Tax Section Odyssey – Détails, épisodes et analyse

This podcast conversation with digital asset specialist Kirk Phillips, CPA, CMA, CFE & CPB, Managing Director — Global Crypto Advisors, focuses on demystifying IRS Rev. Proc. 2024-28, which provides guidance on transitioning from universal basis tracking for holders of digital assets and a safe harbor deadline of Jan. 1, 2025, to determine how to allocate any unused basis in digital assets. Phillips shares recommendations for tax practitioners around communicating with clients and the need for careful planning and documentation to meet the safe harbor provisions.

What you’ll learn from this episode:

Understand more about Rev. Proc. 2024-28 and what it means for holders of digital assets.

• Hear about the safe harbor provisions provided in the revenue procedure.
• Learn the importance of the Jan. 1, 2025, deadline for making a reasonable allocation of unused basis.
• Find out about the challenges of documenting and reconciling cost basis related to digital assets.
• How to communicate and prepare individuals and businesses for the upcoming changes related to reporting of digital asset transactions. 

AICPA resources

Digital assets and virtual currency tax guidance and resources — Sharpen your tax knowledge on digital asset and understand the tax complexities and strategies involved with virtual currency and cryptocurrency.

AICPA advocacy resources

AICPA makes recommendations for digital asset transactions regulations, March 7, 2024

Other resources

Rev. Proc. 2024-28 — Guidance to allocate basis in digital assets to wallets or accounts as of January 1, 2025

Final Regulations 2024-07-09 — Gross proceeds and basis reporting by brokers and determination of amount realized and basis for digital asset transactions

Transcript

April Walker: Hello everyone, and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the tax section, and I'm here today with Kirk Phillips. Kirk is a CPA and it has a lot of other designations behind his name. But he's also more importantly for today's discussion, a specialist in the world of digital assets and crypto. [He's] been in it for a long time.

Our goal today, Kirk, is to demystify some of this latest guidance that we've gotten from the IRS. We're definitely not going to be able to demystify all of it in the time we're just going to spend today. But there are some important deadline related items, so we want to make sure we're covering those. Kirk is on the AICPA's Digital Asset Tax Task Force. And for the past few months, we've actually been meeting weekly, which is unusual for a task force. Because really we've been discussing one thing, Revenue Procedure 2024-28. What it actually said, what it meant. Just really delving into that, the details of all of that.

That's going to be the topic of what we're going to talk about today. What that means for tax practitioners and holders of digital assets. Especially like I said, there are deadlines around this safe harbor. Kirk, to start off. Welcome. Let's talk about I mentioned the deadline and let's talk about the significance of that January 1, 2025 deadline for making that reasonable allocation of unused basis. That's what the Rev Proc says.

Talk to us a little bit about what that means, what you're thinking about, what practitioners should be doing now to prepare for that date.

Kirk Phillips: Sure. Thank you so much April for having me on the podcast. I love talking digital assets and crypto, whether it's tax-related or otherwise. I'm excited to help demystify this Rev Proc. One of the key things here is that and why this is so important is we both have a short timeline. Because we're already nearing the last quarter of the year 2024. It's also very challenging - it's a onetime exercise that we have to go through and on a short timeline. That's why this is critical and that's why we're here today to talk about that.

One of the key things here is that prior to this Rev Proc that the taxpayers would do their accounting for the digital asset transactions, which would be their trading or their sales, and it could be other related transactions as well. But basically they would do all the accounting on a universal basis. The question is, what does universal basis mean?

Universal basis means that whether you have one wallet or one exchange account or you've got 37 wallets and six exchange accounts or even something more crazy than that, you would for the most part, more than 99% of the time people would use specialized tax software because that's really the only way to get the job done. You would connect all those things and or import your transactions into the software and it would essentially co-mingle all those transactions. I like to say as if it was one wallet or as if it was a single exchange.

But it's not simply for the tracking purposes, all the transactions are simply dumped together and you perform one set of accounting. That's what the universal [method] is. Now, you can no longer use universal. You have to do a wallet by wallet, account by account basis. Which means that if you, again using those same numbers I did in my example there. If you had 37 wallets, that means you essentially have to do 37 different sets of accounting for those. I think that without knowing even anything more about it, an accountant hearing that would say, "Wow," immediately that sounds like that could be challenging, that could be a lot more work, and so on.

There could be issues around that. And all those things are true. Because of this short timeline between now and the end of 2024 and essentially we're talking here at the end of September, so we got one-quarter left to do this. The important thing here is if you have any channels to communicate with your clients, the first thing to do would be to communicate with them and let them know, "Hey, there's this Rev Proc 2024-28." Maybe, perhaps even provided a link if you want to, and or read that yourself in detail at least once.

But there's a lot of other things that you can lean on in AICPA guidance, of course. But just to send that out, in other words, you don't have to know it in detail before communicating. You should start the process communicating right now to say, "Hey, there's a lot to unpack here. I'm just letting you know there's going to be more that's coming. Be on the lookout. We're going to do a series of blogs on this or whatever it is you do or a newsletter, segments, and things like that.

I think that's probably the number one thing to start off with is start the communication now, because this is not a one-shot communication thing. This is a series of communications that you're going to need to do. Whether you're just providing value to non-clients or you're working with current clients, you're going to need them to be thinking in steps and increments along the way.

April Walker: Yeah. That's a lot of what we've been talking about over the past couple of months. Who this actually applies to you and who needs to really take notice of this? I think that's a great suggestion. Our listeners might be thinking, "Hey, I didn't know that we are not allowed to use universal method of basis allocation anymore. Did that come from the revenue procedure or where did that come from?"

Kirk Phillips: Well, that actually came from the digital asset broker regulations. But then what happened is in the process of those becoming final and the fact that universal [tracking] comes to an end. And we have to do the wallet by wallet approach. What arises from that is a onetime exercise of how do we get from one thing to the other thing? How do we get from point A to point B?

April Walker: The Sec. 6045 regs, which are long and complicated. Again, like Kirk said, we'll continue to create resources around all of this information because it's a lot to unpack. In the revenue procedure, it talks about a safe harbor. As we're transitioning between universal and wallet by wallet, the procedure provides a safe harbor. Let's talk about what are the key criteria that qualify you for using that safe harbor and give some of the requirements for it and so talk a little bit about that.

Kirk Phillips: Sure. That's one of the big things here is what are those key criteria for the safe harbor? Of course, another thing is we're wondering what is it actually a safe harbor from? There's going to be more to come on that. Because that's actually not super clear and usually that is when it comes to safe harbor. The critical things here are that you have two methods that you can follow in this universal transition process. From universal cost basis tracking.

In that transition process you can use a specific units method or you can use a global allocation method. In either case, you need to do some work before the end of the year arrives at 12-31-24, or before January the 1st, whichever way you want to say that. Those two methods are two distinct ways of doing it. You might say that the global allocation method is more straightforward and less work or less complicated. But let's just unpack those briefly. There's more to dig into on these, but this is a brief touchpoint.

Let's start with global allocation. Global allocation, I like to think of it as more like a recipe. There's more than one way to get the "cake baked". Because you've got your grandmother's recipe and you've got your own style and you've got things like that and things in the cookbook. So you can arrive at a different cake, but if you follow the recipe, you're going to get the same cake. Basically, another way I like to say it too, is if you come up with a global allocation, which is simply saying, "You know, what I want to do is I want to allocate my Ethereum, my ether. And I want to take some low-cost basis.

Maybe you could say, "I want to use my oldest cost basis and I want to apply it to my oldest wallets." For Bitcoin, I had only two Bitcoin wallets and one of them, it's only collected Bitcoin, received Bitcoin, it hasn't sold any. Say, you want to allocate maybe what's already there. Whatever it is, you're really defining a process. You're not actually going through with the process, you're simply defining it.

The key distinction about global allocation is, if you define the process and if you were to give it to, let's say another CPA, they will come up with the same answer. If you give it to CPA A, CPA B, or CPA C, they should all come up with the same answer. It's very systematic. That's the distinction there. Now with the specific units, it's simply user's choice. Like in baseball, it's a fielder's choice. It's user's choice. It's however you want to allocate it specifically.

Again, you have to follow the date. You can't break the date in the basis or a specific lot based on the date that it was purchased. You can't break that up. At that level that's as granular as you can get. If there was a lot or a tranche of Bitcoin or whatever, AVAX, or just pick your favorite coin and that was purchased on a certain date. You can't break up the date because the date piece has to be maintained and be consistent.

Anyway, that's really just a user's choice scenario. That's the difference because you can't give that method to three other CPAs and have them come with the same result because that's not what it is. It has nothing to do with following a process. It's simply just a user's choice. Now the key thing on the dates there is that the specific units method has to be conducted and finalize before the end of the year, before the last day of the year.

With the global allocation method, you just need to come up with the formula for doing it by the end of the year. But you actually can apply the formula to get the allocation after that. That's a super important point right there. Under global allocation, you also have until either the original due date or even the extended due date of the tax return if you did not conduct a transaction. The key is not having any transactions. You've got to put a halt to your transactional activity until you apply the global allocation method.

But it does buy you more time to do it. You just gotta be careful because that's how you could throw off the safe harbor. And ruin the safe harbor if you don't put a halt to the transactions before doing the allocation.

April Walker: You mentioned in one of our discussions is about what is this a safe harbor from? Based on our best discussions and where we think we are now, what do you think about that? What is it a safe harbor? What is our alternative if we blow this safe harbor.

Kirk Phillips: That's a great question. It looks like it would be a safe harbor prospectively from this day forward or the end of the year exercise that we're talking about forward. We're not sure about retroactively. It mentioned if you don't follow the safe harbor, you can incur penalties and interests.

As I recall that's about as deep as it goes. You could draw an inference from that and say, if I don't follow the safe harbor, does that mean that all of my transactional activity, all my reporting for the prior years could be recast and recalculated under different cost basis method. And therefore end up with a different tax liability than you originally calculated. Those things can be worst-case scenario. We just don't really know.

April Walker: Usually when you have a safe harbor, you have rules of what to do and how to document that you have met that safe harbor. Again, things we've struggled with. Seems like a simple question right? But I'm telling you a lot of smart people in the room, this is not a simple question.  Kirk, as we know it now, what types of documentation do we think will be good enough to substantiate that we have met that safe harbor as of 1/1/25.

Kirk Phillips: That's right. You could actually take an action. You could perform your allocation, and you could do this all before the end of the year. The question is, how do you prove that you've done it before the end of the year? People have talked about, well, you could have files saved that because you can look and see what a file date is, the modification date of a file.

But then you could also later open up the file, not even change anything but potentially open a file, change the modification date. If that was something that is being looked at, then that could be an issue there. This is really where it comes into use in your CPA skills to figure out what's a good way to document. We're already good at that. Even in the world of not knowing, you can come up with "well I think I should do this" to document.

One of the things is if there's a way to send an email to yourself. Time stamping on emails is one way to do things like that. Just in the larger world of documentation. Like I said, everybody is relegated to using specialized crypto tax software. You might as well say everybody uses crypto tax software.

Then the question is, which one do you use? Because they're all different. They all have issues and so on. But hopefully regardless of the software, it would allow you to export an end of the year holdings report or an inventory report. That's essentially what it is because the data is in the software and if that's going to be one of the key things is, can I get that report?

Let's just assume that you do. The first thing you do is to export that report. That's going to be the basis and the starting point for doing an allocation. Let's fast forward just a second. Let's say you go through the allocation however long that happens and let's say you're done. For example you could say, let me attach that file now. Again, figuring out how do you document.

You could attach that file in an email or you're copying [yourself] with your client and maybe there's other members in the firm as well. Maybe there's a specifically designated digital asset person who want to get copied. But nonetheless, that would create an email timestamp on it and that document is attached to it. That's one way that you can actually document that these things were done ahead of time.

I guess if we want to dive into documentation further again, I was talking about that inventory being a starting point. Regardless of whether you use this global allocation that we spoke about or specific units allocation. You would need to take the starting point of the ending balances or the inventory and then you need to take your wallets. Then you need to then allocate the basis that's in the wallet. Because remember it's on a universal basis. Now you're trying to allocate it on a wallet by wallet.

You then need to go through it, but it's difficult to describe it without seeing a visual. But basically you would allocate all of the inventory that starting to all of the current wallets that you have. Again it depends on what method you're using.

But at the end of the day, what you're trying to achieve is you want to get a proof. We all love proofs, and this is one way to do it. What's the proof? The proof is the check total. It could be a check total per asset, for example that you've allocated all the Bitcoin, you've allocated all the ether, you've allocated all the Solana, the AVAX, the whatever. You've allocated everything so that the check totals on the top match the check totals on the allocation. That's how you know that you've done it and it is complete and correct. Is by doing the methodology that is like that. Because if you don't do that then there's really no way to know that it's complete. You got to have checked totals and arrive at the same numbers and then that's how you do it.

Again it can be challenging because it's depends on what's the quality of the data that you're starting with. One of the big challenges is I think all the software has different types of issues, limitations, certain features some have that others don't have and things like that.

The first thought might be from the accountant mindset oh, if I split this inventory report out it's accurate. But the thing is, it's most likely not accurate. There's going to be issues with it. You're actually starting with something that's not solid in the first place, which creates a whole other set of challenges. But we can't dig too far into that one right now.

April Walker: I was just went back into my way back machine and I was doing proofs and doing double underlines and I was getting really excited. I think that's a great point. If you are using software for yourself or for your clients, you need to, just like with everything we would say, you're not printing it out and then just putting it in a file or somewhere and never looking at it again. You got to make sure that it's not garbage in, garbage out situation. Again, lots of potential steps in this seemingly simple, allocate your basis comment.

Another thing we've talked about is the role of brokers. Because eventually in the years to come, I'm sure you're aware, there's going to be in a form 1099-DA. And there's going to be reporting of digital assets and then hopefully there's going to be at some point, [cost] basis on those forms.

Again, happy little world the basis is going to be equal to what you think it is and everybody's happy. I think we know that it's going to be much more difficult than it sounds, but let's stay simple for the moment. Let's talk about how that revenue procedure 2024-28 impacts how a broker might communicate with your clients regarding interactions with brokers and how this might be a help eventually.

Kirk Phillips: That's all a great question and it's interesting how just the broker side of things, what were the centralized digital assets exchange. Because that's what we're talking about. It's just the two ways of saying it. But just to be clear what we're talking about because we have decentralized exchanges.

Then the other side of that is the brokers and the centralized exchanges. And so that creates a whole another set of unique things and considerations with the brokers. And how they're going to report basis because they're the ones that are required to do it right now. We don't have it on the self custody side. I guess the overarching thing is you could end up with perpetual mismatches. And when I say perpetual, they could go on forever - definition of the word. But it could go on for a very long time. Just to make a point there, you have a perpetual mismatch between what you have been tracking with your crypto tax software and what the broker actually has on file.

