This spring, an estimated 200,000 federal and state tax returns, all of which contain sensitive personal information, were completed offshore. This is not a new phenomenon; over the last few years accounting firms around the U.S. have sent a growing portion of simple tax prep work overseas.

The accounting industry has largely embraced offshoring as the future of tax preparation. CCH, the industry's leading provider of tax information and software, endorses offshoring as it reduces or eliminates the "tax season staffing spikes in most CPA" firms and results in lower per-unit cost for tax preparation.

Unfortunately, the cheaper wages paid workers in the developing countries where the work is being relocated are not being passed on to the tax paying consumer. The cost to the consumer for standard tax preparation is practically unchanged even as more returns are prepared abroad-- approximately $150 in 2004 and 2003 and usually based primarily on the tax refund received by the customer.

More alarming is the implication for the privacy of consumers' most vital financial information when accounting work is offshored beyond the reach of U.S. privacy law. A recent study by Public Citizen's Global Trade Watch describes the threat and proposes some solutions.

The serious privacy problems surrounding offshoring of work involving information subject to U.S. federal law privacy protections have been highlighted through numerous incidents and accusations. While these unquestionably also plague outsourcing in general, they are particularly problematic with regard to overseas providers in terms of both a lack of legal protections and access to civil justice systems in cases of abuse.

In Ohio, allegations that citizens' birth records had been sent to a facility in Sri Lanka led to the company being barred from state contract work for 15 months and prompted a federal investigation in 2001 - which was soon followed by more accusations that confidential information from the records of hundreds of thousands of Ohioan veterans had been given to an Indian data-processing company.

In 2003, a medical transcriber in Pakistan threatened to post patients' records on-line unless the University of California San Francisco (UCSF) Medical Center paid the wages owed to her by the U.S. subcontractor that had sent the work to her. The hospital's transcription work had already been subcontracted from a Sausalito-based transcription firm to two U.S. sources before being subcontracted a third time to the transcriber in Pakistan. Heartland Information Services, an Ohio-based company that offshores medical records work to India, received a similar threat from a group of disgruntled employees in Bangalore, India. The Indian workers said that they would release confidential records unless they received a cash payoff from the company. The workers were soon apprehended with company training documents - but no patients' files were in their possession.

Such a threat and act of extortion also could have come from a medical transcriber in the U.S. However, a U.S.-based transcriber would be highly unlikely to issue such a threat given the legal recourse available to patients in the U.S. if their privacy is violated. In contrast, the only liability in the Pakistani transcriber case would reside with the U.S. companies having created no disincentive for the bad conduct by the overseas provider.

But what are privacy issues that fall under tax preparation? For starters, personal information on the tax return includes name, home or e-mail address, social security number, as well as your employer and your credit, pension and investment history. Sensitive personal information including medical and health conditions that might qualify for deductions, as well as tax documents pertaining to your mortgage, bank accounts and other financial transactions are required to fill out the forms. Your charitable deductions might reveal your racial or ethnic origin, political opinions, religious beliefs, union membership, or sexual preferences.

The American Institute of CPAs knows it has a problem on its hands and will for the first time in thirty years revise its code dictating CPAs legal and ethical responsibilities regarding outsourcing and obligations to their customers.

As we have seen time and again in this era of corporate scandals, when industry disciplines itself, a dangerous regulatory gap grows with worrisome consumer safety and economic implications. The practice of professional offshoring has gotten far ahead of the consumer protections. The only current "regulatory" system is a silent assumption that your privacy and the qualifications of those doing your taxes are assured by private companies. It is not enough.

Lori Wallach is director of Public Citizen’s Global Trade Watch.

Other Articles by Lori Wallach

* NAFTA on Steroids
* Turning The Trade Tables

* Force Feeding

* Trade Secrets: What The WTO Didn't Want You To Know