The Benefits and Pitfalls of Tax Outsourcing

What are the benefits and pitfalls of outsourcing tax returns? Here is the one reason you never want to outsource your tax work.There is a growing problem in the tax accounting industry. Attend a continuing education program for tax professionals and the problem is impossible to miss: the silver in the crowd is worse than Sunday morning church service.

The tax profession is aging. Attracting new people to the profession is difficult because it lacks the glamour of other professions. But sit in any public forum and mention you are a tax professional and you will be inundated with tax questions and offers to take them on as new clients. The tax profession is a good field with ample opportunity to do good, but few even consider accounting or tax as a career option.

Those of us still practicing know the qualified tax professional shortage is bad and getting worse. Hiring a qualified tax professional is as hard as finding a unicorn.

Demand for our services grows while the number of people available to service this demand shrinks. Tax professionals have taken extraordinary steps to fix the problem with automation, reducing client lists and outsourcing. Each action has its unique set of benefits and pitfalls which we will explore.

 

Getting Work Done Correctly and in a Timely Fashion

For several years now I’ve experimented in my office with a variety of methods to deal with the workflow and demands of regular clients and those seeking to be clients. 

These issues are of interest to the client and other tax professionals alike. Each new method instituted (or merely tested) in my office had its benefits and pitfalls. Clients need to understand the difficulty tax professionals have keeping their head about the paper waterline and tax professionals will continue to explore extraordinary means of managing growing demand with a smaller workforce.

The easiest—and most logical—way to solve the problem of too much demand is to cut your client list to a manageable size and decline taking on new clients. While this solution works, it lacks a satisfying outcome. There is an uncomfortable feeling knowing you can help someone and passing anyway. 

If no other options exist then a reduced client list is the only choice. If you are nearing the later stages of your career this might be a good way to transition certain types of clients to new tax professionals. For everyone else in the crowd we need better options that both serve your client and allow you to retain your sanity.

I will review 3 solid options with special emphasis on outsourcing tax work.

 

1: Maximizing the value of experienced staff

Experienced tax professionals probably remember the days when they did all the work alone. They would meet with the client when the return was dropped off, they would prepare all aspects of the return, have support staff print the return and call the client, and finally, meet with the client at pickup to review the results and answer any questions the client has.

The old way of doing things no longer works when there are not enough experienced tax professionals to go around. 

The solution used in my office focuses each task of the tax preparation process to different teams. Clients drop off their material with a receptionist; notes are taken for the tax accountant. Most of the tax return is processed by a team scanning and preparing the return for the CPA or enrolled agent. Data processors, many with no tax knowledge, enter the raw data.

Once the data processors enter as much as they can the file goes to the CPA’s desk. For all intents and purposes the CPA moves straight to review unless there are serious tax issues unresolved by data entry. 

Experienced staff are always working at their highest capacity under this method. Raw data entry doesn’t consume the tax expert’s time. However, many returns have significant tax issues only an experienced team member can handle. While data processors help, the tax pro still spends significant time with each file, but does avoid the mundane part of the preparation process.

At the end we sit with every client to review the return. This is where we discover if we misinterpreted documentation the client provided and to answer questions. 

It’s not a perfect solution, but it allows for the maximum value extraction from each experienced members of the team.

 

2: Automation

Automation has been an integral part of the tax office for decades. We moved from paper to e-filing; from filing cabinets to digital storage; from hand preparation to tax software. 

There are additional automation processes too few tax professionals use. In my office we use Gruntworx, for example. 

Depending on the tax software you use, there are similar programs offering the same service to tax offices. I use Drake Software and Gruntworx is built right into the program.

What Gruntworx and similar programs do is enter the basics from standard forms (W-2, 1099, K-1, etc.). Unfortunately this doesn’t offer more benefits to the skilled CPAs in the office. Gruntworx partially replaces the data processors only.

The biggest advantage of Gruntworx is cost. It is a poor use of time entering W-2s when the computer does it automatically for pennies.

There is one pitfall to consider. These programs reading forms and entering data periodically make mistakes. The reviewer must double-check the entire return! The same issue applies to human data processors. The review process is a redundancy designed to reduce errors.

 

Outsourcing

This is what I really wanted to talk with you about. Outsourcing payroll and bookkeeping is rather easy. Tax returns are another issue.

