Tax departments evolve: companies embrace outsourcing for compliance

Discover why companies are embracing outsourcing and co-sourcing for tax compliance.

In brief

• The TCJA has intensified tax compliance challenges, prompting companies to outsource and co-source to manage complexities and optimize resources effectively.
• Tax departments face a talent shortage, combined with rising complexities, demands a focus on technology and data management skills.
• Outsourcing and co-sourcing tax compliance allows companies to potentially reduce operational costs while maintaining control over processes to enhance efficiency and quality.

Ernst & Young LLP contributors to this article include Caroline M Flowers, Senior Manager – Global Compliance & Reporting, and Jeana Augello, Senior Manager – Global Compliance & Reporting

Introduction

US companies are increasingly turning to outsourcing and co-sourcing their business tax compliance functions. According to the 2024 EY Tax and Finance Operations survey (TFO Survey), fifty-four percent of tax department leaders say they are rethinking their operating models and respondents say co-sourcing is the most important change they’re considering. This shift is driven by growing complexities in tax regulations, a shortage of skilled professionals, internal budget constraints and rapid advancements in technology. By leveraging an outsource or co-source model, tax departments gain flexibility, access to subject-matter professionals, operational efficiencies, risk management, potential cost savings and access to leading-edge technology. Many tax executives also find comfort in knowing their tax advisors are directly involved in the preparation or review of their company’s tax returns – that a trusted firm is “in the boat” with them, so to speak.

This article explores the varying ways outsourcing and co-sourcing can enhance the tax compliance function while leveraging cost-effective solutions, elevating the role of tax within the organization.

The impact of TCJA and the COVID-19 pandemic on tax compliance

The Tax Cuts and Jobs Act of 2017 (TCJA) prompted tax departments to reevaluate their cost structures and consider outsourcing tax compliance. The TCJA introduced new complexities that required professionals to upskill, produce more and increased the need for costly technology investments. The confluence of these factors left a gap for many departments that was impossible to bridge without assistance from external consultants.

The COVID-19 pandemic further accelerated this trend. Rising technology costs, a shrinking pool of tax professionals, constrained budgets and new tax relief legislation created unprecedented challenges for tax departments. As a result, many companies reassessed their tax functions, leading to a surge in outsourcing and co-sourcing arrangements to improve efficiency and optimize the use of their resources.

The benefits of outsourcing tax compliance

Outsourcing tax compliance can alleviate many challenges faced by internal tax departments, allowing in-house teams to focus on strategic initiatives, such as tax planning, controversy and other high-value priorities.

When a company outsources its compliance to the EY organization, EY experienced tax professionals manage the process from start to finish, facilitating accurate tax computations and identifying potential cash tax savings. EY has made significant investments in process optimization, artificial intelligence, data analytics and standardized reporting, all of which enhance the quality and efficiency of tax return preparation.

The outsourcing model can vary in scale, depending on the size and skill set of a company’s tax department and the complexity of their tax returns:

• Large organizations without an internal tax function rely on EY for day-to-day tax compliance and advisory services.
• Companies that maintain a small in-house tax team may collaborate with EY to gather financial data and address business-specific tax questions.
• Large tax departments also choose to outsource their compliance to allow them to focus on other priorities, while delegating the routine management of compliance to an external service provider.

By outsourcing, tax departments of all sizes and complexity gain access to the deep bench of EY resources, advanced tax technology, including ONESOURCE Income Tax (OIT) and peace of mind, all while reducing operational costs and limiting compliance risks.

The flexibility of co-sourcing

Co-sourcing provides a more collaborative alternative to outsourcing, offering tax departments potential cost savings while still leveraging EY experience and resources. This model allows companies to maintain control over certain aspects of tax compliance while outsourcing specific components to EY.

A common co-sourcing arrangement involves the company preparing tax computations in-house, while EY reviews and integrates them into the final tax forms. This approach provides the benefits of both quality control and external knowledge without the need to hire and train additional staff or invest in expensive tax software. As tax departments evaluate their talent, process and technology for each component of their tax compliance responsibilities, they have additional co-sourcing options, including:

• Outsourcing only the federal tax return preparation, while handling state and local returns internally.
• Outsourcing the state and local returns and keeping the preparation of the federal tax return in house.
• Outsourcing the preparation of the international forms and computations, e.g., Forms 5471, GILTI (Global Intangible Low-Taxed Income), BEAT (Base Erosion and Anti-Abuse Tax) and the foreign tax credit, while the company prepares the rest of the federal and state and local tax returns.

Co-sourcing gives tax departments the flexibility to be as involved in the tax return preparation process as they choose, while allowing them to focus on higher-value priorities such as tax planning, transactions and controversy management. Companies can adjust their co-sourcing arrangements as needed. Priorities change, personnel can go on leave or your business has become more complex. Whatever the reason, EY would work with you so that we have the most advantageous co-sourcing relationship for our client’s needs. At the same time, they benefit from EY tax technology, tried and true process, and review by leading class tax professionals.