There’s a limit to “more with less.”

And corporate tax departments are just about hitting it.

It sounds almost quaint these days to talk about the pressing demands of Sarbanes-Oxley compliance — unless you’re in tax. Every year since the law’s inception, deficiencies in tax accounting have topped the list of reasons for material weaknesses in financial reporting. Add to that the ongoing struggle with the intricacies of FIN 48. Throw in the ever-growing mound of local, state, federal, and international regulations and the prospect of far-reaching tax reform under the Obama administration, and you have to wonder how much more companies can ask of their chronically undernourished tax functions.

When I talked to Mark Schutzman recently about the impact of the downturn on staffing levels in tax departments, he was emphatic: “The advice to tax executives, and therefore CFOs, is: ‘Look, tax is different.’”

“I might encourage senior tax executives to employ what I’d call a ring-fence approach — putting a hypothetical fence around the tax function and saying, ‘Listen, we’re not going to participate in head count reductions because we’re already significantly understaffed, and to further reduce heads would mean running what I think you might agree would be a flat-out unacceptable level of risk of a material weakness or significant deficiency in our tax accounts.’” Schutzman is the leader of PricewaterhouseCoopers’ tax function effectiveness practice.

So, faced with a mandate to rein in expenses, what’s a CFO to do?

One traditional cost-chopping measure is outsourcing. Most companies outsource some of their tax work, notably domestic and foreign income tax compliance. The concerns about control and governance that dogged the practice a few years ago have faded. So why not just expand the scope of outsourcing efforts?

Here again, though, tax is different. Almost uniquely among corporate functions that are routinely outsourced, tax processes are often more expensive to hand off to a third party than to retain in-house. Outsourcing may help a tax department scale its resources against fluctuating workloads or free up staffers to concentrate on strategic imperatives, but the cost savings are often nonexistent.

“For just your plain-vanilla outsourcing within the U.S. — your tax return preparation, your [FAS] 109 calculations — I think CFOs should take a good hard look at that and come away with the point of view that it is more expensive,” Schutzman concedes. “There’s no question that we, meaning the public accounting industry, are just flat-out more expensive than internal cost, notwithstanding that we potentially are more efficient and we have some enabling technologies.”

Of course, there are plenty of specialized tax service providers outside the ranks of the big accounting firms, and some of them are very competitive. For example, “when you get into indirect taxes, such as sales and use tax, there are viable alternatives here in the U.S. that are cost-effective,” Schutzman notes. For income tax compliance, though, he has noticed a trend toward bringing outsourced work back in-house.

The success of that strategy largely depends on the strength of an organization’s tax technology resources. Indeed, for companies that have skimped on tax tech investments in recent years — and that’s most of them — the only way to save some money may be by spending some.

Schutzman likes to ask tax execs how much time their people spend on three activities: data collection, data manipulation, and validating data back to the real books. The answers average around 40 percent, he says, “which means that for 40 percent of their time, they’re not doing real tax work. How do you reduce that 40 percent? You do it by making investments in technology to automate data collection and taking a good hard look at some of your more challenging and high-risk processes that could be reengineered.”

Investments in new technologies may be a tough sell in the current environment, but companies should be able to realize some gains by making better use of their existing infrastructure, including ERP systems, business intelligence software, extract transform and load (ETL) tools, data warehousing systems, and even Web portals. “All these things are being used by finance, but the tax guys don’t get 10 minutes of attention to be able to leverage these tools,” Schutzman says.

That needs to change, and soon — otherwise, even tax departments that manage to fend off head count reductions may find themselves swamped by the rising tide of challenges. ###