing some or all of your tax return preparation business, there is no better time to do it. Take these four tips and apply them to your outsourcing partnership to make sure you and your outsourcing partner are operating at peak efficiency, effectiveness, and providing high-quality returns for your client.