If it was Coinbase, for example, Coinbase and the assets that are on Coinbase were actually purchased there. Coinbase is going to have a record in that scenario. Then your tax software may have under the universal method have already spent some of that basis. Because again, those transactions are treated as if it was all one big wallet. You've got a mismatch off the start, even if you do a proper allocation on your own side, you may not even know what the broker has. So the question is, how can you communicate with the broker and let them know?

The centralized exchange services or these brokers, they can receive user provided basis, but they're not required to, but they may accept it. If you have some that accept it, that may be one path that you could try to match up what you have from your allocation and communicate that to the broker so it matches up. But again, that's not going to be perfect because not every centralized exchange is going to do that. Only some of them are. Even in cases where they do provide that as a courtesy to their customers, that's not a magic wand either. If there's other things that can happen there, we could get into the weeds further on that.

But one of the things is when you transfer in tokens to a broker, that they don't have any cost basis there. Again, if you wanted to report it because they're accepting it, yes. Otherwise they wouldn't have the information. There's just no way for them to know. If you think about the different assets that they may have in your account, they're going to have some that they know the basis for which would be the ones that you traded with them. Then they're going to have other transferred in assets from customers and they're not going to have any basis information on that.

That just exacerbates the issue of what basis they have, what information they have and what's getting reported. You're going to have basically you could have 1099-DAs and so on that get reported on your behalf or the basis information is not correct. I think you know what is going to happen in those cases. You can imagine the challenges of trying to reconcile. That's what it was going to come down to is creating a really challenging reconciliation process with what the broker reported and the software with the software not really having features enough to give you reconciliation, the ability to reconcile to the degree that we're talking about.

April Walker: We've talked a little bit about there are times certainly where you get it 1099-B and the basis that the broker reports, doesn't match for this or that reason? It can be inherited and who knows a couple of different scenarios. But generally, you can rely on what the basis is. I'm not sure that's going to be the case in this situation. But again, we're just scratching the surface on some of these complex issues. More from an issue highlighting, you can recognize that this is coming. Kirk, This has been great, we've covered a lot of great information, gives us some good takeaways as we're wrapping up listening to this podcast and what can practitioners do in the next quarter coming up or then as they're starting working on a 2024 tax returns.

Kirk Phillips: Yes, I've got some great key takeaways and key points here. Then again, these things will be some of the stuff that I was suggesting in the beginning where you incorporate it into your blogs and newsletters, etc. This ongoing communication that's going to be critical. One of those could be strategically setup and tee up this allocation process in such a way that it is less complicated and has less issues. There's really going to be a strategy that could alleviate some of that. It's not relegated to whatever challenging process is going to be for any specific client. One way you can do that as potentially consolidating wallets.

If there's an example, like I said, the client that's got the 37 wallets and the six exchanges. You can consolidate those down. Now whether it whittles down to a single wallet, probably not, with that many for various different reasons. But if you could go from, say, 37 and six, what's that? Forty three. If you go from 43 and you're able to whittle that down to say four or five. You're automatically going to have less challenges and the less complicated allocation process. Really strategically consolidating assets and wallets is one way that could make this process easier. And then also similar and in conjunction with that could be to take the assets off the exchange.

Because again, if you don't have the ability to communicate with that particular broker because they're not receiving user provided information. If you take the assets off the end of the year, and then you put it back, they're going to have a zero basis. Again, that's its own issue, but I think it's the lesser of the evils, if you will. It's a better scenario for them to have a zero basis because then you're going to report something for it. Rather than they have some number and you have some different numbers. It's kinda like cost basis cleansing and you could call it that.

The other thing here is the third key takeaway. I talked about all crypto software has limitations and challenges and issues, all different from one another. You really need to know [whether the software can help]. For example, if a software provider is going to provide some tooling to be able to help in this process, they may actually provide it to the user. And say, hey, you could just click a box here and we're going to lock down the inventory. Then we're going to do this reallocation for you and you think to yourself, that's great.

I don't have to do any of the work, but you're still going to need to check that. You can't just rely on that. Then furthermore, if there is anything [available] like that, the question [comes] back to safe harbor. Does just checking a box, is that an action that proves that I took an action, a timely action, and allows me to be in the safe harbor or not. I think one of the best takeaways is, regardless of any of these pathways, is that you got to have a workpaper of some sort. And it says, I examined this. Here's a work paper that shows I did the work.

Because it's one of the things that the software doesn't lock down the previous inventory. Find out what software the person uses. Because you may know or you may not know. It depends how you work with the client. [You need to] really understand what is that software provider doing to handle this. That's another key thing. This is really a big, interesting brain teaser for CPAs who were in the digital asset space.

April Walker: For sure and we appreciate you taking a walk with us down, at least to start or the path and more to come. Kirk, this first time you've been with me on this podcast. We call it Tax Section Odyssey. We think of it as an Odyssey, a journey toward a better profession. In doing that, I like to get a glimpse of my guests other journeys outside of the world of tax. What's something on your travel bucket list? Something you have planned. Give me something to add to my bucket list.

Kirk Phillips: Yes. I will be going to Orlando in about a month to see my sister and I don't get to see her much. But one of the things I like to do is backpacking. I am involved with Scouts and I discovered backpacking in 2021 for the first time. I just love going on the Appalachian Trail and all different kinds of trails,  whether it's with Scouts or other things. That's one of the things I like to do a lot.

April Walker: Nice being outside and in nature and there's some beautiful places to hike for sure. You'll have to share some pictures from your hike when you're back with us. Thanks again, Kirk. This was very informative for me, as it always is. I didn't give a shout out to our digital asset page, but I will certainly put it on the resources.

Again this April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioner like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax and check out our other episodes, as well as getting access to resources mentioned during this episode. Thank you so much for listening.

Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices.

This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

In this episode David Snider, Founder and CEO — Harness Wealth, discusses the transformative role of technology in tax practices, exploring how tools like practice management software can enhance client relationships and streamline operations. David shares insights on what he sees as three phases of technology adoption in the tax industry and offers practical advice for firms looking to advance their tech capabilities. Tune in to learn how embracing technology can lead to a more efficient, client-focused tax practice.

What you’ll learn from this episode:

• What David thinks are the three phases of a firm’s technology journey.
• How leveraging technology can streamline tax practice management.
• How practice management software can enhance efficiency and client experience.
• Why regularly communicating with clients can strengthen relationships.
• The importance of allocating time and resources to implement new technologies.

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Transitioning to a tax-focused CPA financial planner — Tax return compliance is continuing to become more of a commodity. Your clients see you as their trusted adviser and ask about a range of topics that affect their financial well-being. In this Reimagining Your Tax Practice archived session, learn more about practitioners who offer financial planning services and how that has impacted their practices.

Transforming Your Business Model…Technology — The Private Companies Practice Section (PCPS) is developing tools around technology designed to help firms not only identify elements of their current business model that may be holding them back but also offering solutions to help them adapt in this changing environment.

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Transcript

April Walker: On today's podcast,  listen to hear more about leaning into technology for your tax practice. Hi everyone and welcome to the AICPA Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the Tax Section and I'm here today with a repeat guest. His name is David Snider. He's the Founder and CEO of Harness Tax. Welcome back, David.

David Snider: It's a pleasure to be here. Thank you April.

April Walker: David, I'd love for you to start. Tell us a little bit about yourself and tell us a little bit about Harness Tax and where you see yourself in this world of tax.

David Snider: Thank you for having me. Yes, so Harness has a platform for routine tax advisors that are looking to make their relationship with their clients more seamless and insightful. What that really means is a practice management solution that's tied into a much broader set of offerings. That includes business development to help advisors with leads, a concierge team to help with support, as well as a broader network of resources to help guide advisors and give them the resources of bigger firms.

April Walker: Wonderful. I feel since we talked in Spring of 2022, if it's possible, I feel like the importance of technology is even more important. Maybe that's just me being dramatic, but let's start off just by pretty broad question like, how do you see technology transforming the way tax advisors interact with their clients?

David Snider: Absolutely. I think about it being in the second of three inevitable phases. I think the first was the first stage, which is very typical across industries. My background was spending, now 12 years, building tech enabled services, software solutions, first at Compass, a real estate advisory firm, and now at Harness. Before that in the middle, spent a lot of time at Bain Capital looking at different disruptive technologies. And so that first phase that we went through, very similar to a lot of industries, adoption of email, adoption of technologies that clients can actually submit core documents digitally and not just in paper.

The ability with the early software to actually complete and file electronically. That really is table stakes. If you look at the data, it's 99% of advisors have an Efin, etc. The second phase that we're really still in the early to mid innings of is the software collaboration phase. What that looks like is work-flow automation, ways of interacting with clients to create leverage for advisors and scale. It's not just, hey, I typed an email, send it to one, or I create an engagement letter sent to one. It's using the efficiencies of technology that can, at the vanguard be AI, but really doesn't need to be.

In the vast majority of cases, it's just having good practice management software to create efficiencies for the advisor that end up, ironically, even though you have to spend less time, creating a better client experience and one that's more customized to the individual. It gives them more visibility into what's going on, what's coming next.

The third phase, which I think only a handful of firms are really investing in, fully tapping into, which is totally fine. I don't think the client expectation is there, is around customized insights. How do you not just deliver an efficient workflow? But how do you, at the outset of a tax season, demonstrate to your client that you already know some stuff about them from prior years, here's why we really need just to tweak that. Showing your work. Here is all the different analysis that we ran in the completion of your return or the discussions that we had and at the end of the process, Yes, here's a completed tax document or analysis that you requested, but also here's what it means.

I think that ability to both give insights to people and leave clients like they actually understand tax, the tax process, the work that you did, is going to create massive benefits in terms of client's willingness to pay, their retention, their happiness, etc. Very few firms are at a Phase 3 in our opinion. You don't need to be concerned if you're not. Because there are a few, if any are. But certainly making sure that you've put in place or have the opportunities to go into next tax season and really nail Phase 2. I think will put advisors in a great place to really capture what is happening on the vanguard in Phase 3.

April Walker: We definitely hear from people and when I'm out talking to firms, people who are definitely still in that Phase 1. Where they transferred to Cloud. That seemed like a huge deal and leaning into some technology, but maybe taking that next step into two, even is difficult. Do you have any advice or thoughts on that? Because everyone is so busy and it's hard to figure out, especially if you're really small, it's hard to figure out how to take that time and really invest in trying to get to that next step. Any ideas or suggestions there?

David Snider: I think the good news is there are a lot of very good practice management software that did not exist or did not have the robustness that they do today, five years ago. One of the things to consider in evaluating the different choices is, ensuring that you price in the value of your time as a practice leader. In that there is a learning curve on anything, no matter how good the technology is. There are some that I think are much cheaper and may have the technologies you want to check the box on. But I think really understanding what is the on-boarding team look like?

What does the client success infrastructure of that solution look like? Who's going to make it as easy as possible to set you and in many cases your team up to use it successfully? And to answer issues that will inevitably arise from any change. I think we have over-invested in those resources, because we know there's a lot of change and fully transitioning the way that you think about practice management, some of the potential third-party software you can plug in, etc. That's important.

I think whatever approach that you take, whether it's working with Harness or a whole host of other solutions that are out there that are very good. I think just making sure that you understand, hey, what are the functionality each have, what's going to be accretive to the way that you want to work and your staff and perhaps your clients. But also what's the process going to be to fully utilize and take advantage of that.

April Walker: Those are some good thoughts. Just maybe if we can talk about a few examples of ways that firms can use practice management tools to really help them. Because this is really what it's about. It's about not having to have an Excel spreadsheet of clients and that's all you have. I'm not saying that's what our firms have. I'm just saying, I was in practice for some time and I remember that. What are some ways you can use tools to really advance your practice?

David Snider: I think there's both external components. How do you enhance the way that your clients perceive their process and there are internal things. How do you ensure that you don't miss a filing? The reason that advisors have Excel is just a mechanism to ensure that they do the work for their clients that the clients expect. I think on the external side, the more frequently you're interacting with clients around the tax process, generally the better, not in an annoying way, but I think tax is something clients generally don't want to think about, but definitely want to get right.

It's no different than a patient coming in to a doctor if they have an issue, but don't really totally understand it. Having a solution that allows you to email me before the season starts, to preview of what's to come and the deadlines and things that are upcoming. What do you need from your clients? What is the engagement going to look like from a pricing standpoint? Being able to send out engagement letters that reflect that. So someone feels like they weren't surprised because they had exactly what's being done for them and the pricing terms, etc, outlined being laid out. Having the client questionnaire customized ideally to what the clients already told you in previous years.

It feels intelligent, not like you're starting at Day 1 every year with the same advisor around your materials, etc. All that stuff is beneficial, being able to update them that "I've received everything I need" or expect to hear from me this time in March for business filing. Aspirationally, late March not April 14th, but whatever that may be for the draft filing, what their advisors recommended, etc. Or at extension deadlines, etc. That stuff all again can be done without moving your practice to Phase 2, but it's going to be dramatically more time consumptive. And it's stuff that you can't bill and price for in the way that you want.

Because there are lots of other tax firms that have already made those investments and therefore they can do those things with very little time invested. Internal stuff is really around collaboration, tracking, knowing what clients have uploaded what? Who has been filed? Who's working on documents? Etc. Where are they in the process? Have they paid? The more visibility you have, the easier it is to spend each day, not driven by who is pinging you over and over in your inbox, but who actually needs something based upon external deadlines or prioritization or the revenue they're going to drive wherever that may be as you think about being the quarterback of your practice rather than playing defense. Just having the scrimmage run towards you over and over again during tax season and hoping you're still standing at the end of it.

April Walker: Yes, I love a football analogy. I was just in Minnesota to watch my Tar Heels play. My first trip to Minnesota anyway, it was fun.

David Snider: I went to the Super Bowl when The Patriots played there against The Eagles a number of years ago and it was bone chilling.

April Walker: Yes, we're recording this in early September. It will come out in a couple of weeks and what we're really thinking about, and what I hope our practitioners are thinking about is year-end planning and there's a lot to talk about with impending legislation. There's Tax Cuts and Jobs Act sunsetting. There's a lot going on for you to be in front of your clients and proving your value. Talk a little bit about how technology might assist you with some of those conversations, or pulling data together to be able to help understand who you need to talk to you, and what about?

David Snider: Number 1, I would say, and this is anecdotal, I don't have the data to prove it. The majority of advisors do not proactively email their clients in Q4. Unless they need to collect certain things to do a quarterly estimate, etc. That is a huge missed opportunity. Even if you adopt, no technology, take an hour jot down some thoughts, a few bullets on what could be at stake in the election or the expiration of the Trump tax cuts or of the estate tax exemption, whatever it is, send something that seems thoughtful, and obviously it's going to be thoughtful from any practitioner who cares about what they're doing.

