Tax

8 questions to ask about a tax outsourcing partner

In today’s challenging economic climate, companies are increasingly asking their CPAs for ways to conserve cash, minimize taxes and bring more revenue to the bottom line. You’ve no doubt been asked by clients if they qualify for valuable tax credits for things like keeping employees on their payroll during COVID, or hiring disadvantaged workers, making their buildings more energy efficient, investing in certain types of research and development, or even if they can accelerate depreciation on certain components of their buildings or real estate assets.

While it’s tempting to say yes to high-margin advisory work, you may not be sure if a client qualifies, much less how to file correctly for the credit or incentive. While opportunities for tax savings can be substantial, the rules are complex and the penalties for filing incorrectly can be steep. 

Taxpayer penalties can include up to 25% of the taxes due for either failure to deposit or timely pay taxes. The taxpayer could also face a 20% accuracy penalty for substantially understating the tax due. Also, interest accrues on penalties, which adds to the taxpayer's potential exposure. What’s more, if applicable, the tax preparer can be subject to preparer penalties — up to 75% of the income derived from the return — for understating the taxpayer's liability. 

Finally, there’s the danger of missing out on valuable tax savings opportunities. For instance, many don’t realize that taxpayers can still qualify for the Employee Retention Tax Credit even though that provision expired in late 2021.

Bottom line: There’s no shortage of solution providers anxious to help you. Just make sure to do your homework on them first. You deserve a partner that will not only produce the best possible results for your clients but will reflect well on you as a CPA and reinforce your role as a trusted advisor.

Here are eight important questions to ask when choosing a partner to help you and your clients with specialized tax credit studies:

Do they have the right credentials?

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Tax credit and incentive studies can be complex. Providers need the right experience, technical expertise and credentials for a successful outcome. Some providers hide their high employee turnover rate by not listing personnel on the website. Or they inflate titles to seem like a bigger, more prestigious firm. Look for personnel with backgrounds in engineering, technology, construction, manufacturing and industries that align with your client base. Also, see if the provider’s personnel have accounting or legal credentials that would enable them to stay up to date and properly interpret the latest accounting and tax rules and regulations.

Do they have a track record of successful audit defense?

Look for a provider with longevity and experience so you can be confident they’ll be around to back up any studies they perform. Our study of CPAs, CFOs and small-business owners last fall found that 90% of respondents were not worried about showing a strong ROI from tax credit studies. Instead, they were concerned about audit risk and other damage as a result of pursuing tax credit studies. In fact, “Audit defense claims not meeting expectations” was one of the five biggest reservations they had about working with an outsourced partner.

A worst case scenario would be a client receiving a 100% disallowance on a claim. Essentially it means the examiner found foundational disqualifiers, or representation was not responsive either in timeliness or quality with respect to addressing audit requests. A good outsourcing partner can help in such cases by reviewing audit correspondence and documentation, and by communicating directly with the tax authorities to resolve such issues if they’re procedural.

Will they support your position as the clients’ trusted advisor?

It’s important to select a partner that respects the close relationship you have with your clients and shares your commitment to advancing that role the right way. Do they belong to and collaborate with respected public accounting associations? Or is their involvement seemingly limited to industry trade associations? Belonging to associations that have a nationwide presence is important for keeping abreast of various developments regarding federal and state credits, which areas of various credits are coming under scrutiny, and if there is any case law is on the horizon.

Is their fee structure transparent?

Some providers may find ways to upcharge clients by adding hidden fees or holding unnecessary meetings to drive up billable hours. Look for a provider that will give your client a transparent proposal that includes a fixed fee prior to a commitment from your client.

Are they interested in developing a long-term relationship with CPAs?

A CPA should know their clients’ business well enough to advise them on strategic business decisions throughout the year, not just at tax time. They need a partner that delivers the same value for their firm. It should be someone who is not only highly technical, but who has industry knowledge to help you deliver tailored solutions to your clients. Be careful about trusting firms that aggressively market tax credits studies to industry players and that circumvent the relationship that exists between a company and its CPA firm.

Will they be an asset for growing your tax advisory and consulting business?

Any CPA firm interested in growth should be actively seeking ways to expand their advisory capacity beyond compliance work. Advising clients about tax credits is a unique opportunity for you to bring value to the relationship. A true partner will be able to counsel you about how to find viable candidates within your current book of business and help identify opportunities in which tax credits can be used to develop new clients.

Do they respect your time?

Too often providers get so wrapped up in how they do business that they forget to ask what works for you and your clients. Efficiency and flexibility are important characteristics when looking for a new partner to perform R&D tax credit studies. The truth is the cost of a tax credit or incentive study is not only monetary, but time-based. Time is not a resource to squander by working with an inexperienced and inefficient solution provider.

What is their online reputation?

Does a web search of the provider’s name turn up any red flags? How are their Google reviews? Are there any legal battles or other news items that may not align with your firm’s culture? Perform due diligence to learn all you can about the solution provider you’re considering. After all, you are putting your reputation on the line when bringing on a new partner that will engage with your clients.

Two-thirds of tax preparers we surveyed (64%) believed they had clients who could qualify for valuable tax credits. However, only one in four (23%) said they were offering services to their clients. This represents a substantial opportunity for an untapped market.
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