Outsourcing Tax Returns

The preparation of income tax returns overseas, outsourcing, raises many significant ethical issues. Reports of the scope and size of the outsourcing market vary greatly, but the largest outsourcing companies claim that thousands of returns were processed during the 2006 tax season. Estimates for the 2007 season indicate the total may now be well into the hundreds of thousands. Outsource Partners International (OPI) reports preparing 10,000 U.S. tax returns last year. SurePrep claims to have processed 6,000 returns last year and expects to process as many as 30,000 by April 2008 A statement on their website sums up their outsourcing pitch to CPAs:

What if you could prepare a thousand more tax returns without adding even one more staff member? And what if you could prepare those returns for up to 50 percent less than what it costs you right now? You can with SurePrep. And with virtually unlimited ability to prepare and process returns, you can increase volume, multiply profits and grow your practice. (www.sureprep.com)

SurePrep electronically transmits tax information to preparers in India. Confidentiality of personal and financial data is a critical issue, as is the preparers' competence and skills. SurePrep responds to the latter concern by pointing out that Indian preparers are well educated, speak English, and are trained in U.S. tax law. SurePrep's website provides the following advice to CPAs concerned about what to tell clients:

You might tell your tax clients that while SurePrep accountants will prepare the tax returns, our role is transparent to the process from your clients' perspective. Your firm is responsible for reviewing and approving the return prior to delivery.

The outsourcing process is similar among other service providers. The U.S. firm still interviews the client and collects all the information, which is encrypted and transmitted electronically to a secure server that the foreign accountant can access. Client source documents, including W-2s, 1099s, and K-1s, are also scanned for transmission. These electronic documents, and other relevant tax files, are uploaded to a data center in the United States; the outsourcing company accesses the documents using a web browser and organizes them into a web-based file. In India, Chartered Accountants (their equivalent to our CPA) access the files and prepare the tax returns using the firm's preferred tax software package. Once it is completed, the U.S. firm reviews the return and is responsible for its accuracy.

CPA firms claim that it is increasingly difficult to find qualified part-time staff during tax season, and that there are significant cost savings from outsourcing. Various Indian websites claim that tax returns can be processed in India for 50% of the cost in the United States (www.thehindubusinessline.com). There is an improved turnaround time and increased productivity, because the return comes back in less than 48 hours. This reduced tax preparation workload frees up a CPA firm's professional staff to find ways of offering their clients new value-added services. Tax outsourcing can serve as a bridge for business transformation, enabling a firm to outsource other accounting functions, such as bookkeeping.

Four rules in the American Institute of Certified Public Accounts (AICPA) Code of Professional Conduct are of particular relevance to tax outsourcing: Rule 102, Integrity and Objectivity; Rule 201, General Standards; Rule 202, Compliance with Standards; and Rule 301, Confidential Client Information (AICPA Professional Standards Volume II; AICPA, New York, 2003). These rules and whether or not they are followed are the central part in the discussion of ethical concerns.

Rule 102: Integrity and Objectivity. Rule 102 provides that "In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others." (AICPA Professional Standards Volume II; AICPA, New York, 2003). According to the Code's Principle of Integrity, a member should be "honest and candid within the constraints of client confidentiality." Two major outsourcing concerns are whether a client is informed that tax information is being transmitted overseas electronically, and that the return will be prepared by a non-U.S. CPA.

Honesty in communications is at the ethical core of trustworthiness, points out Michael Josephson, president of the Josephson Institute of Ethics. This includes expressing the truth as we know it, and not doing so in a misleading or deceiving way. In trusted relationships, honesty imposes the ethical obligation to volunteer information that another person needs to know (Josephson, Michael, Making Ethical Decisions; Josephson Institute of Ethics, Los Angeles, 2002).

From an ethical perspective, a client must be informed that personal and tax information is being transmitted electronically overseas for processing. The client has the right to opt out of the arrangement, and must be afforded the opportunity to do so. The only reason not to inform the client is because the CPA does not want the client to know. Nondisclosure is sometimes rationalized by saying that there is no need to inform the client, as long as the CPA maintains control over the source documents, and reviews and approves the return prepared by the overseas accountant. This is unacceptable from an ethical point of view. People who strive for honesty in communications disclose all the information that another party has a need or right to know.

Standards of Performance. Rule 201 includes two principles particularly important to the outsourcing issue: First, CPAs must exercise due care while performing professional services. Second, CPAs should adequately plan and supervise the performance of professional services. (AICPA Professional Standards Volume II; AICPA, New York, 2003). It is difficult to see how these ethical obligations can be met when tax processing takes place overseas and without the direct supervision of the U.S. CPA. While some may argue that the review and approval process is sufficient to meet these rules' technical requirements, it does not satisfy the spirit of the rules. Absent on-site supervision, a CPA must rely on the outsourcer for assurances that the competence standard is met; there is no reasonable way for the U.S. CPA to effectively supervise the overseas preparers.

Rule 202 requires a CPA to comply with the technical standards of services performed. Those that process tax information must follow the Statements of Standards for Tax Services. (AICPA Professional Standards Volume II; AICPA, New York, 2003). While these statements primarily apply to taking tax positions rather than to preparing returns, there are procedural matters