If you do that, you may think, I actually have the time to have something more customized. A, you can use software at least have to be addressed to the person, even if it's a mass email versus just a generic one, but then you could potentially also group your clients and say, hey, I've got 15 law firm partners, and I've got 42 small businesses, and I've got a cohort of people with multi-state issues, etc. I'm going to create three different end of year planning emails.

I'm going to categorize my clients and be able to send out something that's not individual, but that makes you feel like, wow, April is really ahead of the curve in terms of giving the insights that I wouldn't have expected. Although it obviously can be automated, but it takes the adviser having the initiative to create that content and think about what's going to be most useful for. When you do that, feel free to promote the scope of what you can offer. Tax advisors or not, the world's sales-iest profession. In many respects that can be a good thing, but it also does you a disservice where your clients don't know what type of things might be beneficial.

For that end of the year planning to small business owners be like, hey, you're thinking about possibly selling or transferring a chunk of the business to a child or an employee or selling outright, etc. There are a whole bunch of things that you should be thinking about now, potentially some things that may involve tax decisions this year versus next year, etc. I can be helpful with that.

I think highlighting the opportunities around that and giving people the ability to opt in for more complex planning is going to be really accretive. But yes, whether it's Harness practice management solution or others, there are definitely ways to customize the messaging, the cohorts, some of that stuff, but it really starts with the advisers sitting down and saying what is potentially meaningful on the horizon for my clients. And how much time energy do I want to take to customize that? And maybe it's hey, it's one generic one, and there are 10 clients that really move the needle. These are my 10K plus clients, whatever the threshold may be. I actually want to spend some time and really make them feel that I'm paying attention to their holistic needs and how I can be strategic to them.

April Walker: A lot of times we hear people say, I don't want to bother my clients, but I feel like on the other side, they really want to hear from you when you have something to say that's really important and crucial to them. I think it's important. That's a great point you made about reaching out in some way fourth quarter of 2024, because like we said, there's a lot of different things that you could bring up that are specific to their situation.

David Snider: Honestly, my view and it's just a personal view having now been in and around this industry for several years is book-ended communications is extraordinarily rare and extraordinarily valuable. What I mean by that is communication before the season starts, the more customized, the better, but at least something. The same thing at the end, that even after the client has signed a return, you've completed some analysis that post-season follow up.

If it's just previewing when they think about bringing for the next year or some of those planning opportunities goes a really long way, I think in demonstrating value. I'm seeing advisers do the presentation of insights through loom videos and other things that I think is also an element of that. Which is do more than deliver the bare minimum of the compliance requirements, and you will stand out and generate a tremendous amount of goodwill from your clients in whatever form it takes. A Loom video, something semi-customized, something even generic will be helpful to a lot of the people that you work with.

April Walker: Just thinking about some clients you may have worked with with Harness Tax, do you have any success stories that come to mind where technology really improved someone's practice?

David Snider: Yeah. I think we have two different types of advisors that we principally help. The one is a practice with 1-25 employees under 10 million of revenue, that's really making an investment. [They say] we've got a good business. We're going to do just fine regardless, but we also recognize to make it A, sustainable, B, to enable growth,

We've got to be more efficient and we want to not just be good enough that clients don't leave, we want to be better. For a number of those practices, I think the combination of a workflow, practice management technology that can save a couple hours per client with some of these automations of the client engagement letter or the intelligent client questionnaire, the status updates, also supplemented by our client's success team that can help field those level 1 questions that may come into the advisor. They're not necessarily required to answer. They don't require tax expertise, etc. All that stuff gets unburdened. Those firms have then been able to take advantage of new referrals that they generate and a whole bunch of Harness generated clients.

One of the earliest practices that came on to the platform has grown, I think 80, 90% across two seasons because the practice leader is getting a lot more leverage in the amount of time that she spends with each client. She's gotten more resources to talk about in the conversation. The clients, they don't use the network of tax attorneys that we have or some of the other software and database that they have access through our platform.

The other group are people that have been at top 50 firms and for a variety of reasons feel like now is the time to be more entrepreneurial to create their own practice. There's tremendous demand for people that have specialization, nimbleness, a willingness to create a great experience. And one  that joined that had been at a top 50 firm to create his own practice and his first year was able to generate over a quarter million dollars of revenue. That really came from Day 1, adoption of Harness' technology, a few other components to that workflow and the ability to really highlight some areas of specialization and to take a lot of clients that came through our consumer-facing side that brings in clients and distributes those to the right advisors to serve them.

It's really a powerful combination that no matter how good your practice seems, if you free up hours and you position yourself well, you're going to grow. I think giving yourself that time, especially in Q4, to really think through what are ways that you can generate more value, maybe capture a fraction of that incremental value for existing clients and create the space for you to take on new ones that would be incrementally valuable is wonderful. We've certainly seen that just in the top-line value and in really high net promoter scores of the clients that are being served by advisors using our technology.

April Walker: We'll go live before the end of September. Hopefully this will be valuable information for people and we talk about growing. Sometimes firms don't want to grow because they feel like they have too much going on at the time. But what we have talked about and heard and I'm sure you'll echo this is sometimes you need to grow in a different way, like you need to cull some clients and really focus on growing your experience with those really good clients.

David Snider: Grow your free time. Grow your client value and or grow the amount of money that you pocket at the end of the year.

April Walker: All three, I'm going to say, check, check, check for me. David, it has been lovely chatting with you today. Any final thoughts as we're wrapping up?

David Snider: I think we're turning back to that initial theme. If you are an advisor in Phase 1 where you adopted some technology probably 7-10 plus years ago, it's really important, to get ahead of clients expectations. Which I think will rise as more advisers are using technologies to create a better experience. But don't also get anxious. Oh, if I don't have a fully outsourced AI practice then I'm behind the curve or my job's going away. There is secular growth in demand for tax services.

The more that you can devote time to areas that you are advising, building relationships, strengthen relationships you will thrive in this profession. But don't sit in the same as last year mentality. Take Q4, look at what is going well, look at what's going to create the most value for you and your clients and make those investments of time and in some cases, expenditure.

April Walker: Great thoughts. You've been with us before, so you know that in closing on these podcasts — we're Tax Section Odyssey — we're taking a journey together toward a better profession. But I also like to think about other journeys outside of tax. David, share a page from your travel journal, a trip coming up or something you've just recently done. You already had a spoiler with the Super Bowl trip, so that was cool.

David Snider: That's way in the rearview, I don't think the Patriots are making a run this year unless something dramatic changes. But the trip I'm excited about I'm heading actually tomorrow night to Barcelona and watch the America's Cup race as a father sons trip. [He has] always been a big sailor before my time. He spends a lot of the summer and now year-round in Rhode Island. That used to be where the America's Cup always was held and for the last almost 40 years, I think it's been elsewhere. We decided rather than just wait, we will take the trip. We're hoping that Team USA, American Magic, can at least win the Louis Vuitton cup to be the challenger against New Zealand.

April Walker: Worst-case scenario, enjoy some time in Spain which doesn't sound like a bad plan for me.

David Snider: Exactly.

April Walker: Thanks again so much, David. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts and please feel free to follow us so don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax and find our other episodes as well as resources mentioned today. Thank you so much for listening and happy fall.

Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices.

This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

Melanie Lauridsen, AICPA & CIMA VP of Tax Policy & Advocacy, provides an update on IRS service improvements and the impact of the Inflation Reduction Act funding. She also discusses other key tax advocacy tax initiatives that are top of mind right now.

AICPA resources

Employee retention credit resource center — Access resources to learn the latest on the employee retention credit (ERC).

Beneficial ownership information (BOI) reporting resource center  — Access resources to learn about the beneficial ownership information reporting requirement under FinCEN’s Corporate Transparency Act (CTA).

Neil Amato: Welcome back to the Journal of Accountancy podcast. This is Neil Amato with the JofA. I'm joined again by Melanie Lauridsen, vice president–Tax Policy & Advocacy for the AICPA. This is a special collaboration episode between the JofA podcast and the Tax Section Odyssey podcast.

Melanie and I are going to talk about some tax topics that are top of mind for practitioners. This is the third such update in calendar year 2024. First, Melanie, welcome back to the podcast. We're recording in late April. In the tax community – I’m more the general consumer, not a practitioner – but I'm wondering, is there a sigh of relief maybe for the tax community? Or maybe a setting of those out-of-office emails and packing of bags for vacation when busy season ends?

Melanie Lauridsen: Neil, absolutely. There definitely is. I think of filing season like running a marathon in a two-hour timeframe. It's very intense, and at times you just don't know if you're going to make it. It feels very exhausting. But you do, and it's hard to keep up that pace. So, a quick shout-out to everyone and congratulations to those that did just wrap up another filing season. They've definitely earned that break and that vacation time.

Amato: Again, we're recording late April, April 26 to be specific. This episode will air in early May. Correct me if I'm wrong on this, but it feels like this year is the first sort of normal March and April for tax season that we've had since 2019. Is that accurate?

Lauridsen: Neil, last year was also a relatively smooth filing season. We did have uncertainty about how things were going to go. However, the IRS did receive the Inflation Reduction Act funding, which allowed last year to show improvements to their services. This is actually the second filing season in which the IRS has had access to that IRA funding.

According to the IRS stats, they had a really strong filing season. Now, I also believe this is in part because the IRS had a smooth runway for this filing season. There really weren't new laws, and, of course, the government shutdown did not occur, which forced the IRS to shut down. Collectively, like I said, it's a smooth filing season for the IRS to be able to show more improvements.

Now, most notably, according to the IRS, they've reached an 88% level of service, which is an increase from 84% level of service at the same time last year. They also answered over a million more calls this year with shorter wait times. That's all really good. However, I do need to caution that the IRS's numbers are a snapshot of a moment in time. That 88% level of service on their phone lines really captures a limited number of phone lines that they have and only a subset of the callers of those limited number of phone lines. For example, last year they had that 84% level of service that I mentioned. When looked at the entire year and looking at all the calls the IRS received, they really only answered about 34% of all the calls.

I also have to plug in that each year, we also deploy our own survey immediately after filing season, and we reach out to our members and ask them how they felt finally season went. Those responses oftentimes align more so with that 34%, and they also align with Erin Collins’ report to Congress on how the IRS did overall. Hopefully, for the next podcast, we can go over the results that we get from our members.

Amato: That's great, and it definitely does show that while there has been a smooth runway, it doesn't necessarily mean everything's going smoothly. It's certainly not all calm as it relates to issues affecting taxpayers, tax practitioners. What are some of those topics that are still popping up, that are top of mind for practitioners as we head into May and beyond?

Lauridsen: I do have to say BOI is a hot topic, beneficial ownership information. However, during the filing season, it got put on the back burner. But now that filing season is over, I've had a flood of people reaching out on the issue and really asking about the impacts regarding the court case with the National Small Business Association and what that really means. Also, unfortunately, we're starting to enter the natural disaster season as we head particularly into the October filing season, so people start to ask questions about that.

Actually just this past week, we endorsed a bipartisan legislation to provide additional tax relief to victims of natural disasters. Specifically, what we're supporting is when the IRS extends a filing deadline due to a disaster declaration, it would allow the taxpayers to claim and recover refunds not only within those three years but also that extended period of the disaster-related extension. Again, very helpful for victims of relief.

Changing topics again, another area that we're also working on, it has to do with digital assets. The IRS is beginning to ramp up more and more with that, and we're trying to find clarity around that tax framework for digital assets.

Amato: Yes. In the Journal of Accountancy, we recently wrote about the posting of the Form 1099-DA. Is that the draft, or the final form?

Lauridsen: Neil, you're right. It is the draft form, and they did release it. The intention is to show the report of the information of the sale or disposition of digital assets. That's going to be kicking off Jan. 1 of 2025, so that is coming soon.

Amato: Thank you for that. Tell me your reaction or response to this IRS news. Commissioner Danny Werfel said recently that the IRS still receives 20,000 employee retention credit claims a week. That's even though the processing of those claims has been halted since September. Seems like a lot.

Lauridsen: It is. Well, Commissioner Werfel actually told the Senate Finance Committee on April 16 that the tax bill passed by the House in January would actually help the IRS combat ERC fraud claims. That's where they're asking for ERC claims to be retroactively stopped. From his perspective, he said that eligible claims, they do exist, but they're very hard to find and it's finding a needle in a haystack. He's not very happy with that aspect.

If you see the statistics of their moratorium, the withdrawal program, and the voluntary disclosure program, there's real money at stake here. We've been told that it's costing the government something about $3 billion per week to maintain the ERC claims open. Now, all of this is to say that I personally wouldn't be surprised if that provision in that House bill to stop ERC claims retroactively, if it were to get stripped out from that bill, and it were to become a stand-alone bill that gets passed. There's just a lot of support for this provision, especially with that amount of money associated with it.

Amato: I heard that was spoken about in the most recent AICPA Town Hall, April 25. That $3 billion number definitely stands out.

Clearly, a lot still to be wrapped up as it relates to ERC claims. You mentioned that tax bill; that was going to be my next question. What's the update on that? I guess it's now in a committee in Congress, and for clarity, which committee exactly is it that has the bill, and where does it stand?

Lauridsen: It's with the Senate right now. The House passed the bill, and it went to the Senate. The last I heard was that the Senate wanted to do their own markup. But ultimately, if you look at what's happening in the world around us, there are a lot of things going on that the Hill has to focus on, and it takes precedence over this bill. It was also my understanding that this bill, as it stands, was barely on life support. Which it's not to say that it can't be revived in other iterations or eventually it could get passed, but as it stands right now, the likelihood of that bill pushing through is not very high.

Amato: If it doesn't go through, what happens? How does it restart if there's a new tax bill?

Lauridsen: On something like that, it really comes down to what I mentioned with the ERC provision. That has a lot of support, and people can then strip certain pieces out of the bill and either pass them as standalone bills, which is probably what would happen with the ERC bill, but you can also introduce it with other packages, different pieces of it. So like I said, it could be different iterations, different portions of it. It doesn't mean it's completely dead, particularly with the ERC piece.

Amato: If it's a 600-page bill, but not all of it's going to pass, then maybe the 60 most important pages here and the 30 most important pages there could be repackaged into a new bill?

Lauridsen: Yes. Something like that. Yes.

Amato: I realized those are just my estimates and oversimplification, but helps me understand. I hope it helps the listeners understand. You've mentioned disaster legislation, obviously, the news topics we've been following, ERC, digital assets, BOI, beneficial ownership information. But elsewhere from an advocacy standpoint, what are some of the top AICPA priorities for the second half of this year?

Lauridsen: Well, Neil, as you're aware, it is an election year, so we're absolutely going to be seeing tax reform coming up. We already know we have TCJA provisions that will begin to sunset. We have also heard of an IRS tax administration procedural package, which is going to have, we've heard things like potentially the Safe Harbor Act, some disaster relief provisions, or things along those lines with the IRS. Then, of course, there just is the 2025 tax reform package we'll see from the elections. Taxes are the way we generate income and money for our country, so we are bound to see a lot of potential tax changes coming up in this next year, and so we have to gear up and prepare for that.