First we need to define what I mean by outsourcing. Gruntworx is not outsourcing! Outsourcing, as I will refer to it here, is the sending of the entire return to another firm for preparation with only a review required at home office end.

My office has tried several outsourcing models the last few years with the gracious permission of a few clients to allow me the luxury. My results are decidedly mixed so if you ever considered outsourcing tax returns you will want to review my experiences.

 

Domestic Outsourcing

Outsourcing to a domestic (U.S. based) firm requires less disclosure to the client. I recommend always being upfront with the client and disclosing anyway. 

The biggest drawback of domestic outsourcing is cost. I have never been able to find a domestic outsourcing company that was cost effective so I never used one. Therefore, I can’t vouch for the quality of any of these services.

Also be aware that there are several firms claiming to be domestic when they are not! Just because they have a New York office doesn’t absolve you of disclosure rules. My first foray into tax outsourcing was with one of these firms. I outsourced my own return as a test and they crucified the return. At least it didn’t cost me anything.

 

True Tax Outsourcing

After a few false starts and reviewing several outsourcing firms I found one that had it all put together. They had a good portal to transfer documents and a good team domestically and in India (where most outsourced tax returns go). 

Once I was satisfied with their work and security I asked a few clients permission to send their tax file to this firm. (The name of the firm will not be mentioned because they did what they promised. Since I’m pulling the plug at a large loss it would not be fair to them since they did nothing wrong.) This was last summer. The additional test returns came back prepared correctly.

A good outsourcing firm requires money for their service. My firm paid $16,750 for the smallest contract they had. (The low-ball guys are not professional and should be avoided. You want quality first, price second.)

Know the difference between automation and outsourcing. You need to know this information if your tax accountant ever asks to outsource your tax work.The biggest advantages of outsourcing to a quality firm include better quality preparation and less need to find additional in-house staff (qualified tax professionals). 

However, there are serious pitfalls I could not resolve. 

It became painfully obvious early in the tax season this year the outsourcing firm lacked the most important qualification: knowing the client. The time it took to ready materials for the outsourcing firm along with the excessive time needed to review the returns they prepared did NOT save meaningful time of experienced tax accountants in my office! It wasn’t their fault. The issues always revolved around knowing the client and they had no way of knowing the client as I do. And the problem is unsolvable.

It is hard to grasp how powerful and valuable the accountant-client relationship is until you see tax work done without the relationship. 

This one glaring issue caused me to pull the plug with only $2,000 of the contract used. The rest is a loss for my firm. If it weren’t for this blog I wouldn’t try out so many of these things. But with a large number of tax professionals haunting this blog I feel it my duty to try things and share the results so readers can benefit without the extraordinary expense.

Clients of tax firms also get a peak under the hood of how things work when they submit their return for preparation.

There is one additional glaring issue: disclosure.

I sent a modest number of clients a disclosure statement. If they signed I was allowed to send their return to outsourcing. (Only a few select clients were chosen and they were not required to sign.)

Some signed; other, not.

What brought this home for me is when one client signed the form and later read it completely and called begging we don’t send his return to outsourcing. We complied. 

The truth is there is no shortcut. While outsourcing offers the promise of a better back office, anything is further from the truth. Even a good firm with quality preparers can’t give the service required without knowing the client. It’s just too large a hurdle to overcome!

 

My Opinion

It is my informed opinion that all tax offices should tread lightly and slowly if they are considering outsourcing of tax returns. I can’t find a way to provide the quality I demand for my clients from a distant source so outsourcing is starting to look like a rear view mirror issue for me. 

Automation is fine. Gruntworx and similar programs work within the framework of your tax software and is only a data processing system. When it comes to a full outsourcing, total return preparation, there is nothing like handling it in-house where the accountant and client have an intimate relationship built to serve the client; the way it should be.

 

Ongoing Research

Even though my outsourcing days are over I still intend to educate myself on the subject and share the inside information with you. In May I’m attending an outsourcing conference to learn more on a variety of outsourcing options. The conference cost a cool $1,000, plus hotel and travel costs. You will get the important information for simply stopping by this blog in late May or June to read all about it.

Is outsourcing right for your tax office? Discover the risks and why you might want to forego outsourcing even when it can be done expeditiously, accurately, cheaper and securely. Now you know why I have ads on this blog and other forms of monitization. I’m not trying to irritate you. I just need funding to try these experiments so you don’t have to. 

And unlike other blogs, the experiments we conduct here sometimes cost more than a few dollars.

