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Newest outsourcing wave: Your tax returns

Twelve-hour shifts and seven-day work weeks exhausted accountants at Rucci, Bardaro & Barrett. But most painful for Chris Barrett was the annual "Easter parade" layoffs of seasonal workers and interns after April 15.

So Barrett, a partner in the Malden, Mass., firm, will send about 150 of his 600 clients' tax returns this year to India, where recent college graduates will prepare Americans' 1040s. Barrett won't hire or fire any extra employees, and the average turnaround time for completing returns is already shrinking.

"We're always looking for ways to reduce the pressure," Barrett said. "It frees us up to provide financial and estate planning, which we didn't have time for when we were too busy filling out returns."

Tax experts say Indian chartered accountants the subcontinent's version of certified professional accountants will prepare 150,000 to 200,000 returns this year, up from about 20,000 in 2003 and only 1,000 in 2002.

Critics say outsourcing short-shrifts U.S. accountants and exposes unwitting Americans to identity theft, which the Federal Trade Commission ranks as one of the country's fastest-growing crimes.

On Thursday, U.S. Sen. Dianne Feinstein urged major U.S. financial services and accounting firms to be cautious about outsourcing sensitive work such as tax preparation.

"I am gravely concerned that consumer data is being sent overseas without proper safeguards," the California Democrat wrote to chief executives of Citigroup, Bank of America, Ernst & Young, Equifax and TransUnion.

But executives argue they can't afford to ignore the trend.

The average accountant in India makes $250 to $300 per month, compared with $3,000 to $4,000 in the United States. Many firms say they'll use the savings to undercut competitors or add premium services like retirement planning. They also say Indian workers will be needed to replace droves of retiring baby boomer accountants.

"It's going to change the paradigm in which professionals prepare taxes, maybe even more than the way TurboTax (software) changed the way individuals did their taxes," said Dave Wyle, head of Newport Beach-based SurePrep, a software and consulting service with 300 Indian accountants in Bombay and Ahmedabad.

Since the late 1990s, accountants have sent bits and pieces of tax work to India lists of itemized deductions or schedules of profit and loss primarily for multinational companies and U.S. citizens living abroad. But in the last year, they've migrated thousands of individual returns to India, where colleges graduate about 50,000 accounting majors each year.

Ernst & Young, which employs more than 1,000 workers in Bangalore, will prepare 15,000 of 100,000 tax returns abroad. Most are corporate returns. About 4,000 will be for U.S. citizens living abroad, and about 1,000 for U.S. residents, spokesman Ken Kerrigan said.

KPMG, which outsources returns of U.S. expatriates, is "considering" expanding the practice to the returns of U.S. residents, spokesman Greg Dvorken said.

PricewaterhouseCoopers and H&R Block have no immediate outsourcing plans. But H&R's mortgage subsidiary, Option One Mortgage, is sending data entry work to India, and H&R is studying whether outsourcing has "other possible advantages," spokesman Bob Schneider said.

Critics say risks outweigh advantages.

Although firms have yet to report identity theft or fraud that stemmed from outsourcing, privacy advocates cringe at the notion of scanning and transmitting W2 forms along with the Social Security numbers and salary information on them across about a dozen time zones.

Democratic presidential front-runner John Kerry wants overseas call centers to disclose their location the New Economy version of the "made in America" label. Some consumer groups and privacy advocates say accountants should do the same.

"If we believe in the ideas of customer choice and the market, disclosure should be the starting point," said Chris Jay Hoofnagle, associate director of the Electronic Privacy Information Center. "From there we could explore whether the outsourcing nations have adequate data protection."

Ernst & Young customers must sign a document acknowledging that a foreign accountant may work on their return. But most firms don't make such disclosures.

Accountants outsource by scanning clients' W2s, 1099s, K1s and other records and sending them to Indian workers through strongly encrypted e-mail or private networks.

Indian workers complete forms obtained from IRS Web sites and transmit them to American accountants, who review, print and sign the documents, thus assuming legal liability.

To protect privacy, tax consulting firms in India SurePrep, Datamatics, Xpitax, Outsource Partners International and other firms usually have armed guards outside offices. Entry is restricted by microchip-embedded swipe cards.

At SurePrep, bags and briefcases are prohibited. Computers have no printers or devices for removable storage like floppy disks. Internet use is restricted to internal sites and tax research.

Bruce Carlin, managing partner at Worcester, Mass.-based Carlin, Charron & Rosen, plans to outsource about 2,000 returns twice as many as last year and a third of this year's totals. Unless the client asks, the firm does not disclose that it outsources with Datamatics, Carlin said.

"The vast majority of people understand what's going on," Carlin said.

A 1040 prepared in India can cost as little as $75 including labor, software and hardware costs. In the United States, it would likely cost as much as $150, Carlin said.

Michael Gray, a San Jose CPA whose firm prepares about 200 returns per year, worries that rampant outsourcing will limit the experience of American accountants and jeopardize the profession.

"If we're sending the bulk of this work overseas, then we're not going to have the jobs for Americans in the traditional training ground for CPAs," Gray said. "We may see a brain drain in our industry."

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