Amato: Melanie, thank you for this rundown. Anything you'd like to add in closing?

Lauridsen: Just to pay attention. Changes are coming, and we're here to help. We're trying to continue to help them, supporting the profession but also taxpayers in finding fairness and equity in the tax laws.

Mark Gallegos, CPA, MST, Partner — Porte Brown LLC, discusses the importance of having processes around retaining documents for accounting firms as well as advising clients on what information is important for them to maintain. It is imperative to manage files in an efficient manner, and, often, there are different considerations for physical storage versus digital storage.

AICPA resources

Document Retention FAQs for Tax Practitioners — Having a written document retention policy for your firm is a must-do along with advising clients on taxpayer record retention.

Document Retention Policy Template for Tax Practitioners — Formalize your tax firm’s policies about retaining documents related to firm operations and client records.

Optimizing your tax practice — Explore tools to manage a more efficient tax practice, enhance your operations, add value to your service offerings and reinforce client relationships.

April Walker: Hello everyone and welcome to the AICPA's tax section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the Tax Section. I'm here today with Mark Gallegos from Porte Brown in Chicago. He is a second-time guest, but welcome back, Mark.

Mark Gallegos: Thanks for having me, April.

Walker: Today's topic is about document retention, and this came to my mind for two reasons. One, on a practical level, we at the AICPA just updated some resources around this, some FAQs, as well as a document template, which of course I will share in the show notes.

But second, on a more personal level, recently my family has been cleaning out my in-law’s house and it was pretty clear that their document retention policy was to retain all documents. Either they didn't have one or that was their policy to retain everything. That was fun. But I thought this doesn't seem like a super sexy topic, but it's an important topic.

Mark, I thought maybe let's talk about the importance of a firm having a document retention policy. Maybe talk about some risks associated with not having one or maybe you have one to check the box, but you're not following it. What are your thoughts on that?

Gallegos: I know with clients I always run into either they save everything forever and then they have no idea what they've actually saved in all the boxes. Then there's ones that don't save anything.

Document retention policy is so important. It's critical, especially to a CPA firm, but even beyond that to individuals, to businesses. Because you're dealing with sensitive and regulated information, and when you're looking at that, there's different areas you need to break it down to.

Many industries we work in, including the accounting profession, you're highly regulated and you need to keep documents and you need to have a defined policy that helps define what are the legal obligations for keeping these. You don't want to be fined. You want to make sure you are the trusted adviser that can provide the information, but also you don't want to be the one that's keeping things for 20 or 30 years, that is just keeping up space.

It makes you efficient as an organization because you're basically organizing your documents. You can easily access them, and you can pull them when you need to. It's a good way of keeping security on those documents. Because at the end of the day, you want to be able to secure them.

Obviously, you can secure them in paper form, we can secure them in digital form, and we'll talk about all that. But I think there's different ways, because it is sensitive information, to make sure that you're also doing that. I think one of the most important things is from my perspective, from an accounting firm perspective, is client trust.

They trust us with their information. They trust us with their documents and so we want to make sure that we maintain a systematic approach to handling their information in a sensitive way.

We have that responsibility, and our reputation is on the line to make sure that we're holding up to that. But beyond that, there's a lot of risks that can go involved in this. You're talking about sometimes just legal risks and regulatory risks, like we mentioned.

If you don't have a policy, you might retain the documents [for] too long or too short, or maybe you don't have a policy, so you destroy them after a year when really you should have kept them for a period of time that was in fact what you should have kept them for.

Also, now, someone needs them, and you don't have them.

Operationally, it's good to have it because without a retention policy, these documents can accumulate [and that] can lead to your whole organization being disorganized. Then when you need to find something, you can't find it. That I find is a very common occurrence out there. On top of that, security.

Walker: Lots of reasons to have one. This never happened to me when I was in practice, but I don't know if it has happened to you, or you've heard about it anecdotally. Again, hope it never happens to you, but if in a lawsuit, your records are subpoenaed and you have a document retention policy and you're following it, then maybe if you are asked to produce documents and they're outside of your document retention policy. You're not required to provide them. But if you do have them, then you have to provide them and maybe provide even more.

I think that's like a firm liability risk, also, like so many risks around this. I don't know if you have any thoughts on that piece.

Gallegos: That alone is why you need the policy. I have not run into that.

I've had other colleagues and other firms run into this policy problem, where they've been subpoenaed to provide, we'll call it tax documents, tax work papers and they don't have them.

The first thing that people asked for when they start getting more into a litigation situation is providing your retention policy and they realized they don't have one then. Now, whether they've kept them and destroyed them in the proper amount of time, now their reputation, potentially, they could be on the hook for other fines and penalties.

It's just unnecessary legal action that they get drawn into, when at the end of the day, if they actually had a policy, they can say, we kept it for, we'll say seven years and then we destroyed them. Here's the record of us destroying them and you can provide all that information. It helps the entire situation, which I think is very important.

Walker: I think so. We've talked about the importance of having a policy. What about the guidelines? Are there very firm and fast guidelines on how long you keep certain documents?

Gallegos: One of the things, for us, tax returns — you want to keep indefinitely. I tell my clients that all the time, but there are workpapers and bank statements and payroll documents.

Typically, seven years is the policy. But you want to make sure that you are adhering to what are the rules. And for whether it's a permanent document or whether it's just a work paper. [Determine] what kind of document it is and make sure your policy identifies what your policy is to keep them and then how are you taking steps to make sure that you're following that.

When you're looking at different guidelines. Obviously, the legal requirements are based on what kind of document. Is it a federal tax law mandate? Is it something that is more HIPAA, health care type stuff? Is it SEC regulations and finance? Is it legal? Then you want to establish those categories to identify those different types of documents so that you can put them into different buckets. I think that's very important in this process.

Walker: I mentioned that we have a template for it. It's again, just those general guidelines that you can use for your firm and share with your clients.

But as Mark said, we want to make sure that you understand that there could be different reasons — Government grants or something like that or different state requirements related to keeping certain types of documents. You need to be able to think through that and understand it.

[Let’s talk about] document retention in general, in this digital age. I feel like there's still paper.

We talk about offices being paperless. My house is certainly not paperless. I wish it was, but I just remember, I started practicing in the mid '90s, which makes me feel like an ancient crone at this moment.

But anyway, it was like file cabinets. I can still close my eyes and think about going into the file room, pulling out drawers and things. These were the files that need to be destroyed and we moved files around. I don't know, it’s just bananas to think about.

But [hopefully] your policy is not that the cabinets are full, and we need to go through them.

How do you think about digital storage and what are your thoughts about managing that? Digital storage seems like you have an unlimited amount. Again, you go back to, it feels like, oh, I don't need to care about this. But you really do for the reasons we mentioned earlier. What do you think about digital storage, Mark?

Gallegos: I'm with you. I started in the '90s, I think '97, and I remember filing cabinets full of paper and everything was paper. Now we as a firm, we're very paperless.

But you still see paper and I still go places where I see nothing but paper. I think it's just all over the board, but there is definitely a shift from the physical to the digital document storage. It's altered the landscape out there.

We're seeing more and more of that because everything's pretty much digital. But that's good and bad. You've got to look at it as scalability and space availability. In the past, if I had lots of documents, I had rows and rows of file cabinets or rooms just filled with it and then off-site storage. They were paying an enormous amount of money to keep that paper. Then now with digital, it's all in the Cloud, we'll say, or in some sort of format.

However, without a policy, you can store so much stuff digitally and you don't know how to get to it. Searchability and being able to access what you saved because I could save one thousand documents in the cloud. But if I have no way of really knowing how I documented it, how do I search for it? How do I find that stuff once it's there? I think that's a big thing.

Also with digital storage, it's out of sight, out of mind in some respects. At least with physical, I can start digging through and have people go through these drawers and see what you can find on this. But sometimes when it's out of sight, out of mind, it just keeps building. If I have a firm of tens of people, thousands of people and now everybody's storing and we don't have a policy, we don't have any method. Boy, that's going to be a messy digital storage facility for us.

I think the most important thing in this is data breach, security risks. What happens if I have the greatest storage system, but I haven't protected it from outside security measures? That can be a big problem.

Walker: That's probably a different podcast topic, but every time I have a chance to talk about it, I remind our practitioners that they need a written information security plan. It's required — one reason to have it, but it's also, you just have to have it because of all this data…that you hear about these breaches all the time and it's really scary.

You talked about digital files — they're just everywhere. They could be [hard to find] if you don't have a really good system. Do you have any tools or software or things that you use to help with this, with retention in your firm?

Gallegos: Yes. We have a number of things within the cloud, but we predominately use our CCH products and the document products there. We have a very sophisticated way of how we save things and how they get archived, and we have people who manage that. There's an elaborate system of how data flows and gets stored and when it gets destroyed at the same time.

We're very lucky to have the resources to be able to have a great system. But also, there are other ways out there. There's so many, whether it's accounting platforms, even Microsoft’s SharePoint, Google Workspaces. There's a lot of software out there that can provide different tools. I think it's finding the right tool that works for your organization. What documents am I managing? Is it industry-specific? What are the integration capabilities of my system with this? Then I think [about] stuff we do and I think other people do too, is just regular training and updates. How do you maximize the effectiveness of these tools? Because just like anything, you'd go out and put on your phone the greatest app in the world but if you don't actually know how to use it, it's really not going to provide you any value.

Walker: Useless. I've done the same thing trying to keep up with my to-do list and things. There's some great stuff out there, but then it's all human-dependent at a certain level. The robots haven't taken over the world yet anyway.

We touched on this, but I think it's important to touch on it again, and that is recommendations to clients about their records. I feel like that was a common question that I got and I'm sure it is for you too, Mark. How long should I keep my tax return? Like you said, indefinitely for the tax returns, but that doesn't mean every piece of paper associated with that tax return.

How do you help your clients think about the importance of maintaining those records without going overboard and going into a hoarding situation, and then also the digital? Something sticking in my mind is that you as a firm are not your client's document retention [policy]. They should keep copies of their tax return. At a certain point, you're going to get rid of them and they can't ask you, do you have my 2000 tax return or whatever the year is? No, I don't have that, even if you've been a client for that long. How do you help that? We've talked about security, so you need to preach that to your clients too, of course. But what are your thoughts on that, Mark?

Gallegos: This is a question I get quite a bit, guiding our clients on document retention. It's more of a balancing act sometimes, ensuring compliance, but also helping them. A lot of them are hoarders, whether they want to be or not with that information. I'll have clients to call up, for example, and say, I've gone through my basement, and I have 30 years of boxes of tax documents. So you have to specify what kind of tax documents. Is it the actual tax returns or is it maybe all the work papers? W-2s, 1099s, etc.

I think that's where the template that the AICPA has is great for giving some guidance on what you should do. But I always tell my clients, look, tax returns, keep them indefinitely for yourself. Whether you want to know or not, it's just good to have in case you ever have to pull it out. But basic document storage of your records that support the tax returns, the seven years, or whatever makes sense for your situation is what you should keep.

But I agree, we keep our records for ourselves, it's not because we're keeping them for the client. I think that is where, again, circling back to the whole idea of having a policy is important. From a legal standpoint, assessing business needs, making sure that document management system is efficient. How are we handling it, whether it's paper or digital? Who's managing that? We have some key champions or practice leaders that are involved in that. What are the risks? What are the costs involved in making sure our system is up to date?

But also, just constantly promoting how do we keep it clean? How do we keep it moving forward? By having that, when clients ask you for their own, whether it's their business or individual, you can give them the same insights and then help them determine what policy they should have. Even if you're not a client, you just sit at home, and you've got all kinds of records. Say, I’ve got phone records going back 10 years, should you have that or not? Maybe you should create your own home policy, those things.

Walker: Good advice. Mark, as we're wrapping up, [do you have] final thoughts [to share] on this topic as you're thinking about document retention.

Gallegos: I think it can be a generic topic where people go, whatever. But I think it's more important. Where I see this [being critical] is [due to] all the legal things that come out. Unfortunately, there's a lot of lawsuits that fly in a given year, whether someone is involved or not involved or it's indirect. But needless to say, the one thing that will always come out of it is provide documentation or memos. If you were supposed to have that and you destroyed it or if you have a policy that says you should have kept it — If you should've destroyed it and now you still have it, you still got to produce it. It's all these things that come along that are very important. But also the security risks, the challenges that are involved in that, and sometimes just the cost that's involved. There's a lot involved there that you’ve got to really make sure of in the regulatory and compliance area.

I think so, staying compliant, enhancing your efficiency, helps minimize your risk and at the end of the day, from an accounting standpoint, it builds our trust. Our clients know, hey, you're the trusted advisor. You got our information and you're doing everything you can to make sure that is taken very seriously.

Walker: That's great. Just had another thought as you were talking, and that we didn't specifically talk about is emails and maybe other methods of communication with your clients, text messages. Again, I feel like that's a whole another podcast topic. Why are you texting with your clients? But anyway, at least there are ways to do document retention on emails. But I feel like that's where I've heard things can really go awry with liability situations, so make sure you're thinking about your emails and your email correspondence and any other correspondence with your clients when you're thinking about document retention.

You're a second-time guest on here so you know this question is coming, but I like to think about us taking a journey together towards a better profession and I love to hear about your other journeys outside of tax. What have you got on the horizon? We're at least having a pause in tax season, hopefully, you have something fun planned.

Gallegos: Obviously, busy season and tax season coming to a close is always not only a relief but it's like a celebration in your soul. For me, it's taking a step back to enjoy family and friends, to just thank everyone more intentionally that you maybe didn't get a chance to. But also, I think for me, it's all the soccer games to go to, it's all the school events, it's all the vacations that are coming up.

In the summer, we're going to take my family to the Outer Banks. We go every year. It is one of the most, for me, the relaxing week of my life because I just unplug and I literally get to enjoy beach sun and just relaxation. It's the one time a year more than any time that I really recharge. Not that I need a lot of recharging, but it does help.

Walker: Everyone needs recharging in some way. You have a graduating senior just like I do, where I'm sure there's stuff going on around that as there is at my house too.

Gallegos: Absolutely.

Walker: Thank you so much, Mark. I appreciate your time today and hopefully, we have provided some great information for our listeners.

Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us and listen to us wherever you find your podcast and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax and find all our other episodes as well as the resources mentioned in this episode as well as others. Thank you so much for listening.

Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices.

This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

In this episode, listen to a conversation with Jody Padar, the Radical CPA, about the evolving role of CPAs in the face of technological advancements. Jody emphasizes the need for proactive communication, year-round tax planning, and restructuring business models to prioritize client needs so that CPAs can maintain their relevance in the accounting industry.

