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8 Questions You Need to Ask When Interviewing Tax Outsourcing Providers

10/15/20 9:00 AM

Three months ago, firms – and exhausted tax staff – celebrated the end of an extended busy season. However, celebrations may have been a little muted as many immediately turned their eyes towards extension season. And now, even as extension season ends, forward-thinking firms are looking towards the 2020 busy season. As Managers and Partners begin to plan tax strategy meetings, one of the topics typically discussed is the value of utilizing tax outsourcing services, and with good reason. Firms who utilize tax outsourcing services see an average increase of 8-15% in returns completed during tax season (based on an analysis of firms utilizing XCMWorkflow®).

Whether your firm routinely utilizes a tax outsourcing company or is considering outsourcing services for the first time, there is a necessary level of discovery that needs to happen before the contract is signed, but sometimes firms aren’t sure what exactly to ask. It can be difficult to verbalize the values and actions that make your firm a success, especially if tax outsourcing is a relatively new part of your tax strategy. While I can’t tell you what your “secret sauce” is, I can help with what to ask outsourcing companies to set yourself, and your potential partner, up for success.

With that in mind, here are eight questions you should ask potential tax outsourcing providers before signing on the bottom line:

What types of tax prep software are they familiar with?

This question may be basic, but it’s important. There’s no point in continuing discussions if your firm uses a tax prep software the tax outsourcing company is unfamiliar with. An experienced outsource provider will have teams familiar with and specializing in a wide range of tax prep software. They should be able to provide you with statistics around the volume of returns prepared using your preferred system.

Xpitax® Outsourcing Pro Tip: ask for a list of the various tax preparation software types that the staff have experience with, rather than asking if they are familiar with your preferred software.

How are workers vetted, and are they employees or subcontractors?

Ideally, any potential tax outsourcing provider should have their new hires go through the same process that your internal employees undergo during the hiring process. When discussing the external staff working on your returns, ask questions with this in mind. At a minimum, every hire should have a background check done, with particular attention paid to any financial red flags. Also, ask if employees/contractors sign a non-disclosure agreement, and if so, what are the terms?

Xpitax Outsourcing Pro Tip: Many outsourcing firms have subcontractors on their payroll – it’s easier to flex capacity as needed. However, with employees, there is a greater sense of loyalty and a single set of priorities, one reason that Xpitax does not utilize subcontractors.

How do they protect client data, and what are their contingency plans?

Do employees sign a non-disclosure agreement? What are their network security measures? How is the tax outsourcing provider preventing someone from removing or copying confidential client data?
Whether working from home or in the office, your outsourcing partner must have a plan in place to protect confidential information. We learned during the COVID-19 shutdown that contingency plans are imperative to maintaining momentum during periods of turbulence. Having existing security protocols in place to protect client data made the transition easier.

Xpitax Outsourcing Pro Tip: Ask about where your data is housed, as well as any redundancies. Xpitax houses all client data, and a fully redundant infrastructure and off-site back-up, in the United States.

What types of firms are they working with?

While they may not provide you with a client list, any potential tax outsourcing partner should be able to give you information regarding the general firm size and region – possibly even state, depending on privacy agreements. State returns can quickly become as complex as federal, so having an outsourcing team that understands the states you work makes a difference.

Xpitax Outsourcing Pro Tip: If your firm has a specialized focus, make sure that any potential outsourcing partner has experience with your niche – especially if your niche has particularly troublesome tax laws that require finesse and a high skill level. Xpitax has experience in a wide range of markets throughout North America, and our staff often work in highly specialized and niche markets.

What types of returns are they processing, and what level of expertise does their staff have with various return types?

When looking for a tax outsourcing partner, you need someone who is already an expert. If you had the capacity to deal with staff that needs hand-holding and coaching, you’d bring in interns and first-years, not hire a tax outsourcing company. While discussing return types, don’t forget to ask how much experience staff and managers have, both in terms of tax seasons and experience with various return types. Any reputable tax outsourcing provider should be able to provide that information without concern. For example, Xpitax processes over ten different return types, and managers average 14+ years of tax experience.

When interviewing potential providers, ensure that they have staff that can handle any and all return types that your firm files during tax season. Many firms think outsourcing is only suitable for 1040’s when the best outsourcing vendors can handle a wide range of return types.

Xpitax Outsourcing Pro Tip: Ask for a list of the returns that the potential provider has experience with, rather than asking if they are familiar with a specific return type. Not only will you get a more honest answer, but it may spur you to consider outsourcing additional returns beyond the basic 1040 or 1065.

What level of volume can they handle?

Your firm should have discussed its tax outsourcing strategy during its tax planning process and have some idea about the extent of the tax outsourcing services the firm is interested in. Whether it’s sending a predetermined number of returns, outsourcing all of a specific type of return, or utilizing the outsourcing partner as a back-up once the firms’ staff has reached max capacity, it’s essential to communicate that clearly with any potential outsourcing provider.

You should also have confidence in your provider’s ability to provide additional capacity if your tax season performs above projections. After all, part of the reason you are utilizing a tax outsourcing provider is to relieve some of the compression issues your tax staff suffers during busy season.

Xpitax Outsourcing Pro Tip: Ask about average volume over the last 2-3 tax seasons to get a clearer picture of their surge capacity. They should be able to provide you with averages on a per season and per firm basis. For example, the average Xpitax client outsources between 200-250 returns. Prior to COVID-19’s appearance, Xpitax was on track to process 30,000 returns for its clients in 2019.

What is their average turnaround time?

Your outsourcing partner should meet or beat firm standards for turnaround time, especially if speedy service is one of your firm’s market differentiators. For example, Xpitax maintains a 24-48 hour turnaround time unless it is a highly complex return.

Xpitax Outsourcing Pro Tip: Don’t accept a blanket average for turnaround time. Make sure that, for every type of return your firm may outsource, you have a projected turnaround time.

What level of visibility will you have into the progress of a return?

When requesting an update on their return status, clients don’t care where it’s being prepared, or by who – they want an answer, and they want it now. Ask what level of visibility your potential tax outsourcing partner can provide – and it shouldn’t be a daily emailed spreadsheet with a status update, or, “call us to find out.” Customer service is an integral part of the client relationship. Making them wait 12-24 hours for an update on their return usually doesn’t go over well.

Xpitax Outsourcing Pro Tip: Look for a provider with an automated workflow who will provide your firm access to that workflow so that your staff has on-demand and real-time visibility into the status of its return.

When the firm finds a good fit in a tax outsourcing partner, that partner can feel like an extension of the firm – just in a different location. When interviewing potential tax outsourcing companies, ask these eight questions to ensure that you both are a good fit, that you will be able to operate at peak levels of efficiency during busy season, and that your firm will continue to provide high-quality returns for your client, regardless of where the return is processed.

Ray Barlow

Written by Ray Barlow

Ray is XCM’s Senior Vice President of Xpitax Tax Outsourcing and CAS Remote Staffing Services, helping public accounting firms optimize client service, balance workload compression, and maximize profitability His 30+ years in the tax, accounting, and finance industry include years spent with Wolters Kluwer, Thomson Reuters, and Sage.