My goal is to reinvigorate this graying industry. We need to spread the message this is a very good career choice. Even your favorite accountant is looking toward his last decade in the field as a full-time practitioner. (If I didn’t shave my head the gray would be showing on me as well.) 

My practice in unlikely to grow much in the future. My job is to teach the next generation and figure out all this new stuff we need to think about.

Thank you for coming along for the ride. If there is something you would like me to test be sure to leave a note in the comments. 

New or old hat, our profession is in high demand. People are in desperate need of our services. 

If we don’t rise to the challenge, only the wealthiest will have access to quality tax help in the future. The middle class and poor can’t afford that. And we have our work cut out for us.

 

 

More Wealth Building Resources

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Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Keith Taxguy

21 Comments

  1. Andy Connors on March 24, 2019 at 10:11 pm

    Hi Keith, I’m a 30-something EA who has prepared a few dozen tax returns on the side until this year. I recognize the silver you mention every year at my annual NATP update seminars and the business opportunity it presented. My issue in diving into it full-time was the transition period – I would need to continue my full-time, well-paying job in the banking industry while also growing my client base large enough to support my family, possibly burning myself out in the process and creating marital dis-harmony, anxiety and stress. Quitting my job prior to tax season without enough guaranteed work was just too big of a risk financially, not to mention the likely gap in health insurance that we would suffer. Other business ventures can get off the ground with one or two large customers, but I was looking at needing hundreds of clients and was already running out of time during tax season with only a small number of clients. I have enjoyed helping my clients and would have loved to devote more time to learning and helping them and many more, but in the end it didn’t seem worth the risks and family stress during transition while I already have a good job at a great company with health, dental, 401k, lots of paid vacation, etc. Do you have any thoughts on how to overcome this?

    • Keith Taxguy on March 24, 2019 at 10:36 pm

      Andy, there is nothing wrong with keeping your tax practice small. You can earn extra money while maintaining a personal relationship with your clients. Knowing your client is vital if you want to be a top notch tax professional. Keep it small and manageable while you increase tax knowledge. When you are ready you can make the jump. There is plenty of room for the part-time tax office.

      I agree you shouldn’t make the jump if you need the income. And no business/job/career is worth it if it friction at home, anxiety or stress. This needs to be fun so your clients know you are 100% engaged to help them.

    • Karl on March 25, 2019 at 12:24 am

      Hi Andy, I did that transition, and here’s how. I was a full-time Controller three years ago making a nice salary with a company car and paid benefits. It was a cushy but toxic work environment. I started doing taxes as a side gig. Nine clients year one, 20 in year two.–nowhere near enough to make the jump to full-time and leave the W-2 work behind.

      I had a local CPA firm reach out to me. I had public accounting audit experience, and they needed audit seniors (I think every firm is short on them). They offered me a seasonal job to help out with their busy season load, and had no problems with my piddly practice being any form of competition. It gave me the base of income I needed for the first four months. I didn’t want to go back to public full-time, so I was happy to get a pink slip.

      I had planned to look for another Controller/CFO gig afterward, but after busy season, my heart wasn’t in it. Talked to my wife, and she was on board with me trying consulting. We had lived simply and stockpiled cash so if nothing else came in we could just barely make it to next tax season. Some work came in, so we got to next tax season with some surplus.

      I was on COBRA at the time, and the firm covered that during the months I was employed there.

      Did that arrangement for two years as my practice has been growing. Would have done it one more year (this year), but the firm merged into a regional firm with that pesky HR policy of “no outside work arrangements.”

      Things are a little tight, but we’re making it. The keys to success for me are a supportive wife, good communication w/ said wife, and living well below our means when we both had salaries (she’s now a stay-at-home mom).

      A little more of my story is in a subsequent comment below. My situation won’t be entirely repeatable, but hopefully it sparks some ideas for you. I’m now on Medi-Share, and my wife & daughter are on traditional insurance through a QSEHRA (thank you Keith and TakeCommandHealth!).

  2. Art Felgate on March 24, 2019 at 10:24 pm

    Cry me a river. This is exactly like large corporations bemoaning the lack of engineers, so they can keep salaries low by encouraging a glut.

    A couple of years ago I walked into an H&R Block office, trying to get a part-time job for the tax season. I have an MBA, have held product management positions, have started my own company, and been involved in several other startups in my career. When I sincerely asked about becoming a tax preparer they laughed me out of their office, saying I was unqualified.

