The ideas from this article are not my own. The information provided is from the more than three thousand corporate tax executives I have written or spoken to about their experiences outsourcing the tax function or keeping a tax team inside the company over the years. Recently, I sent a letter to three thousand tax executives in the Fortune 5000 asking them to answer four survey questions surrounding in-sourcing tax work versus outsourcing tax work to which many responded. This article is about sharing educated tax executives’ valuable experiences on outsourcing tax work versus keeping tax responsibilities in-house.

For over three decades, I have been educated by thousands of tax executives and CFOs through my tax executive search services about in-sourcing versus outsourcing of the corporate tax function. Over the years I watch waves of outsourcing, then bringing all tax responsibilities back in-house. Tax Executives and CFOs are in my ear every day sharing stories with me. What typically happens is that the CFOs and CEOs are convinced by advisors that outsourcing is a good way to trim costs. This article will discuss what leading tax executives, CFOs and Executive Boards have learned, in hindsight, what happens when they outsource tax work and what happens when the tax team remains in-house.

Again, I repeat these are not my own words or ideas. The information provided in this article is valuable because it is an accurate accumulation of the real thoughts and experiences of hundreds of tax executives who were kind enough to respond to my survey questions as long as I did not identify them by name or company. I hope you will find this article informative and valuable if you are contemplating these issues. The goal of this article is to learn from the experiences of others who outsourced the tax work to consultants versus having an in-house corporate tax organization who maintains the integrity of the information for the company.

You will learn from corporate tax executives with years of experience what really happens “in their own words”. Here are the questions I asked and the responses from tax executives of Fortune 500 to Fortune 5000 companies. Your interpretation of the quotes I provide in this article and the decision you make to staff an in-house tax organization or outsourced are up to you. Here are my survey questions and the responses from lead tax executives with U.S. multinationals. As many responses were similar, I have highlighted the top responses for each question presented and note that these  responses are in no particular order.

1. What Corporate Tax Work Is Best Kept In-House?

• The work that keeps you in touch with what your organization does should be in-house.
• It depends on the size of your tax department and commitment of your company to computer systems and tax software
• Basic information gathering and computations of book/tax differences
• Tax Provision, Tax Accounting, Income Tax Accounting should be in-house as no one understand the business as much as the business.
• Mid-sized to large companies should retain all work in-house with exception of specialized projects/audit issues that require outside expertise.
• Keep as much tax work as possible in-house
• Apportionment data gathering and analysis
• Believe tax compliance is best kept in-house, while others think it should be outsourced
• Tax planning should be started by the in-house team so you know they are practical to implement
• Tax Accounting/Financial Reporting mainly due to judgements in certain tax positions and building the supporting documentation to defend said positions.
• Tax Returns and tax provision.  I believe this helps the in-house team stay close to the numbers and have an continuous understanding of the key drivers, which in turn drives planning.
• Federal & State Income and franchise tax returns, research, planning
• ASC 740 Provision work due to the time factor (tight deadlines) and the rapid pace in which the closing accounting data is changing during the close cycle.
• Complex, creative, and high risk
• Compliance is best kept in-house as it keeps the tax department continually abreast of what’s going on with the company.  It allows for a deeper dive into accounts.
• Tax work that can be performed at a lower cost than outsourcing.  We have typically found that some compliance work for income tax and sales and use tax is more economical to do in house.  Day to day research is also kept in-house
• Core compliance and tax provision work.  Core, meaning the work that required company history and systems knowledge acquired over multiple years.
• Projects that are high risk as subject to audit
• Projects that involve subjective analysis and decision making Compliance that can be highly automated in house (data centric)
• Skill set building work from a career path perspective.
• I believe that one must consider the strength of personnel as well as how data is gathered.  It also matters how much compliance, how many jurisdictions, how many entities, etc.
• 1. Compliance:Putting information on forms is the easiest part of tax compliance.  Someone internally still has to retrieve and scrub the data.  And someone internally should be reviewing the returns before filing.  There is a learning curve on using tax compliance systems, but if set up properly, they save so much time.  There is no way an outside firm can do our compliance cheaper than my team.
• 2. Controversy: Outsourcing audit and notices is like handing an outsource firm a blank check.  There is no incentive for an outside firm to close an audit quickly.  If the compliance is done in-house, managing audits is easier.  If compliance is outsourced, the in-house audit personnel must rely on the outsource firm to provide information to support what was reported.  And the outsource firm will bill, accordingly.  If an audit issue arises, then reaching out to an outside firm (I prefer law firms) to provide legal analysis is more efficient and cost effective than trying to research in-house—of course, depending on the complexity of the issue.
• 3. Planning: Understanding the upcoming transaction is best left to in-house personnel, provided that they are experienced enough to identify issues.  If it is a transaction that is complicated, then consulting with an outside Advisor is best.
• Sales and use tax due to data from different sources and not standardized/not all automated
• Core compliance and tax provision work.  Core, meaning the work that required company history and systems knowledge acquired over multiple years.
• Tax Accounting is essential to keep in-house
• Regular tax compliance, audit defense, acquisitions and reorgs and tax planning
• Income tax provision; audit
• Indirect taxes and maybe foreign income taxes
• My preference is to keep the compliance in house as much as possible–better quality product is produced (more accurate and complete), better control over timing and cost is a lot lower.  The reliability of all tax information (returns, provisions, etc.) improves with in house expertise.
• The OECD just issued new directives concerning varying aspects of transfer pricing that will materially change how corporations have to comply. Corporations should bring TP in-house to deal with them.

