Outsourcing tax preparation is a key function that requires deep analysis. After all, firms primarily need tax preparation during specific months (read season) of the year. In that sense, it doesn’t make sense to have a full-time tax preparer who could be unproductive throughout most of the year.
Interestingly enough, the word “outsourcing” is often synonymous with “cost-saving”. Perhaps in the same way that the brand Coors brings attention to lager beer. Numerous studies show that accounting firms are increasingly moving core services out of their firm. A 2023 survey by the AICPA PCPS MAP revealed that 25% of CPAs utilize offshore outsourced tax preparation services.
This blog examines the cost analysis behind outsourcing tax preparation. It also looks at various outsourcing models that have a direct impact on savings.
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Outsourcing the process of tax preparation frees the CPA firms of several costs associated with hiring a full-time in-house tax professional, such as:
Labor Costs: Outsourcing tax preparation eliminates the need for CPA firms to allocate resources like salaries, health insurance, retirement plans, 401(k)s, bonuses, and payroll taxes for in-house tax professionals. Instead of bearing those expenses, CPA firms only pay the hours their outsourcing partner spends on tax preparation, based on the number of tax returns processed or a project-based fee, rather than employing a full-time in-house professional. One of the most common practices for CPA firms is outsourcing tax preparation to India, due to a high number of skilled resources.
Recruitment and training: Recruitment and training have become increasingly challenging due to the decreasing availability of skilled professionals in the accounting sector, making the hiring process particularly tireless. Expenses related to finding, recruiting, and training a seasoned full-time, in-house tax professional team are not only costly but also time-consuming. By working with a reliable outsourcing service provider, CPA firms can eliminate these costs and access a team of tax preparation experts who are qualified, understand the complexities of tax regulations at both the federal and state levels, and are experienced in navigating industry-specific requirements for their clients.
Infrastructure: CPA firms that solely rely on in-house tax preparation teams often face increased costs related to expanding infrastructure. Infrastructural costs can include office space, data storage, or staff accommodation. On the other hand, when it comes to outsourcing tax preparation services, no such costs exist for the CPA firms. These costs are covered for maintenance under the outsourcing service provider.
Software & Licensing: Investing in specialized tax software is a common feature of automated accounting systems, especially those that are cloud-based. These automation tools usually have more than just subscription fees; there are annual renewal fees, regulatory compliance fees, or usually hidden costs. It might not feel like it, but these costs can pile up fast for the CPA firm. For outsourcing, these costs are handled by the third-party service provider.
Overhead: Managing a large workforce is a complex undertaking that includes a variety of administrative costs associated with having a larger workforce, including the salaries of administrative personnel. With outsourcing, the costs associated with effectively onboarding and training new personnel are taken away from the CPA firm’s hands. As the tax professional working on preparing their client’s tax returns, don’t require much direct oversight from the CPA firm.
Error-Related Costs: When internal employees work extra time and have more responsibilities than they can effectively handle, there is an increased chance that errors will be made, deadlines will be missed, and/or penalties will be imposed. By providing additional resources and assistance to your staff, you may reduce the likelihood of incurring error-related costs. So, potential non-compliances are reduced, leading to no resources or costs being invested in having to redo any tax preparation.
How Outsourcing Models Impact Cost Benefits for Accounting Firms
There isn’t a rigid model for outsourcing tax preparation. Most reliable and mature outsourcing service providers offer flexible engagement and communication models. Depending on the model that best suits the CPA firm, the cost-effectiveness of outsourcing tax preparation services can vary. The following lists different outsourcing models and how they can directly impact the cost-saving benefits of outsourcing tax preparation:
Full-Time-Equivalent (FTE): In partnership with the Outsourcing company, CPA Firms place dedicated offshore professionals who complete CPA tasks that include staff accounting, tax-related issues, audits, etc. All these offshore professionals have similar responsibilities as in-house employees of the CPA Firm. These dedicated offshore professionals offer CPA Firms a consistent and specialized service, like an employee.
However, CPA Firms use this service on a predetermined monthly expense basis, similar to a salary; therefore, they have a monthly fixed cost with no additional marginal expenses, such as office space and other employee overhead. Offering CPA Firms reliable capacity to allow for increasing workflow without the necessity of hiring permanent employees.
Pay-as-you-go: Known as the hourly model, flexible pricing has become very popular with both service companies and service providers. In this way, companies only pay for hours worked on a job/project/activity and do not pay upfront for all hours that they would normally need. Because of the nature of this task-based payment structure, it is more dynamic and adaptable to the needs of many different types of tasks/projects/activities. As the price is based upon actual use, it allows a CPA Firm to pay for resources that are available but do not have to worry about the overall cost of the resource.
Per-Return-Based: In this model, CPA firms charge a fixed fee for each tax return or specific work requested. This may include tasks like bookkeeping, creating audit schedules, or similar outsourced tax preparation services. The hallmark feature is that the fee remains constant regardless of the task size or complexity. This provides a predictable expense per unit, making budgeting easier, particularly when the provider manages the complexity to keep costs stable despite slight variations in tasks.
Conclusion
For decades, cost savings have been a main reason for CPA firms to outsourcing tax preparation services, with many outsourcing tax preparations to India. Today, when CPA firms consider outsourcing, there are two key perspectives to remember. This is especially true for complex processes like tax preparation. First, by outsourcing and saving costs, growth depends on the smart and proper use of those resources. To grow, CPA firms need to use the funds saved more strategically. For example, they might invest more in client satisfaction or use outsourcing as a steppingstone toward more client-facing roles.
The second perspective is to gain strategic leverage from outsourcing tax preparation. Leading CPA firms go beyond just using outsourcing to cut costs. They make sure that their outsourcing partner acts as a valuable extension that integrates smoothly into their workflows. To get the most out of outsourced tax preparation services, CPA firms must ensure that their partner and outsourcing model fit seamlessly with their workflow.
