Wash your hands and put your lab coat on. Today's experiment: Outsourcing an income tax return.

Outsourcing was presented to me as a cost savings alternative: wages in India are comparatively low to wages in the U.S. So, I've tried outsourcing with QuickBooks accounting and I've been pleased. Cost savings do result.

But what I discovered is that I am also saving time. And I have even less time than I do money (as for lack of money, I think that has something to do with having two teenagers and an eleven year old...)

And I can use more time very productively: marketing, meeting with my best clients, staff training, going to the beach more often, etc.

But outsourcing tax returns? Thinking out loud, it would seem that outsourcing tax returns would produce efficiency by separating data management (1099's, K-1's, organizers) from data input (I'll be using Lacerte in our experiment) from providing a great service and doing great work (what CPA's do).

So, here we go! I started with outsourcing first.My client's tax return is on extension.He does a great job of completing his organizer.And he gives me all of his 1099's and K-1's and so on. His tax return is average in terms of complexity, and average in terms of how long it should take to do. He pays us $1,000 for his tax return.

I first electronically sent my client's 2005 data file to the Chartered Accountant in India, so she could start from where I'm starting from.

Next, I organized my client's input (1099's, K-1's etc.) in the same order as these items appear on his organizer.

Third step: I scanned all of the source documents and the organizer, and I electronically transmitted same to the Chartered Accountant.COMMENT: If we go to outsourcing, I will have my clerical staff do the scanning part... they are faster than me.

Well, that was easy... 33 minutes.

So now on to doing this tax return myself. First, some background: My CPA firm is small: Four CPAs, one entry level staff, and two clerical team members. Thus, the partners do a lot of their tax returns themselves.

First, I have one of the clerical team members copy the source documents. They come back in no particular order. This took my lab assistant 6 minutes.

Then, since I'm doing this tax return myself, I follow the firm's protocol, starting with the indexing of all source documents and the organizer.We use letters (A to Z).

I first index the lower right hand corner of the organizer in red from page one ("C1") to the last page ("C22").

Next, I index each source document in the lower right hand corner in red, in order similar to where items appear on the organizer for example, "D1" through "D8" for 1099-Int's and 1099-Div's, "G1" through "G6" for my client's K-1's, "L1" through "L7" for itemized deductions, and so on.

I then reference the source number to the particular organizer page, in red. For example, for interest income of $57 from Wells Fargo, I put a "C9" (the organizer page) to the right of the $57, and on the organizer I put a "D2" to the left of the $57 (the place the number came from).

After all indexing is done, I do control totals on appropriate organizer pages. For example, for interest income, for dividend income, for home mortgage interest, etc.

COMMENT: This is slow. And my client actually filled out his organizer. One-half of the clients don't. I can't believe the staff does this during tax season. No wonder everybody gets so grumpy...

COMMENT: Why can't we at least index the organizer pages ("C1" through "C22") in red in the lower right hand corner BEFORE tax season, like in early January, BEFORE we mail the organizers to the clients. The clerical team members could do this. Or better yet my 2 teenagers and my 11 year old and other team members’ children. This would save so much time during tax season.

COMMENT: I was slowest on the K-1's. One K-1, from a trust, had as attachments the 7 partnership K-1's that flowed into the trust. My "G3" exhibit was 47 pages ("G3.1" to "G3.47"). I had to re-sharpen my red pencil. Way too slow...

FURTHER COMMENT: We should stop indexing K-1's: too many pages. Consider side tabs with the K-1’s going in the file in order of organizer appearance with a bottom "K-1's" tab.

COMMENT: I thought the firm listed "going paperless" as its number one priority by 2008 year end... I think the Chicago Cubs will win the World Series before we achieve paperless-ness.

COMMENT: I can’t believe partners here actually do quite a bit of this.

COMMENT: I indexed a lot of immaterial numbers. Witness the $57 of interest income from Wells Fargo. Consider setting materiality limit, where all we do is make sure the number gets on the organizer.

COMMENT: I may be getting delirious. Does the client see any value to such amazing precision and attention to detail? I doubt it: the client just wants to feel like they are my favorite client. And I haven't ever gotten to the data input yet. No wonder good staff are getting harder to find. I'm actually starting to think about converting to Ron Baker's accounting religion. I think I see Rod Serling hiding behind the fake plant in the corner... c'mon man, get a grip on yourself.