To learn more about Jody and her new book coming out soon, please visit her website.  

AICPA resources

Reimagining your tax practice — Tackle today’s top practice management issues with insights and tips from pioneers in the tax community.

Transforming Your Business Model — “Transform” indicates a dynamic but collaborative change that our business models will support. This concept invites firms to join the discussion and explore their businesses through the lens of the five focus areas.

Transcript

April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcasts, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the tax section and I'm here today with Jody Padar. She is the Radical CPA. I can't wait to hear more about that.

I think we’ve both heard of each other, but we've never officially met. I'm excited to chat with you today.

I saw a LinkedIn post that you did sometime during last week about communication gaps between clients and tax advisers. It really just resonated with me and so I reached out and I'm super appreciative that you sat down with me, we're actually chatting on April 15th.

I'm happy to not be scrambling around doing tax extensions today, but I think we will have a great conversation today. Let's start off with a quick summary about your observations that led you to that post and just where you're coming to this conversation from.

Jody Padar: Sure, I'm Jody Padar, the Radical CPA, and probably one of a handful of branded CPAs. I've been creating disruption in the industry for years now and really it began as a small innovative firm owner almost 15 plus years ago. I was at early cloud adopter, disrupted the space around cloud and technology. Fast-forward, I owned my own firm for 14 years. I sold it in 2020 right before the pandemic.

I joined Botkeeper for a couple of years, so I went to the tech side and then I was recruited away from Botkeeper to April [which] is the name of the software company. I started to build tax software from scratch.

Now I currently work as a senior adviser to April and then I'm all-in on being the Radical CPA and helping firms evolve to the next level of, I'll say, disruption — it's not really just disruption. The next level of relevance, really, as AI and all the new technologies come into firms to evolve them to stay relevant in the future.

How I got to that post was, I sold my firm in 2020. A couple of clients last week reached out to me because they were actually resold. When I sold, they didn't join Botkeeper. They actually went to another practitioner and then that new practitioner was sold again.

Fast-forward, they're in a new firm and they reach back out to me because where they landed in the new firm, they are not feeling heard. Ultimately, they do not feel that this new firm is listening to them and I don't think that they're unusual on that.

When you see the post, and it got over 150 responses, a lot of tax practitioners feel that not all firms treat clients the same way from a feeling perspective. When I talk about it, I'm talking about in [terms of] small businesses under a million in revenue. I know it could go up, but that's my sweet spot.

I think what happens is practitioners get the technical right and they get the deadlines, but they forget that the consumer that they're serving really doesn't care about that. They don't know any different, but they do know how you make them feel and they're not feeling heard. They're not feeling they're getting the right explanation and they're not feeling that CPAs are giving them what they're paying for.

It was interesting because there was a little bit of scuttle on it saying — you sold your firm pre-pandemic — what do you know? That was the feeling and I get it. It's been a rough few years. But if we're not selling and we're not meeting our customers needs where they need to be due to product market fit, what value are we to them? We can't complain about deadlines. We can't complain about lack of talent. We can't complain about all that other stuff because ultimately, we're here to serve our customer.

If our customer is not getting the feeling that they need and the understanding that they need about their tax situation, guess what? We're not going to be relevant because there are technology companies coming into the space that are meeting those needs.

I think that's the hard part for practitioners to hear. Again, I'm the person who's pushing the bleeding edge, but I think it's a real eye-opener to say, your competition is not the firm down the block. It's someone else in a technology space whose meeting their needs from a feeling perspective and a communication perspective and an understanding perspective and if we want to still be relevant and do business as tax preparers in the future, I think we need to up our game.

Walker: I love all of that and I call myself a recovering tax practitioner because I'm on the other side now. But I love, it's really a passion of mine, to think about, we can re-imagine this. We can rethink the way it traditionally worked. It didn't work for me to stay as a tax practitioner and why was that? But I love it — asking the hard questions and making people think, hey, maybe it's not everybody else's fault. Maybe you need to look in the mirror a little bit.

Let's think about when back when you were in the trenches and a firm owner, what strategies did you use to build those strong relationships with clients? Because that's really what we're talking about today. We're talking about communication and relationships. And no, an AI bot is not going to be able to do all the tax returns. That's not what we're saying. I know that's not what you're saying, but technology is going to be able to do a lot of things. The relationship is where we've got to figure that piece out.

Padar: The more technology comes in, the more human we have to be. We have to up our game on relationships. One of the reasons I'm so radical is because I threw out the billable hour. I was all about fixed fee pricing. How do you price a tax return upfront by getting paid up front for the work you're going to do, making sure that you're talking to the client quarterly at least, if not monthly, from a tax perspective and doing planning year-round.

I didn't let just tax returns come into my firm. You had to come in for at least quarterly projections, if not more. Restructuring your business model so that it is meeting the customer's demands and where they want to be. It's very hard to appease a customer when you're only talking compliance because the value in tax [work] is in the planning, it's not in the return.

How do you position yourself to do that? How do you set your pricing? How do you set your sales process? How do you set all of those other things? Then when it comes to communication, it's about scheduling those calls ahead of time and having those conversations year round. If the customers are cranky in March, it's because they haven't been communicated through the whole year. Because we know in March, that compliance document shouldn't be a surprise. Because you should have done planning before year-end and you should have had conversations the prior June about where that taxpayer was standing.

Again, it's how do we re-imagine who it is we're serving, what it is we're selling and how we deliver it so that our customer is the focal point of it. Because I think in years past, it was always like, that’s the end result and that’s not it. We need to re-imagine the whole process.

The thing is we can schedule these things. We can put in strategies to have conversations four times a year. Again, if you think about pricing and how [changes to the model can be] very disruptive to a firm. But if you price upfront for it, then the customer, they see it as part of what it is they get and you're not chasing them down. You send them an email and say, it's time to schedule our quarterly appointment. They put it on their books and you have that tax planning conversation as opposed to asking them to ask for it. Because they won't ask for it because they don't know it's important to them. They don't know what to ask for.

Walker: True. Another thing I was thinking about was, and this is a topic that's come up on this podcast before, is talking about active listening. It's definitely something that is a skill that I'm working on. In my life, in my family, in my dealing with listening to what people need. But let's talk about how important it is or how important you feel it is and building that bridge really between being that compliance [focused]: I asked you questions, you tell me things, I prepare a tax return, I check it off and I'm done and being a true business advisor.

Padar: That's where, again, I think it comes into scheduling these conversations and making tax a year-round conversation and restructuring your firms. That is part of what you do in the off season. Have these conversations at least quarterly- could be more- so that you’re used to talking to this customer and they’re used to calling you when they need you.

I would argue that most of this comes down to pricing because I think pricing is the number one thing that pushes people from calling their CPAs. If they think they're going to get billed by the hour or if they think there's going to be an extra charge for this, they don't call and it's very hard to be proactive when you're not getting called. When you fundamentally shift that pricing model, now all of a sudden your customers are calling you all the time and you can be proactive and you can actually even sell more services.

Because now you can step back and say, you need that calculation, happy to do it for you. Whereas in traditional firms, what happens is the customer doesn't call, they make some decision and now you're trying to figure it out in March. Then the taxpayer is mad at you because now they have this huge tax bill and they think it's your fault when ultimately in reality, you can't do anything after December 31st. Had you called me in August, we could have planned for this. But we get the blame, because we're the one who prepared the tax return.

I would argue, but if your customer felt there was an open-door policy where they knew they could call you all year and they weren't going to be nickeled and dimed for those phone calls, they would call you and you could then get proactive around tax planning.

We've created this problem ourselves, but we can undo it. It's just a matter of restructuring our firms to be radical. This is stuff that I've talked about for years. This is not new to me. What I think has happened though, is that the market has changed so much and I would argue that tax practitioners have felt it for a while, but it seems to be more extreme these days. It seems to be that more customers are demanding more and they want more, I'll say post-pandemic. How do we adapt to them?

Because if we want to be relevant, we truly have to have product market fit. I do’'t believe that CPAs have product market fit anymore. I think that they used to, but I think today professional service firms, the way we operate is not conducive because our customers are used to dealing with an Amazon type of experience, and they want that experience. Most firms, you send them documents and maybe you ask a question, it might be three days before someone gets back to you. Unfortunately, I think part of the reason firm owners haven't changed is because it's not just the front side of the house, it's the back-end of the house that we have to reorganize. We have to standardize, we have to productize our service offerings on the backend so that we can have a clear front end.

There's packaging and pricing on the front, but firm owners have to get their act together on the backend with the way they standardize the way they collect documents, the way they set meetings, they have these advisory conversations with their clients, the way they standardize all of those activities. They can't have seven different partners doing seven different ways in a firm. Unfortunately, it's still like that today.

Walker: Definitely. I was just thinking as you were talking, I feel like where the push is that these traditional firms and practitioners have all these clients. They don't have time to service all of them or they don't take the time. This is a general statement. You don't take the time to figure out what is my actual right fit [client]? That means getting rid of some, I think it has to be, if you're going to truly give the same experience that we want to give, an Amazon type experience, it has to be fewer people.

Padar: There's a talent shortage. There absolutely is a talent shortage, but that's supply and demand. Either you have to raise your prices and hire more people and pay a premium for them or you have to cut some of the clients you are serving today. That was some of the scuttle in the LinkedIn post saying who's going to serve them? If you can't serve them to the level they should be served, you are doing a disservice to your firm and to the customers who are paying a premium price and that's reflective of your brand. I get it, you're trying to be nice to these customers you've served for all these years. I get it. I was in that place and I had taken over my dad's clients, so I had some of those legacy clients.

But a certain point, they either have to pay more to get that level of service or they have to find another alternative. It may be a do-it-yourself product or it may be something else, and that's okay. But you can't let your business suffer because you're trying to help these people who "can’t afford it.” They’re making decisions every day about their priorities and what they’re willing to pay for. Some will be willing to pay for your services and some won’t be, and that’s okay.

I think that's the place we're at today. Firm owners have to really embrace that mindset and say, okay, who am I serving and how am I serving them? Because right now, taking everybody and giving them all not right level of service is not the right business move because now your good customers get annoyed with you too, and they'll go find somewhere else because they're not getting the service level that they want so that you can take care of these people who have been with you for years, who I would argue most of them will pay more because they trust you, they love you, they want to stay with you. You just have an ask them to pay a premium price.

Walker: This is really a tough love conversation right after the tenderness of April 15th. But sometimes we need to have these conversations. I'm also thinking about professionalism and customer service versus creating boundaries like clients that'll text you at all hours of the day and night. We're saying customer service, and then we're also saying, you've got to have boundaries because this is a business relationship. What are your thoughts on that or how to tackle some of those concerns?

Padar: Well, I think that depends again, on your pricing model, because you can have first-class clients who you will respond to at all hours of the night because they're paying a premium for that service. They want that service. They want the white glove service. But the other services, when you get to packaging and pricing, you can have a standard SLA service-level agreement where you'll respond to an email in 24 hours, but you'll spell it out.

I think that's the other piece of it is like, how poor are we at communicating what the expectations are for how our customers are going to interact with us? If we don't lay it out in a service level agreement and say, look, this is the price you're going to pay and we're going to respond within 24 hours or we're going to respond within 48 hours or whatever it is for your firm, then everybody's on the same expectation. If they don't follow it, you can always go back to them and say, hey, look, this is the price you're paying and you said that you were good with 48-hour turnaround and now you want me to respond in a half-hour, guess what? You're going to either pay more for that or if they're really abusive in it, may be the conversation to have, hey, maybe we're not the right fit anymore.

But these are all clarity around expectations that unfortunately CPAs never did before because it was always like, Oh, I'll bill you by the hour because the pricing model didn't make you rethink these things. If you rethink them and you think about it from a different lens, now all of a sudden you can set those boundaries. Again, I think people always get freaked out and they're like, oh, I don't want them calling me all the time. Guess what? Nobody wants to talk to their CPA every day. You can put unlimited calls in and guess what? They're not going to call you every day. People don't call every day, they really don't. Yet it gives them peace of mind and they'll pay a premium for that because they want access.

It's like when you look at these concierge doctor practices. People will pay a premium to be able to be seen within a couple of days or that day. It's funny too, because when you think about it, if you're sick and you call the doctor, like to me, there's never tax emergency.

Walker: We're not saving lives is what I say.

Padar: How many notices happen before that became an issue?

Walker: Right,100%. This has been great. I feel like we're on the same page with this, so we just need to get everybody else on the same page and then it will be a lovely world. Any final thoughts on any of these topics as we're wrapping up?

Padar: No, I just think that you have to realize that it can be done. I think so often we come out of this rat race of tax season and we're overwhelmed and we think, oh, we've got to change something. Then we take our vacation and then with summer, and then it's fall, and then we have extensions and then we're back to another tax season. The reality is you can't live in that world anymore, you have to change something and it has to happen right away. Because if you don't, you blink and it's another tax season.

There are lots of firms out there who are doing things like this. It's not like years ago when I was preaching a lot of this stuff, people said, oh, you can't do it. Oh, it's not proven. It is proven now. And there are lots of firms who are proactive and have redefined these new business models. Look to them, see what they're doing. Most of them are willing to help and talk you through it. Because ultimately, we became CPAs because we wanted to serve our clients and ultimately that's at the core of this. How do we serve our clients better? How do we still have lives? We can work less hours and actually enjoy the things that we do.

Walker: Wonderful thoughts. In closing on these podcasts, I like to think about us taking a journey together toward a better profession. Shoot, being radical. I love that part. In doing that, I like to get a glimpse of my guest's other journeys outside of tax. Jody, I'd love for you to share a page from your travel journal or a bucket list trip or something like that you have on your mind.

Padar: I recently got back from Australia and it was amazing. I would encourage anyone who hasn't been to Australia to make the trek on the airplane, which I was a little bit nervous about, and it was definitely worth it and it was amazing.

Walker: Super. Thank you again, Jody. This has been delightful. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much, and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax, and find our other episodes, as well as resources mentioned during the episodes. Thank you for listening and I hope everybody has a nice deep breath relaxation before they get into some of this hard work that Jody has pushed us today.

Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices.

This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

Elizabeth (Liz) Young,  the new Director of the AICPA & CIMA’s Tax Practice & Ethics team joins the podcast to discuss the importance of clear communication with clients, especially during the tax filing season.

Liz emphasizes the need for valid contracts and signed engagement letters before filing extensions. Common  risks and pitfalls associated with not having them in place include improperly filed extensions, missed deadlines, fee disputes and potential loss of revenue.

Sharing her passion for safeguarding the profession and futureproofing it for upcoming generations, she is focused on initiatives to recruit, retain and support young practitioners. 

 AICPA resources

Say "I do" to engagement letters — Understand the importance of establishing parameters of client relationships and detail the scope of services to be provided.

Tax Extension FAQ for Clients — Do you have clients who are hesitant about filing an extension to file their tax return? Communicate the who, what, when and how to ease their minds.

