Apparently, one problematic outsourcing program at a time is enough for the IRS.

The IRS had reached a $103 million deal with IAP Worldwide Services, under which the tax agency would turn over to the private firm responsibility for the filing, storage and retrieval processes at seven IRS centers. The shift was to have taken place on Friday, Dec. 1.

But now, under what both sides are calling a "mutual agreement," filing duties at just two IRS centers -- Kansas City, Mo., and Ogden, Utah -- are under IAP management.

In a statement, the IRS said the contract was scaled back "to ensure that a sufficient number of employees with the required training and security clearances are in place to manage the files during the upcoming filing season."

The IRS and IAP expect those issues to be cleared up by June, at which time the company will assume filing activities at Andover, Mass.; Atlanta, Ga.; Austin, Texas; Fresno, Calif.; and Cincinnati, Ohio.

The National Treasury Employees Union, however, says the contract changes are an example of failed privatization efforts.

"This is not the first time that IRS employees will be expected to clean up behind a contractor that has not fulfilled its agreed-upon duties," said NTEU President Colleen M. Kelley in a press release. The union cited an earlier instance, where Mellon Bank was unable to process lock-box items. In that case, the bank's employees destroyed, according to the union that represents most of the IRS rank-and-file workers, "tens of thousands of tax documents and some $1 billion in tax payments."

A story in Information Week on the IAP situation also pointed to another privatization "foul up," in which a botched software project, outsourced to Computer Sciences Corp., resulted in more than $318 million in refunds based on phony returns.

But those instances, as well as the reaction to sending debt collectors out after overdue taxes, are not the main reasons behind this latest delay in privatization efforts. Timing played a big part in the IRS decision to deep six most of the program for a while.

"The filing season for the IRS is the Holy Grail," David Grant, IRS director of procurement, told the Washington Post. "We don't put it in jeopardy for anything."

Uncle Sam's not alone: The IRS isn't the only one outsourcing taxes. A few years ago, there was a tiny bit of an outcry about some accounting firms outsourcing tax work to employees in other countries.

Advocates of the practice say that sending routine tax work overseas means:

1. U.S.-based accountants can focus on higher-margin services, such as tax consulting.
2. Tax-return processing is speeded up.
3. Labor costs are lower. (I suspect this actually is not number three on the list.)

Arguments against generally fall into two categories:

1. It's unpatriotic (for tax work but not textiles or tennis shoes ...) and
2. Concerns about how U.S. clients might react when they discover that, instead of staying on their local CPA's desk, their tax data gets funneled half a world away to be finalized.

We haven't really heard much about individual return outsourcing since that initial blip on the general public's tax radar screen a few years ago. But judging from the companies that are soliciting such jobs, it looks like it's a thriving business.

Continuing outsourcing efforts: An ad for PB Tech Impact Solutions was in a tax e-mail newsletter I get. As intriguing to me as the service itself was the phone number for the U.S. contact. The area code is 512. That's here in Austin.

A quick online search pulled up Madhuvan Infotech Pvt. Ltd. with a U.S. office in Hoffman Estates, Ill., and Xpitax in Braintree, Mass. This table from the June 2005 CPA Journal lists a few more, including well-known tax publisher CCH, along with the firms' going prices for tax return outsourcing.

ValueNotes, a business research firm in Maharashtra, India, released a report just last month in which it estimates that by 2011, 1.6 million U.S. tax returns will be prepared from India.

"Significantly, returns preparation is expected to lead the way for a host of other accounting services that can be effectively outsourced to India," continues the ValueNotes analysis. "These estimates are conservative and the potential is as high as 22 million returns that could come to India."

The major accounting firms are leading this trend right now, but if ValueNotes and the various outsourcing companies are correct, your neighborhood franchise tax prep office could one day be sending your 1040 on an international journey before it ends up at the IRS.