2. What Corporate Tax Work is Best Outsourced?

• Property Tax mainly because you can get expertise by jurisdiction and for filing appeals.
• Sales & Use Tax and Business Licenses
• Transfer Pricing Studies
• Transfer Pricing Audits
• Tax Controversy
• VAT Filings
• Transactions but now we will do more and we need someone in-house
• Special projects for which the in-house team lacks the skills and expertise
• R&D Tax Credit work should be outsourced
• Cost Segregation studies
• Projects related to significant new tax law changes
• Putting the numbers into the tax forms
• Transaction Cost Analysis
• Tax planning(technical part involving complex tax issues and/or multiple jurisdictions, validation of ideas)
• Given the complexity of the tax code now, international tax compliance
• Tax planning needs to be conducted with external experts in the various countries and not something that should be done completely in-house.
• Indirect tax compliance but only to the extent that the information necessary to file those returns is systematic and “clean data” that essentially can be downloaded directly from the ERP system to a standardized file/report.
• Special projects that require specific expertise such as R&D Tax Credit, Cost Segregation Studies, transfer pricing study, reverse sales & use tax audits, etc..
• Special projects and certain standalone parts of the return which may require specific expertise such as the R&D credit or transfer pricing documentation for example
• Special projects and where value can be gained from outside expertise, as well as when additional resources are needed in peak-load periods.
• Outsourcing can be an excellent bridge when lacking scale or resources, skill development, etc. until the in-house staff are able to absorb or learn.
• Complicated compliance and research driven audit issues
• Sales Tax, International Information Reporting (Forms 5471, 5472); property tax payment & rendition & protests
• Routine tax compliance can be outsourced or co-sourced with in-house personnel partnering with outside tax service providers
• R&D studies, E&P studies, Cost segregation studies–Subject matter experts at some firms may have an efficiency and expertise to complete these projects effectively in a cost effective manner because of their specialization
• Routine, repetitive, and low risk
• Very technical work like transfer pricing and R&D credit documentation and calculation
• Tax planning that requires specialized knowledge acquired over focus work on many clients over the mid to long term.  Examples:  Interest netting, optimized cash repatriation, M&A tax due diligence.
• Niche or specialized knowledge projects, one-off projects
• Compliance (primarily state transaction tax-related) where each state has a different format required that frequently changes
• Low value, low risk
• Highly seasonal where it doesn’t make sense to hire permanent staff year round to manage the peak
• Tax planning/research/entity structuring, estimated tax calculations and payments; foreign tax return preparation, transfer pricing studies.
• Preparation of the tax compliance, ideally certain repetitive areas (fixed assets, various indirect taxes)
• We outsource work that has a % fee, such as WOTC credits, property tax reductions.  Co-sourcing audit issues and transaction structuring ensures in-house personnel understand the transactions.  Outsourcing largely depends on how much effort it takes for in-house personnel to provide information to the outside firm.
• Lower value or more transactional tax compliance. For example, property tax is an area we found could be outsourced very economically.
• One time specific complex and unusual tax issues regarding compliance, audit defense, acquisitions and reorgs and planning.
• Sales & use tax compliance, an economist for transfer pricing
• Complex tax planning and implementation of those plans.  Very expensive to have in house expertise that can plan and implement complex transactions.  Also tax filings where expertise is not available locally  (i.e. foreign country tax filings for foreign subsidiaries)