Annual Tax Compliance Kit — Engagement letters, organizers, checklists and practice guides help you manage your tax season workflow

Tax season resource center — Access the AICPA’s central hub for guidance, tools and developments throughout the tax filing season.

April Walker: On today's podcast, listen for some important reminders for the upcoming April 15th deadline.

Hi everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, Lead Manager from the tax section, and I'm here today with Liz Young. She is my new boss and the new director of tax practice and ethics team here at the AICPA. Welcome, Liz.

Liz Young: Thanks, April. It's great to be here with everyone.

Walker: Here we are. We're actually recording this on April 1st, but it will post later in the week, and April 15th is coming up very quickly. I'm sure our members have everything handled and in order and ready to go. But in case you don't, I thought we could talk through some deadline oriented questions that we get a lot and get your thoughts on them, Liz, especially considering your most recent position which was in KPMG and risk management.

To start off, let's talk about filing extensions. Because in the next week or so, you're either filing extensions or you're wrapping up returns. I thought that'll be a good starting place.

I'm thinking about two different scenarios. First, your clients that you've had forever. You're sure they're going to sign the engagement letter, but they haven't signed it yet. You've been in contact with them for this and that reason, but the return's not going to be completed before the deadline. It may be that their tax returns is always on extension.

What are the risks and pitfalls in this situation with filing an extension without having that signed engagement letter?

Young: Thanks, April. It's great to be here today and it's wonderful to have the opportunity to talk about this topic with you. It's certainly a topic that is very important to me.

First off, I would like to say I'm extremely happy to be back on board with the AICPA and the tax practice and ethics group. I used to be in the policy and advocacy group at the AICPA for four years. It's really great to see another side of things here as well.

But previously, as you mentioned, I was in KPMG and their risk management group, and I got to see a number of issues that practitioners face, specifically in this area. Our group at the firm always took a pretty strict approach here when looking at both professional standards and applying risk policies to these types of scenarios.

I'll address a few things that I think are important to consider specifically.

For example, there are both reputational and professional risks that come into play here and that can arise with regard to performing work when the taxpayer is not actually a client or is no longer a client because the terms of the contract are no longer valid.

Really the fact of the matter is if there is not a valid contract in place, then there's not a valid client relationship, and you should not be filing an extension on behalf of the taxpayer. There are certain nuances that can arise, but really, we recommend taking a strict approach in this type of situation.

Further, take into consideration that contracts typically last for a set period of time.

For example, a standard term can be 15 months. That's typical of what we would see at KPMG and would have in place at the firm. If returns or extensions are filed without proper contracts in place or when there are lapses in contract terms, because you go over that 15 month period, then a number of things can happen.

For instance, an extension may be improperly filed because the extension is not reviewed by the taxpayer before the filings occur. Deadlines might be missed if the wrong extension is filed.

For example, what if there was a structural change that occurred and the firm who prepared the extension was not aware of the structural change? The wrong extension might have been filed for the wrong entity. Perhaps if you're looking at an extension for a state return the wrong state was included, you might not be aware of this.

There can also be issues such as fee disputes that can arise subsequently when the client comes back and will not pay because there was not an agreed upon fee structure in advance for the work.

Ultimately, there may be time lost that needs to be written off by the team, and ERPS (enterprise resource planning system – a billing system) might need to be adjusted downwards when the expected fees cannot be collected. Really, these are just a few examples of pitfalls that can occur and traps for the unwary in this area.

Walker: As you were talking, I was just thinking that never happens – that our client doesn't tell us stuff that happens during the year, like a structural change. But really it doesn't [always] happen, [and this could be the result]. I know our listeners are probably a wide range of firms. We've acknowledged that KPMG is certainly one of the top four firms.

People who are listening are not necessarily in that situation. In thinking about that, yes, I appreciate you bringing up the risks, but then looking at it from the other side, what about that long-term client? That they expect you to file an extension. You don't file an extension. What are the risks there?

Young: Sure. Yeah, we definitely see that a lot in small to mid-size types clients or firms sizes. There are definitely risks to consider here as well with all types of firms sizes when an extension is not filed.

First of all, I would say business risks impact everyone in this type of situation. You mentioned the client relationship can be hurt long term. If the taxpayer believes they are your client, has an expectation that an automatic filing may occur on their behalf, say, due to history, but then ultimately it does not, you could lose out on long-term work. This directly impacts fees and revenues to the firm if there is this damaged or lost relationship.

There are other things to consider as well. Another element that's very important to consider is that if a filing is missed, then the client, no matter how large or small, will also face penalties imposed by the IRS potentially from missing the filing deadlines. You could have failure to file penalties, failure to pay penalties. This may be a surprise to the client. If they didn't know they missed a deadline because they were expecting you to file. That's a main point of consideration as well.

There's also statute of limitation concerns to be aware of. The statute of limitation typically starts to run three years after the return is filed. If you have an extension that's properly granted until October 15th, then three years would run from then if the return is filed on October 15. But if the extension has never filed, then the extension of limitation would begin to run three years after the tax return initial due date. The client may believe that their statute of limitation is different. That's something to be aware of as well because that's definitely a cause for concern.

I think the bottom line is that it's very important to be proactive with your clients, no matter how big or small with regard to communication about these potential risks that can develop and the importance of entering into a valid contract because of that.

Walker: That's what we were talking about when this came up. Just [having] better communication - I think will be a theme of this podcast today. Just making sure you're communicating exactly what your expectations are, and if your expectation is, "Hey, we're not going to file an extension until you sign this engagement letter." Even if we've done not a stitch of work for you that we're just not going to do it.

I’m thinking about another kind of set of circumstances and that would be clients, you really just haven't heard from at all. You're aren't 100% sure they are are going to be a client. You addressed some of these in earlier conversations, but I feel there's two steps. I've got a client list and I haven't heard from them and you're really busy. What are the risks or pitfalls in this particular situation about filing an extension? Again, when you haven't heard from them. And then recommendations that you might have [considering the] limited amount of time [remaining]. What would you recommend in this case?

Young: Thank you, April. I think as we have been emphasizing so far - communication is really key. The firm needs to be clear with the taxpayer that if the they are going to continue to be a client and the firm is going to continue to do work for them, then both parties need to have a contract in place by "x" date or the firm is not going to be able to do the work.

This communication really needs to start as early as possible and well in advance of the due date for any tax filings, so we're not down to the very last-minute. That really goes into planning for this in advance of the due date for filings that are going to incur, because it's critical and it should really be part of the annual planning process.

If the firm doesn't hear from the taxpayer after continued outreach, the best practice here is to not do the work and assume that the client relationship is no longer in place. Again, a pretty strict viewpoint should be taken related to this, but communications should be undertaken continuously to try and be as clear and concise as possible to try to resolve any ambiguities with regard to if there is in fact a client relationship in place or not.

One thing that can be considered is upfront is to enter into multi-year engagement contracts, so that any work would be covered for a longer period of time without a risk of lapse to the engagement occurring. When you get up to that deadline that's coming up in a couple of days, you'll know that you're already covered because you have a multiyear contract in place.

If you tend to have a client that tends to be on the quieter side, you can negotiate more upfront originally to try to get a longer contract term in place that would offer better coverage. Or if the client doesn't want to sign or they are lingering because there's terms in place that they don't like, you can allow for time upfront to go back and forth with them. If there's legal counsel available at all to work on contract term modifications that are acceptable to all parties, that'll help prevent scenarios from arising where you aren't sure if a taxpayer will still be your client or not for the upcoming compliance season.

Walker: Those are good thoughts. Again, some of this might not be realistic as we're talking about really short-term, but again, hopefully something will stick in your mind and maybe it's- we'll do better next year. I'm also thinking about quality control and accuracy during this crunch time. I remember when I was in practice and I was working a lot, and my brain at certain point just started getting really fuzzy. [What] advice, support, encouragement for practitioners [would you like to share for] this next week or so.

Young: Sure. I think because of the short turnaround, the time-frames that happen at the end, is why it's even more of the utmost important to just be cognizant of this type of risk during filing season.

My advice again would be to make sure that you're taking time to properly address the situation at hand. There are, of course, inherent pressure related to trying to rush through and finish before 4/15 or whatever the deadline is that you're looking at. But it's always a best practice to take a step back to make sure that you have the proper engagement letter in place that clearly covers the term of the work before the work is commenced because as you mentioned, mistakes can easily be made, especially during this time of year.

I know here at the AICPA, we actually have specific resources that can assist in this area. For example, I believe we have a number of best practices for engagement letters, tax return extensions, access to numerous engagement letter templates. I don't know if maybe you can comment more on those for our audience as well in terms of tools that they can leverage to help during this situation?

Walker: Absolutely, and I'll put some links to those in the show notes.

Also, when thinking about this upcoming deadline, I feel like extensions [are a good idea], even if your client is expecting for you to finish your return. It may be in your best interest to file an extension and just wrap the report in the next couple of weeks.

We hear a lot of times that clients are not understanding of what an extension means for them, so that we do have some resources around that, which I'll put in the show notes about dispelling myths and that sort of thing. We'll definitely put those in there.

Then my next thing I'm thinking about is as far as deadline-oriented questions, the seemingly constant requests for tax return updates that are happening right now. People probably were on spring break either last week or this week, but then they start thinking about, Oh my gosh, my tax return is due. Just want some thoughts again for our listeners thinking about all those contacts.

Young: Absolutely great questions and points of interests for consideration. But what I would say is absolutely leverage the team that you have in place, use your administrative staff to help with communications to your client, to put together filing deadlines, schedules to help set clear expectations while in advance, set deadlines for your clients and stick to them and have your clients stick to them as well. [Make sure] you're holding them accountable if you aren't receiving the documentation that you need from your client to move forward successfully or answers to questions that you're putting out for them and try to set clear boundaries and expectations so that they're aware that there's a risk to the work being completed timely and accurately.

They need to be able to meet obligations on their end in order for you to meet obligations on yours. Make sure you have a good staff in place as well to help with workflow and updates coming through and that their workloads are managed and planned out as much as you can as possible. I know, of course, easier said than done but building in any extra time for these updates that may occur can be extremely helpful, especially as you close in on that deadline.

Walker: Already knew this, but I'm really glad we're all on the same page with this. I've been preaching this for some time and I'll continue to shout it from the rooftops.

Let's pivot a little bit and Liz, I'd love to hear from you. [You are] a couple of weeks into this new role and [we know] how important it is supporting our members and our tax practitioners. Do you have anything special passion projects that are on your agenda or what you're thinking about as you're transitioning?

Young: Oh, yes, there are so many interesting things here that we get to work at the AICPA. That's actually one of the things I loved when I was here for four years previously too, every day is dynamic, every day is challenging when you get to work with such great people and our members are so wonderful and we have such a great impact.

But I think in particular I have always had a great interest in working on how to safeguard our profession and future proof it for generations to come, which I know is a big initiative here. I believe the AICPA has an opportunity to make a material impact on the profession for the future, starting with our young accounting folks and encouraging them to seek careers on this wonderful field.

I know I've had a wonderful career myself and as we face an ever-changing and dynamic landscape, I hope to directly be involved with efforts to recruit, retain, and support our young practitioners coming in. I think it's really important to showcase our great field and to address the accounting shortage head-on to really help young people realize how great a need there is for skill sets in this area and that there can be vast opportunity for success long term.

I know myself, I've definitely been a tax nerd my whole life and I love taxes specifically, of course, shouldn't everyone? No. But I would say I try to be a fun tax nerd. I love to help others see potential as well and all the opportunity available to them. Probably one of the most important initiatives I'm looking forward to working on directly here.

Walker: We're always excited to do that and same, I love talking about, how many different things you can do, different roles you can play as being a tax practitioner and being just a CPA in general. There's so many different things you can do and trying to encourage our younger generation. I have a getting-ready-to-go-to-college child myself, who is not very interested in accounting, but I still try to offer it up as, hey, it's a cool career. So we'll see if that sticks one day.

Liz, it’s so fun to be with you here today. In closing on these podcasts, I like to think about us all taking a journey together towards a better profession. The Tax Section Odyssey -we're journeying together. I like to get a glimpse of my guest other journeys outside of tax. Liz, tell me something from your travel bucket list or a recent trip you've been on, or something that you enjoy doing.

Young: I would say my family are avid Disney fans. We have a membership to the Disney vacation club and we get to spend a lot of our time or a lot of our free time down there. I have a four-year-old and a two-year-old and they're just really great ages where they love it. We spend a lot of time in Florida looking for Mickey Mouse and I have a vast ear collection- Minnie Mouse ear collection- that I love to sport while I'm down there. I love to travel in general, I've lived in France twice and love to get back as much as possible. Yes, there's always somewhere new to see, I would say my bucket list is ever-growing.

Walker: Disney is definitely fun. It's the happiest place on earth, and that is mostly always the case.

Young: That is true, mostly always.

Walker: Alright. Thank you again so much, Liz.

This is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcast and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax and find our other episodes, as well as getting access to all the resources we mentioned during this episode.

I wish everyone a happy almost April 15th and thank you so much for listening.

Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices.

This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

Steve Turanchik from the AICPA’s Digital Assets Tax Task Force discusses upcoming reporting requirements for digital assets. Sec. 6045 will require brokers to report transactions involving digital assets, similar to how they report securities transactions currently. This is meant to combat anonymity concerns and improve tax compliance. However, the reporting rules have been delayed multiple times. The AICPA continues advocacy efforts in this area, providing comments to highlight issues and gaps in reporting requirements.

AICPA resources

• Digital assets and virtual currency tax guidance and resources — This hub is your go-to library for AICPA guidance and resources as well as current legislation, IRS initiatives and tax advocacy projects.  

.  Advocacy

·      AICPA submits additional comments on the proposed Sec. 6045 regulations on gross proceeds and basis reporting by brokers and determination of amount realized and basis for digital asset transactions, March 4, 2023

·       AICPA comments on the proposed Sec. 6045 regulations on gross proceeds and basis reporting by brokers and determination of amount realized and basis for digital asset transactions, Nov. 8, 2023

·       AICPA comments on virtual currency reporting under Sec. 6045 and Sec. 6050I, Form 8300 and instructions, Oct. 28, 2022

Other resources

• IRS Digital Asset page — Recently redesigned page to provide the latest IRS information on digital assets
• Treasury and IRS announce that businesses do not have to report certain transactions involving digital assets until regulations are issued, Jan. 16, 2024

Transcript

April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the Tax Section.

I'm here today with Steve Turanchik. He's an attorney with Paul Hastings in their tax, litigation, and controversy practice. He's also a member of the AICPA's Digital Assets Tax Task Force. That is a mouthful.

We are wrapping up this three-part series, I hope you've been listening, but you can always go back and listen to the first two parts, on digital assets here on the Tax Section Odyssey. It's been a wild and fun ride.