    Really? I suspect 99% of the returns these H&R offices handle for $99 are extremely straightforward. Probably the most complicated thing they handle is Schedule C, for self-employed. Which I have done myself many times.

    So, I have a hard time believing it is hard to find qualified people, or at least people who are capable of being trained (and have an aptitude).

    It certainly

    • Jacob on March 25, 2019 at 7:41 am

      He has no incentive to try and flood the market. He is not in need of experienced tax professionals because he fulfills that role for his business. He is simply sharing what he has observed in the industry. As you stated yourself, you are not a tax professional, and therefore are not in a position to knowledgeably discuss the industries needs. He would benefit from a shortage of good tax professional because he could charge a higher fee for the same work as a result of the shortage. His recommendation for individuals to pursue tax preparation as a career is selfless and has the reader’s best interests in mind.

  3. Karl on March 25, 2019 at 12:05 am

    I’m 34 (also bald), a CPA, and have transitioned through my career 5 years of Big 4 audit experience, 5 years in the private sector, and now a self-employed, home -office-based tax accountant and consultant.

    I mostly agree. I have gotten so many of my client base by networking because other CPA’s in town don’t want anymore 1040 clients. They want to focus on businesses and recurring accounting work. So I sincerely wonder if I will be able to pitch the value of my practice to some younger CPA a couple decades or more down the road to get a good sale price. So I’m focused on getting my fees up and providing value to grow a loyal client base. But then I’ll have to work on a solid transition to keep retention high.

    I wasn’t planning on hiring employees, wanting to keep the work manageable to handle myself rather than try to grow and staff a new firm in town. We just had our first child, so I love getting to be at home and watch her grow up.

    A thought on grooming the next generation of accountants is to adjunct, or even guest speak. I go back to talk up accounting at my alma mater about once a year.

    I use Lacerte and have kept an eye on the Gruntworx-equivalent feature , can’t recall the name of it. I haven’t been convinced that it could provide that much value to my practice since I do everything, not having/wanting someone to delegate down to. Like you said, every field has to be checked for accuracy.

  4. Mike on March 25, 2019 at 9:04 am

    Hi Keith, I’m a CPA in my late 20’s and I agree with most of your points here. I’ve seen a big shortage of qualified tax professionals and worry about what this means for the future of the profession. Our firm has had a really hard time hiring or even training qualified tax professionals. We’ve trained a couple of interns only to see them leave the profession to earn more money and for a better work life balance. I also feel like the complexity and time required for tax returns has increased. Our firm has more work than we can handle and we are working on finding an appropriate solution. We’ve never tried Gruntworx, but we’ve tried similar software and there were too many mistakes to be worth it. We haven’t tried outsourcing because we had the same concerns that you’ve experienced. We’ve also been forced to raise prices but we feel like we are pricing out a lot of clients who have been here for a long time. I’m not sure what the answer is but I appreciate you testing out different solutions, because changes need to be made.

    Do you think work life balance is also a big issue? In my experience this a big reason why people have left the profession and why a lot of people aren’t going into it in the first place. Even I’m considering leaving the profession because I feel like I can make more money and can have more work life balance in a different job.

    • Keith Taxguy on March 25, 2019 at 10:23 am

      Work/life balance is a huge issues especially during tax season. It can be very stressful. That is why limiting the work you take on is imperative. It is also why I try things like outsourcing and spread the word on my results.

      More people in the profession would help with the work/life balance issue. More highly trained people would mean more face time with clients.

    • Derby on March 25, 2019 at 4:09 pm

      I’ve had some luck growing my tax practice slowly, plus adding a seasonal tax job with a bigger firm during the season, then doing random gigs the rest of the year. It’s not nearly as much as a full-time accountant job would pay, and my family dislikes the busy tax season but we love the rest of the year when life is flexible and free time is abundant.

      At some point I’ll have to make the plunge into 100% self-employment. I haven’t decided whether to try to partner with an older one- or three- member firm with some support staff and advisors in place, do it myself for a few years. Maybe even try to work an outside tax job while hiring someone with a little experience to do scanning and initial prep as I grow.

      Right now I’m in a Big Accounting Firm on a team that does virtual tax prep. We try to be personal but there is a lot of time spent reviewing the prior year return, reviewing documents for completeness and messaging with the clients to get to know their situation. There’s a lot of benefit to that real client relationship.