3. What Are The Biggest Issues Encountered By Corporations Who Outsource Tax Work?

• Outside Consultants lack of knowledge of the business. If you do not provide sufficient or complete data, the end product is likely incomplete and inaccurate.
• High quality of work and dependency on outside consultants
• High turnover of consultants at firms, maybe you get same person 2-3 years in a row
• Scope and budget, timing of deliverables, chasing service providers for finished project, memos
• Outsourced work requires a learning curve of the business, and eliminates a majority of tax planning considerations and opportunities.
• Lack of control of information when needed quickly
• Biggest issues around COST CREEP and timeliness of deliverables
• Big Four firms, in particular for me, have been notoriously last minute on deliverables
• Biggest issues are cost and project management. Cost because you need to do more to get your boss to approve your outsourced work (which typically requires a ROI analysis).
• You then need to Project Manage the outsourced work to stick to the “cost estimate” you provided and to make sure you keep the work within the scope of the project as originally planned. If you do not Project Manage the work closely, you will look bad to your boss and have to beg for additional funds to pay for it.
• Timeliness of information requests, turnaround times and not having much time to review the information before due dates of the tax returns, errors causing redrafts.
• Outsourcing, it seems everything has to get approved at the next level or “national office” which adds more fees and time to the project
• Sourcing of information (how will this be done, typically need to retain in-house tax team members to organize and collect data)
• Lack of judgement for key positions taken
• Generally letting employees go as a result of outsourcing, companies will find that those employees were also involved in many other (unplanned) projects which now have to be handled by someone
• Fees generally run up over time and may negate original savings objectives.
• Scope of the work being done for the price of the project
• Fees are often too high and over budget
• Transferring documents via email, Dropbox, etc., communications of requests and replies, minimizing fees of third party
• Lack of intimate knowledge of the organization causing somewhat of a disconnect from service providers perspective
• Outsourcing does not remove accountability of in-house tax professionals who must manage and own the work of service providers
• Transferring documents via email, Dropbox, etc., communications of requests and replies, minimizing fees of third party
• Communication, getting back to us in a timely manner
• Quality of work; taking ownership of work as if it’s your own fiduciary responsibility
• Disruption caused by constant change of personnel
• Sometimes continuity of service provider personnel can be an issue with higher staff turnover in some Big 4 shops.  Quality control is critical.  Fee escalation and high fee rates.
• Lack of timely communication.  Being kept up to date on challenges by taxing authorities.
• Communication between data providers and O/S resource
• Work requiring a specialist on a particular issue, say a specific issue on Georgia sales tax.  It is this type of work that it is too expensive to keep expertise in-house.
• Lack of understanding of the company as a whole.  This is where it is critical for the tax department to have institutional knowledge of the company and be able to deliver relevant facts to consultants.
• It is quite expensive.  Determining expectations between what work we do or information that we provide compared to what the outside firm provides.  Helping management see the value of spending the money for outsourced work.
• In experienced consultants that lack company knowledge and sources of data.
• Audits or re-insourcing of long term outsourced arrangements, where the internal people have turned over and no longer have the detailed knowledge of the project.
• Managing the outsourced work.  Gaps sometimes come to light well after the fact – whether caused/created by the outsourcer or caused/created by an internal business change where the impact isn’t realized and brought to the attention of the company doing the outsourced work.
• The timing of provider responses; Providers are less knowledgeable about the business than those within the organization.
• Ensuring that the outsource provider has qualified personnel on the account
• We have had limited success using outside firms for compliance.  These types of engagements surround short-year returns for pre-acquisition periods.  The biggest issue is the quality of the work
• Still require a strong internal person to gather data to deliver to outsourced provider and things tend to always be out of scope requiring additional fees
• Inaccuracies
• Losing control of the work and related knowledge base
• In experienced consultants that lack company knowledge and sources of data
• Tax planning that requires specialized knowledge acquired over focus work on many clients over the mid to long term.  Examples:  Interest netting, optimized cash repatriation, M&A tax due diligence
• Transitional hand-off be it on engagement startup or when our data is transferred periodically. The outsource provider simply does not know the company, our systems, our data as well as your in-house people and mistakes and misunderstandings happen.
• Problems occur because rates per hour are very high and a lot of times the work expands beyond the agreed scope and the out of scope work is done without prior approval. This can lead to very strained relations because of unexpected fees and arguing about fees. Also, accounting and law firms are trying to get the most money out of their clients as possible. When they bring up issues often they paint a more serious picture than what the situation actually is. Often times there are no issues but to them there are issues and they are usually big serious issues. They use fear to make money with you. Outsourcing can work well when someone in house is extensively managing the consultants.
• Record retention, expertise, turnover, response, and accountability
• Still need an internal teammate to coordinate and provide direction and data
• Lack of ownership by the outsourced company leads to many mistakes
• Constant turnover at the outsource company – leads to inefficiencies which defeat the time savings of outsourcing
• No historical knowledge of the company due to people may rotate to different role, new team is introduced from time to time, lack of information/knowledge transfer from the third party provider
• Quality, Timeliness, Accountability, Lack of Continuity/Institutional Knowledge
• Timing:  As a client I want all of my compliance completed early to allow us to true up our accounting provisions early in the year.  This is important so that we have as accurate re-forecasts as possible throughout the year.  However, the accounting firms ignore the client timelines and focus only on meeting the statutory filing deadlines.  Hence the compliance work that I outsource is constantly delivered late which prevents us from meeting goals for accurate forecasts.
• Quality:  There is never enough time to review properly or make changes since it delivered just before the deadline.  Compliance work that is outsourced is not an accurate/quality is not as good as a qualified in house team would produce.  There is not enough staff continuity at the firm where the outsourced work is completed and they are rushing to complete everyone’s work and so the quality suffers.
• Cost:  It’s too expensive.  For all domestic work, I can hire year round expertise in-house for significantly less than it costs to outsource.
• Audit support:  When compliance work is outsource then you also have to outsource all audit support which increases the cost again

