For many companies, tax accounting is not a core competency. However, even if you don’t have qualified personnel on staff, keeping sufficient controls over your tax processes is of critical importance. Recently enacted laws have put more pressure on company executives to certify that their company’s accounting reports are accurate, says Tom Tyler, CPA, a partner with Crowe Horwath LLP in its Dallas office.
“One of the most common reported weaknesses is in the area of tax accounting,” Tyler says. “Partnering with a firm that has the resources and does this day in and day out can help a company avoid a material weakness.”
Smart Business spoke with Tyler about how partnering with an outside agency to handle tax functions can help you stay compliant and keep your business focused on what it does best.
Why are companies outsourcing their tax function?
The outsourcing of a company’s tax function is due first and foremost to the fact that tax management is increasingly complex, particularly if you are operating in multiple states or multiple countries. Also, considering the many types of taxes — income, payroll, property, sales and use, value-added, transfer taxes — it is important to have expertise in each of those areas, which is not often found under one roof.
Furthermore, outsourcing your tax function frees up time that allows employees to spend their energy on issues related to the business’s core competency. Those who handle tax management are typically responsible for other aspects of a business, as well, so taxes don’t get all of their attention. In addition, some companies don’t want to hire additional in-house staff for what some perceive as a compliance function.
Outsourcing often refers to a job function performed outside of a company’s home country. Is this the case with tax outsourcing?
While some might see tax outsourcing as moving the preparation of tax returns overseas, that’s not really the most common case. Although it is certainly one form of tax outsourcing, what is more often meant is engaging a competent third-party provider to perform three related functions or some part of those functions: accounting for income taxes, tax planning and annual tax compliance, or tax return preparation. All of those activities are done domestically, not overseas.
Co-sourcing is another option in which specific tax areas are handled by a third-party provider, for example, sales and use taxes, or real and personal property taxes. Companies that have an in-house tax function, however robust, are often in a co-sourcing relationship for some piece of their tax planning or preparation.
Why would a company choose to outsource the accounting for income taxes?
For public companies, the answer can be found in the 2002 Sarbanes-Oxley Act. SOX requires both the CEO and CFO to certify that a company’s annual and quarterly reports filed with the Securities and Exchange Commission fully comply with certain requirements of the Securities Exchange Act of 1934 and that the reports fairly present the company’s financial condition and results of operations.
In addition, SOX requires companies to test their internal controls over financial reporting and correct any deficiencies or report them as material weaknesses. Tax accounting is an area most commonly reported as a weakness. To strengthen this area and ensure that your company remains in compliance, work with a firm that focuses on tax accounting as its primary business.
Privately owned companies can also benefit from outsourcing the accounting for income taxes. In the case of a growing business in which key employees need to focus their efforts on markets, product lines and other strategic issues, it makes sense to look externally for this expertise.
Accounting departments might be stretched thin and the CFO or controller is likely to wear many hats. The time that they can devote to the tax area may not be sufficient, and outsourcing can remove a time-consuming task, allowing efforts to be focused on the most strategic issues related to a company’s core competencies.
Turnover can cause a company to seek an outsourcing solution, particularly when the departing employee was the most qualified to handle this task. Temporary absences could also create gaps in expertise that could be filled by outsourcing.
When should a company consider outsourcing?
A company should consider outsourcing when it doesn’t have the technical skills or the resources to do the job in house, or when the costs to have a fully staffed tax function outweigh the benefits. In addition to salaries, consider the cost of benefits, software, hardware and training, among other things. The software costs alone might be prohibitive and at times can be as high as the cost of outsourcing.
Co-sourcing makes sense when a company doesn’t possess the specific skill for the function it wants to co-source. For example, a company that is acquisition minded might co-source the tax planning and compliance associated with acquisitions to a firm that has expertise in the mergers and acquisitions arena.
A company with personnel who possess the skills and technical knowledge regarding income taxes might not possess the skills to adequately comply with and plan for personal property taxes.
Tom Tyler, CPA, is a partner with Crowe Horwath LLP in the Dallas office. Reach him at (214) 777-5250 or firstname.lastname@example.org.
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