As many as 360,000 US tax returns were prepared in India in 2006, according to a report prepared by Pune-based ValueNotes, a leading provider of business intelligence and research.

The report says that at least 1.6 million returns will be prepared in India by 2011, but adds that this estimate is quite conservative and the potential is much larger at 22 million returns per year by 2011.

Actual offshoring could be limited by CPA firms' (US's Certified Public Accountant) inhibitions about outsourcing the work to India, but competitive pressures could force many more firms to offshore, the report says.

Glen Keenan, president of Xpitax, a facilitating outfit, says: "The whole outsourcing business requires a shift in thinking for the CPA firms, so comfort factor has to be really high in order to do that."

The accounting and audit services are relatively new in offshoring and are gradually gaining maturity with each passing tax season.  Unlike other services, which are traditionally outsourced due to cost pressures, the demand for tax returns offshoring stems from the lack of accountants and excessive workload during the 'tax season.'

The number of CPAs and other qualified accountants in the US are just not enough to meet the increasing demand from increasing tax compliance, Sarbanes--Oxley related work, estate planning, advisories, et cetera. The demand-supply mismatch has led to severe competition for experienced accountants and salaries are skyrocketting, even at starting levels.

CPA firms are discovering that offshored tax returns are not only turned around faster, but are also 40% to 60% cheaper. CPA firms after initial success with tax returns preparation is slowly sending more work offshore: bookkeeping, financial statements analysis, etc.

ValueNotes CEO Arun Jethmalani says: "The industry will quickly move beyond 1040s. Both the vendors and buyers are at an inflection point on the maturity graph, and we expect tax returns preparation will drive penetration into a wider range of offshored professional accounting services."

The Indian offshore services provider landscape consists of captives of the Big Four audit firms (KPMG, PricewaterhouseCoopers, Deloitte and Touch�, and Ernst & Young), American facilitating firms / agencies (Xpitax, SurePrep, CCH, IFR), Tier-1 multi-service BPOs (MphasiS, Datamatics, OPI), Tier-2 BPOs (PB Tech Impact Solutions, Cosmic Internet Technologies) and F&A BPOs owned/ controlled by Indian chartered accountants (GKM Management Services, Business Accounting Services, Accountant Anywhere, Enablizer).

Pratibha K, analyst at ValueNotes, feels that "facilitators like Xpitax and SurePrep are best positioned to service CPA firms, while Indian CA BPOs are well placed to operate as complete back-offices for accounting firms."

Based on the analysis that included extensive primary research, ValueNotes picked three winners from the current crop of vendors: Xpitax, GKM Management Services and Business Accounting Services.

Karthikeyan, managing director, GKM Management Services, says, "As chartered accountants, we feel our biggest advantage is that we can speak the global language of accounting with the CPAs. We feel this is a good differentiating factor for us compared to the large corporate vendors. CPAs are bound to trust us more than the tech companies because of our common accounting background."

The ValueNotes report � 'Offshoring Tax Return Preparation to India' -- said that tax return preparation will also set the stage for other accounting services to be sent to India.