4. How Are You Currently Handling The Corporate Tax Provision?

• Preparing tax provision in-house using excel
• Internally developed spreadsheets
• Tax Prodigy is the only one we are considering
• Corptax
• LongView
• Onesource
• Looking at software
• Historically we used excel but will implement a software package for 2019.
• We do our tax provision in-house.  We use Excel schedules at the moment due to our reporting.  The Excel schedules are set up to mimic the reporting packages we are required to complete.  Do to the complexity of the packages, we have not yet automated these within our CORPTAX system.

5. Additional Information And Comments

• When I started with this company, income tax was outsourced, sales and use tax was somewhat being reported, business licenses were not being researched and property tax was outsourced. We brought income tax back in-house and have been much more successful in correct return reporting and management of deferred taxes. We were formerly always sat the mercy of the outside preparer with never enough time to properly review. We have looked at outsourcing sales and use tax but have not found a solution that would work better than internal staff (same with business licenses).
• If you get too comfortable with outsourcing, things often get overlooked.

If you have read this article and would like to add to the list, please send your thoughts directly to kat@taxconnections.com and I will continue to add your responses and maintain your privacy. Please just list number and thoughts next to the question number you are responding to on this tax executive survey.

Please contact me if you are now smartly planning for a transition and have a lead tax executive role to fill as this is my specialty in executive tax search services. You can also just call me directly anytime at 858.999.0053 X100. You can also text me on my cell phone at 858.232.4415 to request I call you. I respond 7 days a week.