Offshoring Tax Returns Preparation to India

“The industry will quickly move beyond 1040s. Both the vendors and buyers are at an inflection point on the maturity graph, and we expect tax returns preparation will drive penetration into a wider range of offshored professional accounting services.” – Arun Jethmalani, CEO, ValueNotes

Indian accountants are gaining expertise in preparing 1040s, 1065s and 1120s. ValueNotes estimates that in 2006, approximately 360,000 Returns were prepared by Indian vendors, garnering $40 million in revenues. Shortage of accountants and the grueling tax season are the prime offshoring drivers. CPA firms are discovering that Returns are not only turned around faster, but are also 40% to 60% cheaper.

ValueNotes Research estimates that in 2011, 1.6 million US tax returns will be prepared from India, for $200 million, for a largely 4-month activity. Significantly, Returns preparation is expected to lead the way for a host of other accounting services that can be effectively outsourced to India. These estimates are conservative and the potential is as high as 22 million returns that could come to India.

The offshore vendor landscape is made up of:

  • Captive units of the Big Four: KPMG, PriceWaterhouseCoopers, Deloitte and Touche’ and Ernst&Young
  • American facilitating firms / agencies with or without captives in India: Xpitax, SurePrep, CCH, IFR
  • Large multi-service BPOs in India: Datamatics, MphasiS BPO, OPI
  • Smaller multi-service BPOs in India: PB Tech Impact Solutions, Cosmic Internet Technologies
  • F&A BPOs owned / controlled by Indian Chartered Accountants: GKM Management services, Business Accounting Services, Accountant Anywhere, Enablizer

According to Pratibha K, analyst at ValueNotes, “Facilitators like Xpitax and SurePrep are best positioned to service CPA firms, while Indian CA BPOs are well placed to operate as complete back-offices for accounting firms.”

ValueNotes has recognized three vendors as potential winners in this space: Xpitax, Business Accounting Services and GKM Management Services.

The report provides an overview of the buyer scenario and an in-depth analysis of the Indian vendor space along with profiles of major industry players. The report is designed to help:

  • US CPA firms looking to outsource/offshore
  • Global accounting firms and departments to gain understanding of the Indian vendor space
  • Potential vendors / facilitators to assess opportunities
  • Outsourcing consultants to evaluate and compare the offerings of vendors
  • Returns preparation vendors to assess their competitive environment
  • Venture Capital companies looking for investment opportunities
  • Researchers looking for detailed information on F&A offshoring

This study is based on secondary data as well as extensive interviews with key people at various BPOs (captive as well as third-party) in India.

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Table Of Contents

1. Executive Summary
2. Scope of the study
3. Tax Returns Preparation in the US 
3.1 Industry Structure
3.2 CPA Firms
3.3 Tax Season in the United States
4. Offshoring Perspective 
4.1 Primary Offshoring Driver: Lack of Qualified People
4.2 Secondary Driver – Tax Season Challenges
4.3 Offshoring Tax Returns Preparation: “Need” Rather than an     Advantage
4.4 Who is Offshoring Returns Preparation?
4.5 Legal, Regulatory and Ethical Issues
4.6 Offshoring Tax Returns Preparation: A Relatively New Concept
5. India is the Favorite Destination 
5.1 Plenty of Qualified People in India
5.2 Wage Differentials
5.3 Billing Rates
5.4 Cost Savings for CPAs
5.5 Growing Volumes of Returns Sent to India
6. Tax Preparation Process in India
6.1 Indian Accountants
6.2 Training Process
6.3 Tax Preparer Hierarchy
6.4 Process Flow
6.5 Data Security Measures
6.6 Cyber Security in India
6.7 Factors Limiting Returns Offshoring to India
7. Indian Vendor Scenario 
7.1 Vendor Segments
7.2 The Big Four: Key Attributes
7.3 US Facilitators: Key Attributes
7.4 Tier-1 BPOs: Key Attributes
7.5 Tier-2 BPOs: Key Attributes
7.6 CA BPOs: Key Attributes
7.7 Finance and Accounting Services Value Chain
7.8 Tax Returns Value Chain
7.9 Returns per Employee
7.10 Workflow Tools
7.11 Vendors are Networked to Scale Up Delivery Capabilities
7.12 Offshoring Models
7.13 Vendor Positioning
8. Vendor Fitment Analysis
8.1 The Compatibility/ Fitment Factor
8.2 Fitment Analysis Methodology
8.3 Large CPA firms
8.4 Mid-Sized CPA firms
8.5 Small CPA Firms
9. The Offshoring Decision and Vendor Selection
9.1 Buyer’s Responsibilities: Caveat Emptor
9.2 Buyer Guidelines for Tax Returns Preparation Outsourcing
9.3 Vendor Selection Process
9.4 Service Level Agreements (SLAs)
10. Trends, Insights and Projections 
10.1 Vendors Need Wider Service Offerings to Fuel Growth
10.2 Sophisticated Tax Products will Differentiate Players
10.3 Changes in the Vendor Space
10.4 Vendor Re-sourcing to Gain More Traction
10.5 Delivery Centers in Tier-2 Cities to Drive Further Growth for Vendors
10.6 Book-keeping for SMBs to witness a Bigger Boom
10.7 Tax Preparation Revenues to Touch $200 Million in 2011
10.8 Billing Rates to Remain Stable
10.9 Returns Mix to Evolve
10.10 Manpower Availability Might Limit Growth
11. Company Profiles
Datamatics Technologies Ltd
MphasiS BPO
Business Accounting Services (BAS)
GK Management Services (GKM)
Accountant Anywhere
PB Tech Impact Solutions
12. ANNEXURE A: Table of Vendors
1A: Facilitators
2A: Tier-1 BPOs
3A: Tier-2 BPOs
13. Research Methodology
14. About ValueNotes