Okay, okay, I'm coming back to reality. Subtracting 3 minutes for my brief departure into the Twilight Zone all that took 57 minutes.

Next, I input all data into Lacerte. I'm not the slowest one here... the two youngest staff are the fastest, but I think I take 3rd place.

COMMENT: I can't believe partners here actually do quite a bit of this as well. I spoke with another CPA who once told me he does all of his own input because he's just as fast as junior staff and clerical staff. When I inquired about billing rates, the response was: he's at $250/hour, junior staff are at $125 and $140 respectively, and clerical staff is at $60/hour. If you don't get my point here, please stop reading this right now....

Anyhow, that took 52 minutes, with no time off for a reality departure.

COMMENT:So where's my tax return from India? I've been at this now for 2 hours... how slow can these people be?

COMMENT: The last comment is a joke. I'm just killing time while I'm waiting for the printer to finish. The outsourcing company told me the tax return would be back in 4 days. (My firm's average turnaround time approximates 15 days... could outsourcing actually lead to better service?)

The printer stops. I grab the tax return. I copy the summary pages for federal and California (which I index "A1" and "A2") and I reference all of the line totals to and from the organizer pages on which my calculated totals appear.

I'm off on dividend income. I discover one input item where I inputted $282 as $228. I fix this. I compare it to the year-end tax projection I did in December.

All of this takes 16 minutes.Then the tax return goes to another team member for review: he spends 18 minutes. So that’s 34 minutes of review.

In summary, we spent:

1. Clerical staff time copying; 6 minutes

2. My time on data management 57 minutes

3. My time on data input 52 minutes

4. My time on review 16 minutes

5. Review time on review 18 minutes

Total 149 minutes

That's 2 ½ hours.At this point, there should be no difference in subsequent time compared to outsourcing: the tax return gets assembled, a partner signs it, we send it to the client.

Three days later, I get the electronic tax files back from India, which include the organizer with control totals on it.I’ve saved my scan of the input data for reference.

I reference organizer totals to tax return (no, I'm not going to look at the tax return that I've prepared yet... I'm a scientist, not an accountant). I take the extra step of reviewing my scanned files, and comparing totals that I add manually to the tax return totals. I do interest income, dividend income, and home mortgage interest and charitable contributions. Bingo!

COMMENT: I need to upgrade to dual screens.That will make review faster.

Total time: 25 minutes. Not too bad. Next, before final review, I take a deep breath, and (drum roll please...) grab the tax return that I prepared.I start hyperventilating. I am not tracking my time on this (the hyperventilation or the tax return comparison, because this step would not happen if we outsource tax returns.)

COMMENT: Maybe I should just file the tax return with the lower balance due. Maybe we should do all tax returns twice, and pick the better one.

COMMENT: The last comment is a joke. Really IRS - I'm just joking.

Anyhow, I put the tax returns side by side, and (oh, wait a minute, I have to use the restroom... and, I forgot to call my wife back... I’ll hurry, I promise... do you watch "Deal or No Deal" too?...)...and, and, and... taxable income and refund are the same!!!

Lastly, onto review. I pick another team member for the review: 21 minutes.

COMMENT: Hey the other guy took only 18 minutes…what gives???

Here is the outsourcing summary:

1. I scan and transmit data 33 minutes

2. My time on review 25 minutes

3. Reviewer (the slow one…) time on review 21 minutes

Total 79 minutes

That's just over 50% of the firm prepared time (149 minutes)!!

COMMENT: And I went from 125 minutes down to 58 minutes, and if I use clerical staff to scan, I'm down to 25 minutes... plus they scan faster than I do...wow!

COMMENT: The areas where I will spend more time if I outsource are on data organization and review, in particular on spending time on the scanned files as "input." But significant time savings do indeed get created by reducing data management and data input applications.The outsourcing hypothesis is correct.

By the way, the Chartered Accountant in India spent just over 4 hours on this project.

I promised I wouldn't disclose my team members hourly pay rates,which are too high (just kidding...) but the outsourcer says their tax return rate is $15/hour. So yes, a cost savings also results, but I'll take the extra time please.

Thank you for participating in my outsourcing experiment.Don't forget to join me for next week's experiment: trying to get an actuary to laugh.