Outsource overview

Outsourcing income tax preparation is a powerful way to supplement your 1040 practice. If you’re considering income tax outsourcing, you’ll find the information you need here. We’ll discuss what it is, who needs it, offshore vs. onshore options, and full vs. partial outsourcing.

What is tax preparation outsourcing?

Outsourcing is the practice of hiring a third party to handle work that would otherwise be done internally. When outsourcing income tax preparation, your firm flexes the preparation work to an external tax professional, who sends back a fully prepared 1040 return. Your firm performs the review and the final sign-off. A good outsourcing service offers a smooth, standardized workflow that makes their preparers feel like an extension of your own staff.

An income tax outsourcing provider must use the same tax software as your firm, so most work with multiple software options. Some vendors also offer other services such as outsourced bookkeeping.

Why do firms choose income tax outsourcing?

Income tax outsourcing addresses one of the top challenges in the tax industry: staffing. For example, your firm may lose a preparer, and finding a quality replacement takes time. Turning to income tax outsourcing would allow you to process the same volume of returns while you hire. If you’re looking to grow your business, but can’t find additional staff, outsourcing is an easy way to increase your tax return volume. Even when fully staffed, your preparers may be overworked during busy season and benefit from offloading some work to a third party. In these cases, outsourcing your income tax preparation is an economical way to manage tax season without hiring additional employees.

What is the difference between offshore and onshore outsourcing?

It’s a common misconception that all tax outsourcing services are performed outside the United States and that firms only outsource for the offshore cost benefits. The reality is that some 1040 outsourcing services are performed onshore, others are offshore, and some vendors offer both options.

One significant difference between offshore and onshore outsourcing is consent. Section 7216 mandates that taxpayers give consent before their 1040 tax information is disclosed to a third party outside of the United States. In 2014, new Section 7216 language went into effect that required more explicit disclosure. As a result, you’ll need a 7216 consent form signature from your clients before outsourcing their returns offshore.

Are taxpayers resistant to 7216 consent?

In general, no. Firms that provide additional services like retirement and financial planning have always collected 7216 signatures. SurePrep has processed hundreds of thousands of outsourced returns since the 7216 language change in 2014, and our clients have reported little effect. Most firms send the 7216 consent form along with the Engagement Letter and receive a signature without issue.

Rarely, the 7216 form may prompt a client to request additional clarification about your data security practices. A reputable income tax outsourcing service will have clear and transparent documentation about their security protocols. This is usually enough to assure security-conscious clients. Some firms keep an onshore option on deck for an additional fee in the unlikely event that a client remains resistant.

Which is better: offshore or onshore?

Aside from consent, cost is the only notable difference between offshore and onshore income tax outsourcing services. Location does not affect accuracy and turn-around time. Many firms make the mistake of overestimating client resistance to 7216 consent and pay extra for their assumption. For most practices, there is no reason not to benefit from the cost savings of outsourcing income tax preparation offshore.

Full-preparation vs. OCR verification outsourcing

Most outsourcing vendors have full preparation as their only level of service, but select vendors offer partial outsourcing for OCR data verification only. It’s standard best practice to verify OCR data for accuracy after scanning tax documents. Compared to data entry, OCR verification takes a fraction of the time, but it still pulls preparers away from value-added work. Outsourcing verification in conjunction with an effective scan-and-populate solution can eliminate as much as 80% of the preparation work for roughly 20% of what a full-preparation service would cost. It’s an economical option for firms that need a middle ground between full outsourcing and in-house services.

Outsourcing income tax preparation next season? Plan ahead!

If your firm is considering outsourcing income tax preparation, contact vendors and secure services well in advance of January 1. Outsourcing vendors have staffing limitations of their own and may reach capacity months ahead of time. Onshore capacity is generally smaller and may sell out as early as spring. (Yes, really!) Offshore options are easier to find later in the year. However, some vendors may enforce blackout dates for new clients during busy season or charge a premium for last-minute contracts. Bottom line: plan ahead!

SurePrep has provided onshore and offshore income tax outsourcing since 2002. We offer both full-preparation and OCR verification outsourcing. To learn about our pricing and availability, please contact sales.