Table Of Exhibits

Exhibit 1: Tax Returns covered in the report
Exhibit 2: Tax Returns filed with IRS
Exhibit 3: Break up of Individual Returns Filed in 2006 by Preparer Type
Exhibit 4: Number of CPA Members and Firms as on 31st July 2004
Exhibit 5: Steady Decline in the Number of First Time CPA Exam Candidates
Exhibit 6: AICPA Memberships Trends
Exhibit 7: Rising Entry Level Salaries – Growing Demand for Accountants
Exhibit 8: Staffing Challenges in an Expanding Work Environment
Exhibit 9: Buyer-Returns-Vendor Matrix
Exhibit 10: Summary of Rules Related to Tax Outsourcing in the US
Exhibit 11: Offshoring Tax Returns – Unique Features
Exhibit 12: India SWOT Analyses
Exhibit 13: Wage Comparisons in the Accounting Industry
Exhibit 14: Billing Rates for US Tax Returns Preparation
Exhibit 15: Cost Savings from Offshoring Individual Tax Returns
Exhibit 16: US Tax Returns Offshored to India – 2004 to 2006
Exhibit 17: Factors Driving Tax Returns Preparation to India
Exhibit 18: Indian Accounting Degrees – What They Mean
Exhibit 19: Re-sourcing and Training Process
Exhibit 20: Tax Preparation Pecking Order Offshore
Exhibit 21: Work Flow from the Client to the Offshore Vendors
Exhibit 22: Data Security Measures Employed Offshore
Exhibit 23: Offshoring Does not Increase Existing Risks
Exhibit 24: Vendor Segmentation Criteria
Exhibit 25: Market Shares of Vendor Segments: 2006
Exhibit 26: Who They Are and What They Do – Big Four
Exhibit 27: Returns Prepared Over the Years – Big Four
Exhibit 28: SWOT Analysis – Big Four
Exhibit 29: Challenges and Strategies – Big Four
Exhibit 30: Who They Are and What They Do – US Facilitators
Exhibit 31: Major Facilitators and their Services Offerings
Exhibit 32: Returns Prepared Over the Years – US Facilitators
Exhibit 33: SWOT Analysis – US Facilitators
Exhibit 34: Challenges and Strategies – US Facilitators
Exhibit 35: Who They Are and What They Do – Tier-1 BPOs
Exhibit 36: Major Tier-1 BPOs and their Services Offerings
Exhibit 37: Returns Prepared Over the Years – Tier-1 BPOs
Exhibit 38: SWOT Analysis – Tier-1 BPOs
Exhibit 39: Challenges and Strategies – Tier-1 BPOs
Exhibit 40: Who They Are and What They Do – Tier-2 BPOs
Exhibit 41: Major Tier-2 BPOs and their Services Offerings
Exhibit 42: SWOT Analysis – Tier-2 BPOs
Exhibit 43: Challenges and Strategies – Tier-2 BPOs
Exhibit 44: Who They Are and What They Do – CA BPOs
Exhibit 45: Major CA BPOs and their Services Offerings
Exhibit 46: Returns Prepared Over the Years – CA BPOs
Exhibit 47: SWOT Analysis – CA BPOs
Exhibit 48: Challenges and Strategies – CA BPOs
Exhibit 49: Finance and Accounting Services Value Chain
Exhibit 50: Extent of Focus of Tax Services
Exhibit 51: US Tax Returns Value Chain
Exhibit 52: Other Tax Returns – Vendor Profile
Exhibit 53: Estimated Returns Mix by Vendor Segments – 2006
Exhibit 54: Tax Preparation Employees
Exhibit 55: Workflow Platforms/ Productivity Enhancers
Exhibit 56: Advantages and Limitations of the Seasonal Offloading Model
Exhibit 57: Advantages and Limitations of the Staff Augmentation Model
Exhibit 58: Advantages and Limitations of the Back-office Model
Exhibit 59: Advantages and Limitations of the Captive Center Model Exhibit 60: Critical Factor Ratings (CFR) of Vendor Segments
Exhibit 61: Classification of CPA Firms (Buyers)
Exhibit 62: Unique Features – Large CPA Firm
Exhibit 63: Concerns and Capabilities Matrix: Large CPA Firms
Exhibit 64: Vendor Group Recommendation for Large CPA firms
Exhibit 65: Growth Strategies – Mid-sized CPA Firms
Exhibit 66: Unique Features – Mid-sized CPA Firm
Exhibit 67: Concerns and Capabilities Matrix: Mid-sized CPA Firms
Exhibit 68: Vendor Group Recommendation for Mid-sized CPA firms
Exhibit 69: Small CPA Firms Need to do a Cost-Benefit Analysis
Exhibit 70: Unique Features: Small CPA Firm
Exhibit 71: Concerns and Capabilities Matrix: Small CPA Firms
Exhibit 72: Vendor Group Recommendation for Small CPA firms
Exhibit 73: Identifying Outsourcing Drivers
Exhibit 74: Rating Parameters for Vendor Selection
Exhibit 75: Vendor Agreements: Clauses to be Incorporated
Exhibit 76: Vendor Positioning for Other Services
Exhibit 77: Potentially Offshoreable Returns – 2011
Exhibit 78: Potential Revenues from Offshore Tax Preparation – 2011
Exhibit 79: Projected Growth Pattern in Tax Preparation Services
Exhibit 80: Year-wise Projection Of Returns Till 2011
Exhibit 81: Projected Returns Mix Across Vendor Segments in 2011

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