In today's episode, we're going to focus on reporting for digital assets. We're going to be talking about when that's scheduled to happen, what it will mean, what it will not mean, when it will actually happen as far as we know, at least at this moment, and what you need to do to help businesses and individuals that you work with in this space.

Steve, always, especially with this topic, I like to start off at a foundational level. I'm still learning terminology in this world and I bet our listeners are also, but talk to me about what we need to know about Sec. 6045 and 6050I. What are the key things that we need to be paying attention to?

Steve Turanchik: I'm happy to address it. Let me say, information reporting is rarely a fun topic. But for our members, it's going to be incredibly important because as information is reported to the IRS and to their clients, the practitioners are going to need to decide how they handle that information that's reported. You've got to account for it someplace. If you don't, the IRS sends you notices asking — hey, where is this information?

Let's step back prior to these code sections dealing with digital assets. We'll just talk about them generally.

[Sec.] 6045 is in the code because it requires brokers — that is the JPMorgans, the Schwabs of the world — to report when their customers have transactions involving securities. If you have an account at JPMorgan and you sell a security during the course of the year, JPMorgan will report that to you and the IRS on a Form 1099-B that is dealing with the reporting of securities.

There was a bit of a hullabaloo when that first came into play so far as information reporting to making sure basis was reported. This was one of the tools in Congress's toolbox to get people who are dealing in digital assets to report those transactions dealing in digital assets. Remember the big concern about this. When you go back to Bitcoin and the Blockchain and the various types of protocols that exist in the world, the concern from the government's perspective, including the IRS, is that these transactions were taking place anonymously. There was no real way to go about tracking these transactions.

Congress, in its infinite wisdom, has put into place an amendment to [Sec.] 6045 that requires people who are dealing in transactions on the Blockchain to report those transactions to the IRS. We're going to get into what hazards are going to come along with that and the various snafus that we are invariably going to see in a few minutes, but the basis of [Sec.] 6045 reporting was the brokerage reporting. That is, your JPMorgan and Schwabs reporting securities transactions to the IRS to assure that people who had money or had assets on those exchanges would report them to the IRS.

Now let's turn to [Sec.] 6050I. [Sec.] 6050I is historically been used to report transactions in cash. That is, greenbacks. If an individual or business comes into an art dealership or an automobile dealership and they bring in more than $10,000 in one transaction or a series of transactions, that trade or business was required to report those transactions to the IRS on a Form 8300 within 15 days of receipt of that cash. For those businesses that dealt heavily in cash, it just became a relatively standard way to go about reporting those transactions. Like it or not, if you're dealing in cash, you're receiving cash and you fail to report those, the penalties can be pretty severe.

With that in mind, that's where these two sections come from. Under the new legal requirement, if any person who in the course of their trade or business, it is important to note that it is part of your trade or business, receives more than $10,000 in digital assets in a single transaction or series of transactions, that needs to be reported to the IRS within 15 days. It's not limited to whether it's a taxable transaction. If a borrower is repaying a loan in digital assets, that needs to be reported. If funds are being raised in a capital raise, a venture capital firm, or an investment fund, if they're receiving digital assets as part of an investment, that also needs to be reported to the IRS. The penalties for failing to report that get to be pretty severe.

I understand the policy reason for it is that the IRS wants to see more and more reporting about a part of the economy that they believe is anonymous, that it's running under the radar. [Sec.] 6050I was put in place really to combat two different things.

First was tax evasion. If you're dealing in cash, it's hard to track. But the other part of it was money laundering. That certainly remains a concern here, which is why the IRS and frankly Treasury wants to root out potential money laundering by requiring those transactions to be reported. The reporting requirement involves obtaining the name, the social security number or tax identification number of the transferor.

From a policy perspective, I get why they're trying to do that. One thing that I've seen for frankly clients of mine, a question that routinely comes up, and I know for practitioners these are not the clients they want — but they exist out there — is, hey, Steve, I understand this requirement to report the received digital assets within 15 days, is that only for US businesses? If I locate my operation to the Caymans or Malta, do these rules apply to me? The short answer is the IRS could try, but enforcement is going to be very difficult.

You see a light bulb go off in the guys who are in this area. They're like, guess what? I'm going to start a foundation in Malta and forget the United States, which is discouraging if we want to see this infrastructure develop here in the US.

But for our practitioners, for our members, when this reporting comes in, there's going to be a deluge of information for the IRS. There will be every incentive for recipients of digital assets to be careful. That is, more conservative and over-report.

If your clients are the ones providing digital assets, they are going to need to deal with the fact that the information is reported to the IRS and be able to explain why it wasn't a taxable transaction or if it was a taxable transaction, that they'll need to report it. Remember if the person has, let's say $1,000 basis in Bitcoin and Bitcoin is now at $10,000. When they transfer that in exchange for goods or services, that itself is a taxable event for the transferor. [If it is an] event for the transferee, it depends upon the nature of the transaction.

[Sec.] 6045 is, at least in its initial drafting, was extremely broad. [Sec.] 6045 requires any person who for consideration is responsible for regularly providing any service, effectuating transfers of digital assets on behalf of other person. When we first read that as practitioners, we said that's going to encompass a lot of people that have no ability to comply. It's not just wanted to be exchanges or financial institutions. It could be anyone who develops software, anyone who is validating blocks on a Blockchain.

The good news is that, at least in the proposed regulations this past fall, the IRS has said, we don't intend this to apply to validators. We don't intend for it to apply to miners, or for people who have no ability to comply. Rather the requirement to the extent we're looking at one is for custodians to report this.

Now, what's troubling about this is you're going to have reports of transactions that may not be taxable. If the assets are moving from my account at custodian A to my account at custodian B, that's not a taxable transaction. The problem, of course, is because of the anonymity of the Blockchain, the brokers are not going to know whether it's a taxable transaction. You as the practitioner, are going to need to root out with your clients whether or not it's a taxable transaction for them.

The sad reality is that many account holders and many clients don't keep the best of records and trying to get those records off the Blockchain while doable is going to be labor intensive. That is the landscape we're looking at on a going forward basis.

Walker: That's a lot to unpack there. I was just thinking about as you were talking, I was in practice and I remember when the basis started having to be reported on the 1099-B and all the concern it caused with all the different codes and things. Now that's just old hat and it just happens. It seems like a whole different ball of wax for digital assets.

But spoiler alert, these reporting requirements have been started, [saying] they're going to be in place now and then they've been pushed back. Let's talk about where we stand now with the timing of their reporting requirements. I say where we stand now because I feel like we've just continued to push back because maybe the IRS isn't quite ready to deal with all the questions, but where are we right this minute?

Turanchik: April, the short answer is, we are in limbo.

Walker: That's not a fun place to be in the tax world, but here we are.

Turanchik: It is not. We were expecting rules to become effective January 1 of 2024. That is this past year. The reality is on the [Sec.] 6045 broker reporting, those rules will not become effective until the regulations are finalized. Proposed regs were issued last fall. They took comments last summer, they took comments through the fall. It's not entirely clear when the [Sec.] 6045 regulations will be finalized, in part because the IRS has received more than 30,000 comment letters.

Now, the backstory behind that and it's a little nefarious. A lot of those comment letters were likely AI or chatGPT generated, but they weren't generated by folks like the ABA or the AICPA. We did provide comment letters. The vast majority of them were created by artificial intelligence and explicitly meant or intended to slow down the IRS's rulemaking procedures.

It is my understanding from talking with folks who are working on the final regulations that they will have a way in which to sift out the more bogus comments. The reality is as part of the Administrative Procedures Act, the IRS needs to issue the regs, issue the notice, receive comments and take those comments into play. If the IRS disregards the comments entirely and it's likely the regulations is invalid and that of course, throws everything in a haywire.

With all that said, my contacts at Treasury estimate…they expect to have final regulations the summer of 2024. That might be a little ambitious because even if you throw out the bogus comments, there are still really substantive commentary from serious groups explaining — here all the areas that we think you guys need to provide guidance in and because it is a brand new area.

We see potential for reporting transactions that are not taxable and for potentially double reporting. Because remember the standard for the brokers is, any person who regularly provide any service effectuating transfers. You can have more than one person providing the service of effectuating or a transfer from place A to place B. If let's say three or four parties report the same transaction and that assumes it is even a taxable transaction. You now have a potential gain that's four times what should be reported to the taxpayer. That is a recipe for chaos. That's assuming that you have a taxpayer with good records whose straightforward with their return preparer about here are all forms I got. By the way, the same transactions reported twice, three times, four times. You're the return preparer. What do you do with that? You report it four times and then back it out as duplicative. Maybe. I think you probably have to.

But when I say it's a recipe for chaos, I'm not kidding about that. Let's imagine you're the IRS examiner and you're either newly trained, let's say you're well experienced in this area. You see the transaction shows up four times on a 1099-B or 1099-DA, which stands for digital assets. Are you going to take the return preparers word for it? That's a dupe. For all you know, you had four transfers of Bitcoin on that day and all of them are taxable. When you pull the Blockchain out and give it to the examiner who can't understand the Blockchain. Just think about that in the course of an audit. Is the examiner going to understand the Blockchain you give to them and even if they do, are they going to trust you?

Walker: Potential for, like you said, chaos, yeah.

Turanchik: If I had to guess, it is a wild guess, I would suggest we're going to see reporting on the brokers for transactions beginning January 1 of 2026. That's my current best guess. The problem is, let's say the regs come out final this summer. If you make it January 1, 2025, the people who are required to report are not going to have the infrastructure in place. Some might, the established exchanges might, but everyone who's going to be required to comply will not have that capability.

Walker: [Sec.] 6050I, I was going to say, with a little bit of the same story but a little different.

Turanchik: Little different, because there, there are no proposed regs and under the statute that was to become effective in the express language of the statute was January 1, 2024. That is just at this point two months ago. No proposed regs, nothing from the IRS saying we're delaying this. It wasn't until mid January that the IRS said, without implementing regulations, this cannot be effective despite the express language of the statute.

One area that gave me as a practitioner some comfort and I say some comfort, is that there's a lawsuit pending against the enactment of these particular provisions claiming violations of privacy, Fourth Amendment rights and in a brief to the District Court, the Department of Justice said [Sec.] 6050I will not become effective until final implemented regs are promulgated. It gave me some comfort, but just some comfort. Can I really use litigating position from the Department of Justice to justify my clients failure to file the Form 8300, despite the express language of the statute? As a lawyer, that gives me the heebie-jeebies.

Walker: Technical term, right? January is the time when people are trying to gather and get their reporting together. The fact that it wasn't delayed until the middle of January, there was this new form that was maybe going to be out there and then anyway, so like you said, some comfort that, okay, it's going to be delayed until we hear more from the regulations.

Turanchik:When the regulations are finalized. Regulations have not even been proposed yet. Unfortunately, unlike the broker reporting which takes place in January of the following year, the [Form] 8300 needs to be filed 15 days after you receive your digital assets. The [Form] 8300 currently does not have a place to report digital assets.

Walker: A lot of things. We talked a little bit about what the reporting is supposed to accomplish, and we talked about some of the gaps already, but what are some things that are probably not going to be fixed? You talked about tracking records and that sort of thing. Why is it still important for taxpayers to be able to track the cost basis or track their digital asset activity even once this reporting happens, whenever that might be?

Turanchik:The concern is if you don't track your cost basis, and you can't prove it up, the IRS's default position is, your cost basis is zero. Yes, zero. I have seen that, and I know this from my days at the Department of Justice, where there would be an IRS audit that came to my desk where the taxpayer simply didn't respond in the course of the examination.

Where the IRS had the gross proceeds recorded and until the taxpayer went to prove the cost basis, it was assumed to be zero. Now, one thing that was a success story of sorts. My particular taxpayer was deceased and her executor was a parish priest. He said, Steve, I don't know how to prove my cost basis. I said, don't worry, Father, I have subpoena power and I issued a subpoena to the custodian, and they provided the cost basis. After that, we got to the right tax result and the taxes paid. But look, in the digital asset space, the IRS isn't going to subpoena Coinbase for you, that's going to be on you. You got to be able to track and prove up your cost basis if it becomes an issue.

I had one client I brought through the streamline voluntary disclosure and the cost information, I won't say it was unreliable. But we took the conservative position that we're going to treat all of it as gain. The cost basis frankly was nominal to start with, but rather than trying to go through and track all that was a cost basis zero, whatever the proceeds are, and we have that number, that we're going to report as gain. It can be done from an administrative perspective, it is more conservative. But look, the reality is the prices of digital assets have dropped in the last 18 months or so. You might find yourself without significant gains and if you don't have your cost basis information, you may find yourself paying tax on something that you lost money on.

Walker: Not a good situation. We talked on part 1 of the podcast with Nick. We talked to a decent amount about possible options for people. Go back and listen to that one again, if you want to learn more about why you need to track, and maybe an Excel spreadsheet, not your best idea. I mentioned at the top that you're on the digital asset tax task force and so let's talk a little bit about the continued advocacy work that's being done in this area throughout this time, and will definitely continue.

Turanchik:We have provided comments on the [Sec.] 6045 proposed regs in an effort to highlight areas where we think there are real issues, gaps in reporting, the double reporting is a problem. The cost basis tracking, the more guidance the IRS can provide for practitioners, the more fluid it's going to be for tax compliance.

The simple reality is tax return preparers, we are the first guideposts. We are the first guardians of the Fisc, that if the return preparer is getting it wrong, you're less likely to have good compliance and the appropriate amount of tax reporting and payment. That guidance for return preparers provides us with the tools we need to tell our clients what needs to be done, and the reality is the IRS, even with the increased funding, doesn't have the ability to audit all taxpayers.

Rather, they're going to rely upon return preparers to ensure at least, the best compliance as possible for their clients. I also expect that we will be providing some comments on [Sec.] 6050I regs. On a personal matter, I think they should be repealed, but I don't think that's going to happen. I think the amount of information that's going to be reported to the IRS is going to be entirely overwhelming, and I will tell you in my conversations with folks both on the Hill and Treasury that they're not concerned. Their worst-case scenario is fine, we have more information we know what to do with, we'll figure it out or not figure it out.

Walker: I just go back to — it's not the same — but the whole discussion about the 1099-K and $600 is not a lot of money to have all these forms out there. Reporting is important. We're on this podcast to talk about reporting, and it is important. But also we have to think about the reality of the world.

Turanchik: I've done a fair amount of consulting on the 1099-K issues with third-party seller organizations, and it's a real issue. The biggest issue for me on the 1099-Ks is the payment for goods or services. Because a lot of transfers on those payment services, whether it's Venmo or PayPal, it's friends sharing expenses for dinner.

Walker: They just don't mark the right box or whatever it is.

Turanchik: They're not income events and the problem is if the wrong box is marked or worse, no box is marked, the [1099-] K gets reported to the IRS and the taxpayer now has received the form. They've got to go to their accountant.