  5. Maria on March 25, 2019 at 10:56 am

    Great article Keith. You’ve got me motivated to ask my CPA relative to mentor me in the field.

    • Keith Taxguy on March 25, 2019 at 12:06 pm

      Awesome, Maria!!!

  6. Lisa on March 25, 2019 at 12:06 pm

    What is the best and quickest way for a person to become qualified for a tax preparation position? Do I need to be a CPA? Do I take H&R Block’s course or maybe online courses through Udemy, Khan Academy, or an online university? Going to college to get a degree doesn’t much interest me, but zeroing in on the courses, training, and education I need to become a competent and effective employee has great appeal. After spending the past 35 years as a SAHM raising six children and the past 29 years homeschooling those six children, I am ready and eager to do something else. I have had difficulty finding a job because of very little employment history on my resume. When I do apply, I am granted an interview and then told the position was given to someone with more hands-on experience. At this stage of life, I am not expecting a 40-year career, but I am capable of working hard for a number of years assuming my good health continues. While describing my love of and obsession with details and being organized, a friend suggested I enter the accounting field. Because I am highly interested in the subject, I spend many hours reading and learning from financial blogs and books. Thank you for suggestions on how I should proceed.

  7. Logan Allec on March 25, 2019 at 6:18 pm

    Keith, I must say, this is awesome. I’m a full-time blogger with a CPA license and almost 9 years of public accounting experience on the tax side, and I do get a ton of tax-related inquiries from my blog that generally go ignored. However, it does bother me that I am passing up on what is potentially another stream of income for me in addition to my blog. I really hope to hear about what you learn at that conference on outsourcing. Thank you for doing this.

  8. Jason on March 26, 2019 at 12:06 pm

    A problem I see as someone trying to move from the audit world into tax is that very few are interested in hiring people without much experience. They have more work than they can handle, yet almost no one is hiring anything below the manager position. The few I’ve talked to want applicants to intern for a busy season or two first. Sorry, but I’m not giving up my full-time, benefits-paying position to audition for three months with no guarantee of future employment.

    • Keith Taxguy on March 26, 2019 at 12:24 pm

      That is the Catch-22 of the tax industry. The Code is so complicated now experienced tax professionals command a high wage and there is no room for entry level people. My hope is that I can break this barrier so more people can enter the field more easily.

      • Penny on March 27, 2019 at 2:12 pm

        Amen! There’s the problem – how do we make a tax prep career accessible?

  9. Tripplefiguy on March 27, 2019 at 5:10 pm

    Very insightful and transparent post Keith! It is very commendable to take on somewhat of the guinea pig role with trying out new things and reporting back to your readers to see if it’s useful. I was wondering how your new advertising relationship is going for your blog through Mediavine and how it’s affecting your site? I know you mentioned something about ads in your post and I can relate that the new ads are a little more annoying. Especially the ones that continue to pop up at the bottom of the screen and you have to click a tiny little x to close them.

    • Keith Taxguy on March 27, 2019 at 5:21 pm

      Tripplefiguy, Mediavine is awesome! The old Google/IMS platform was 1/3 to 1/2 of what I earn now. Traffic has also climbed, especially from search engines. And good thing now that I took a $16k kick and another $2k or so is out the door for the upcoming conference in May. The things I plan on trying and reporting back to you on will be more expensive, but as long as this blog is self-sustaining I’m fine with it.

  10. Carly Scofield on March 27, 2019 at 6:37 pm

    I have to say, reading this post and the comments on it I feel very fortunate to have accidentally stumbled into taxes a few years ago. You’re right that it’s not a career that a lot of people pursue. I know the office I work at has experienced what Mike mentioned above; train some one young, they work a year, and then move onto another career.

    Never thought of myself as a tax person but I love research and helping people, tax preparation definitely does a lot to satisfy those interests for me. Even though there’s not the best work/life balance the first few months of the year I feel that the reduced hours the rest of the year balances it out.

    I wonder whether or not Gruntworx would be worth it or not for our very small office. Just today we were talking about how we don’t have a receptionist, we all do tax preparation, so no dedicated data entry or reception for us. I thought a dedicated receptionist at this time of the year would be very helpful, but when they tried that in the past it caused as many or more problems than it solved. I was told that one receptionist in particular would try to answer client’s questions and when they didn’t know the answer they would make stuff up and give out really bad and incorrect information.

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