Walker:What do I do with this?

Turanchik: I've got to deal with it in some way, shape or form. I think you report it and then back it out.

Walker: Again, we're talking about reporting. It's important. We'll just end on that note. Steve, any final thoughts to share with our listeners on just this topic of digital asset reporting, we'll definitely be talking more about this as things get finalized.

Turanchik:It's more a stay tuned because things will be changing. There will be additional developments. It's hard to say what they'll be. There's a lot out there, that still needs to be decided and we're still - early stages. This hasn't gone through litigation, it hasn't been tested. The good news, did I say there's good news? Treasury and the IRS at least are willing to listen to us and that is a good thing.

It's actually one thing I like about being in the tax community is that the folks at Treasury often times used to be in private practice and vice versa. The conversation is there not because practitioners are trying to help their clients evade taxes. It's that we are trying to make it as easy to be tax-compliant as possible. We want our clients to follow the law. We don't want them to get in trouble. Will there be bad actors? Of course, there will be.

Walker: There always are, in some worlds. Absolutely.

Turanchik: The vast majority want to be good actors, and that includes practitioners as well.

Walker: Absolutely. In closing on these podcasts, I like to think about us taking a journey together towards a better profession and in doing so I like to get a glimpse of my guests other journeys outside of the world of tax and digital assets and all of those things. Steve, share a page from your travel journey bucket list or a trip you have planned or something on your mind in that area.

Turanchik: During the pandemic, the year 2020, I turned 50, and I was supposed to go on a Safari with my wife that summer. That did not happen for a variety of reasons. Didn't happen in 2021 either. But in 2022, we did go on a Safari in Kenya, and it was the experience of a lifetime. It was absolutely amazing. I love the big cats, and we saw leopards, lions, elephants, zebras of course, and we were there for part of the migration, that was absolutely intense. It was always on my bucket list and my wife, you know what? I'll humor him. I'll go on it. She also absolutely loved it. It was fantastic. The downside is I'm not sure, I need to go at and again, I've seen everything I wanted to see. It was absolutely intense.

Walker:That's amazing. We had another guest who said the same thing. I can't remember which country they were in but said that the Safari was amazing. My husband also turned 50 in 2020. You and him are the same age. I'm a little bit younger, just a little bit. Thank you so much, Steve, for chatting with us today. We talked about reporting and all the things that are up in the air, but we're trying to help you learn what you need to know next.

This is April Walker from the Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcast, and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much, and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax and check out our other Odyssey episodes, as well as getting access to any resources we mentioned during the episode. Thank you so much for listening.

Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices.

This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

Melanie Lauridsen, AICPA & CIMA VP of Tax Policy & Advocacy, provides an update on several key tax initiatives that are top of mind right now. Highlights include the latest updates on beneficial ownership interest (BOI) reporting as well as what to expect from pending tax legislation.

 AICPA resources

• Decision holding Corporate Transparency Act unconstitutional appealed, The Tax Adviser, March 12, 2024
• Federal court holds Corporate Transparency Act unconstitutional, The Tax Adviser, March 5, 2024
• Plaintiffs: FinCEN should pause all CTA enforcement, The Tax Adviser, March 5, 2024
• Beneficial ownership information (BOI) reporting resource center  — Access resources to learn about the beneficial ownership information reporting requirement under FinCEN’s Corporate Transparency Act (CTA).
• Client letter and FAQ for a government shutdown during tax season — Share some considerations with your clients as the potential for a government shutdown looms, and IRS services will be affected during tax season.

Transcript

Neil Amato: Welcome back to the Journal of Accountancy podcast. This is Neil Amato with the JofA. I'm again joined by Melanie Lauridsen, Vice President ­– Tax Policy & Advocacy for the AICPA. This is a special episode — a special collaboration episode between the JofA podcast and the Tax Section Odyssey podcast. Melanie and I are going to talk about a host of tax topics that are on the minds of practitioners as we record in early March. Melanie, first, welcome back to the JofA podcast. How are you?

Melanie Lauridsen: I’m good. Thank you for having me back.

Amato: Tell me first, what’s new in the world of tax advocacy these days?

Lauridsen: As you’re probably aware, there are some big things happening on tax, and sometimes with tax, it can linger and sometimes they move super, super quick, so it’s an interesting world.

But right now, the big issues that we're tackling are beneficial ownership information, ERC, which is employee retention credit, there's the government shutdown, which hopefully there won't be a government shutdown. We do a lot of work behind the scenes, but that may never come to light.

Of course, there's the House Ways and Means tax bill, but that doesn't mean there aren't a lot of other pieces of work that we're working on.

For example, this year, we've already started working on guidance for SECURE 2.0. We have the FBAR extension for those affected by the disasters. We have virtual currency. There's limitations of excess business losses. There's just a lot of work that's happening.

Amato: You've touched on some of those issues. I guess, through comment letters and other advocacy, what would you say are some of the highlights of those important issues right now that members should be aware of?

Lauridsen: Well, off the top of my head, the biggest one right now is beneficial ownership information. The interesting thing about this topic is every time we connect, something new is arising, something new has happened. Then of course, that creates a flood of activity, sometimes confusion, and people needing a little bit more guidance with that. Most recently there was a court case that has impacted BOI.

With employee retention credit, there are some tax bills that are impacting the timing of how long people can submit claims for it, and there's a flood of activity and some confusion also associated with that. It just depends on the topic that we're touching base on what you want to dive into.

Amato: On the topic of beneficial ownership information or BOI — I guess that falls under the Corporate Transparency Act — a court ruling a week ago today as of this recording, deemed the Corporate Transparency Act unconstitutional. Tell me a little more about what that means, how it changes or doesn't change what the AICPA is advocating for, etc.

Lauridsen: The court ruling — there have been different press releases that have come out. Again, I can't stress enough that it's created a lot of confusion. There was a court ruling from a lower court, and it comes from the state of Alabama, in which it did deem the Corporate Transparency Act — CTA is what I call it sometimes. It did deem the CTA to be unconstitutional. But the thing that people need to understand with that ruling, there was an injunction associated with it that was very narrow and limited in scope.

FinCEN has actually come forward and said that based on this court ruling, it is only the plaintiff, the association, National Small Business Association and its members, which is roughly [65,000] members, that do not need to file the BOI report.

Everyone else still has the requirement to file, and FinCEN has said that they will be enforcing that.

Now, what that means too from FinCEN's perspective is we've heard on good authority that they will appeal the court case, and they will also ask for a stay of the injunction.

One of the questions I do get is like, “Then we're going to become NSBA members because then we don't have to file the BOI reports.” That's not actually accurate. It's of members as of March 1, which was the date of the court ruling. Rushing out and becoming a member isn't going to help people.

Our position and what that means for our members, if you are not an NSBA member, it means that you are still under the requirement to file the BOI reports. I would say it's business as usual.

I would also clarify that for the existing entities, that was an entity that was created before 2024, that they have a full year to file. Like I said earlier with BOI, things keep changing and they seem to change rapidly. I would encourage those people to not rush out to file right now but to go ahead and take their time. They have time. Use that time until we can get more clarity and take that time necessary to file.

Amato: To clarify on that, entities formed before 2024, do they have until 12/31/2024 to file a BOI report?

Lauridsen: They have till January 1 of 2025, which is interesting. That extra day matters to some people.

Amato: Well, it's a leap year, so, get the extra day. Whether it's fast or slow, there probably will be some change as the year progresses.

What are the differences between the customer due diligence rule and BOI. And, I guess, are both needed? Can you explain a little more about that?

Lauridsen: Absolutely. In tax, as CPAs, we are bound by certain ethical requirements, whenever we do a tax return. One thing to keep in mind is BOI is not tax. A lot of people think it is tax simply because the entities — you know, it’s a form, it's got numbers — they’re going to be turning toward their tax preparers for help on this form. But, to be clear, BOI is not tax. Anyhow, CPAs, they're bound by due diligence.

When they get a client, they look at the client and make sure it is a valid client. They verify information, driver's license, Social Security numbers. They know the client, and CPAs also have tendencies to have long-running trusted relationships with the client. In other words, as a CPA, I'm not going to have a client who is running all these shady business dealings. I would know my client, and I would have that due diligence.

So, BOI, its intention is anti-money laundering. They're trying to capture those shell companies and trying to capture, really, money laundering associated with it. I think people believe, “Well, we have the due diligence piece. Why do we need the BOI piece?” And, is that necessary?

The first thing is keep in mind, CPAs already have that due diligence piece from our perspective. But not everybody is a CPA, and not everybody is working on ethical levels. That is the intention of BOI and why some people in our worlds, I completely understand why they think, “What's the point of it?” But there is a purpose.

Amato: That makes sense. Thank you for that. Let's talk some about the tax bill that you mentioned at the top. It's with Congress right now. It's in committee still. What does that bill mean for practitioners, and what do you expect to come next?

Lauridsen: The tax bill, officially named the Tax Relief for American Families and Workers Act, which is a very long name. I have a tendency to just call it the House Ways and Means bill. Essentially, what's happened is House Ways and Means. It's Chairman [Ron] Wyden and Chairman Jason Smith who came together. They had been working together on this bill for over a year and they came together, and it passed the House with lots of support there.

The core of this bill really is the expansion of the child tax credit, which is a Democratic priority. But in exchange, they also agreed to some business tax provisions of some fixes from the Tax Cuts and Jobs Act business tax provision, some extensions there, which is the Republican priority. What the bill entails, just high-level, it would allow essentially the refundable portion for the child tax credit to be increased in time for taxpayers who work.

As far as the business taxes, what that means is it would reinstate the 100% bonus depreciation. It would also allow for immediate deduction of the Sec. 174 expenses, and Sec. 174 expenses are the research and experimentation expenses. It also allows for victims of disaster relief to be able to deduct those casualty losses without meeting the [adjusted gross income] 10% threshold. They also don't need to itemize. They can take what's called an above-the-line deduction for it.

The real big kick of the bill is ERC, where the bill would be retroactive at this point if it were to pass through, as it stands, which is saying that ERC claims would be stopped as of Jan. 31. The reason this is such a big deal is because ERC, stopping the credit claims, that is the “pay for,” meaning that is what would allow for all the other provisions to go through. That piece is nonnegotiable in the way it's written in the bill. There's a lot of questions associated with retroactivity in the bill

Amato: Again, as we're recording early March, you mentioned the word “shutdown” a little bit earlier. What would be the effect of a government shutdown during tax season? I guess the next deadline we're facing is March 22 for funding several agencies of the government.

Lauridsen: Well, let me start by saying there is never a good time for the IRS to shut down. There's just a lot of lost efficiencies or inefficiencies, I guess, within the IRS in shutting down and then opening back up again.

With all the IRS service issues that our members face, it would never be a good time. Having said that, having a shutdown in the middle of a filing season would be first of all, unheard of. It hasn't happened. The closest that we've come to a shutdown in a filing season is when we delayed the start of a filing season by two weeks, which is very different than having a shutdown right before tax returns are due. That would be, in my opinion, detrimental.

The AICPA has positions to maintain the IRS 100% open for them to provide all the necessary services to people. But all of this depends and hinges on the IRS’s contingency plan. The IRS did release a contingency plan at the end of last year, but that contingency plan is for nonfiling season. We don't actually know what's going to happen with the IRS, were it to shut down during filing season. And they would issue that plan if the government shutdown was imminent.

Amato: Well, we will have to wait and see on that. We’ll know more, again at this recording, in a few weeks. Melanie, there's always plenty going on. Clearly, by this conversation, there's a lot going on, but anything else you'd like to touch on before we conclude?

Lauridsen: Yeah. Touching back again on the tax bill that I was referencing, there are some retroactive provisions in there. Some of them would be great to see passed and then, of course, the ERC, there's a lot of question. And we get a lot of questions from the members regarding should we file, should we extend. We don't really particularly want to amend.

So couple of things that I do want to say what the bill is right now — at this moment in time and things change when it comes to legislative bills, so tomorrow it could be a different answer — but as of right now, it's not looking great that the bill would pass the Senate and it would become effective.

Even if it could pass and become legislative rule, what would end up as the final bill would probably be different than would have some edits made to it. Meaning, would it be retroactive, take the ERC provisions to Jan. 31? I don't know.

Would people have to do amendments? We don't know. But again, it's not looking great for the bill. The IRS has made it very clear people should go ahead and file and file now. We support “go ahead and file and file now.” We understand amending can create some roadblocks and some issues, but just things are up in the air in a way that, right now, it's not looking good for the bill.

Amato: Melanie Lauridsen, thank you very much for that update.

Lauridsen: Thank you, Neil.

Superseded returns — essentially a replacement for an originally filed tax return — can be a useful tool, especially as it relates to partnership returns which operate in the centralized partnership audit regime (CPAR). Learn more about when these “do-over returns” should be considered and what implications they may have for statutes of limitations. 

AICPA resources

Superseding returns and statutes of limitations, July 1, 2021, The Tax Adviser

BBA Partnership Audit and Adjustment Rules FAQ — Gain answers to frequently asked questions about the centralized partnership audit regime under the Bipartisan Budget Act of 2015 (BBA).

Other resources

Amended and Superseding Corporate Returns — Information from the IRS on filing a superseded return electronically  

April Walker: Hello everyone and welcome to the AICPA's Tax Section, Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the tax section, and I'm here today with Colin Walsh. Colin is a partner and firm leader at Baker Tilly in tax advocacy and controversy services.

Colin, today we're going to talk about a topic that is very timely as we're recording here on March the 4th and March 15th is coming up very, very soon. We wanted to get this in prior to March 15th, so thank you, Colin, for agreeing to be with us today and let's just get started and talk about what is a superseded return.

It might be a new term for some of you listening, but hopefully it won't be by the end of our conversation today and [let’s] just talk a little about basics and how it differs from an amended return.

Colin Walsh: Sure, thanks for having me, April. Superseded returns are incredibly important this time of year. A superseded return, by definition, constitutes a timely filed original, keyword, original tax return. You essentially are replacing the originally filed tax return with a second originally filed a tax return and as an originally filed a tax return, the superseded return carries certain rights and privileges that an amended income tax return does not carry.

Walker: Perfect. Let's talk about some of those. What are some of those characteristics of the superseded return and how do I actually do a superseded return?

Walsh: Historically, when we think about superseded tax returns, some of the more important items that taxpayers look at are things like statutory or regulatory elections that are required to be on an originally filed tax return. Certain types of elections cannot be on amended income tax returns. For purpose of making an election, it's important that those elections be on a timely return and the superseded return allows you to do that.

Likewise, we've seen a lot of clients that as some of us in practice may see those harsh penalties for late foreign information filings like 5471s and 5472s. Once again, because a superseded tax return constitutes an originally filed tax return, you can file a superseded income tax return, attach a foreign information reporting, and be absolved of those harsh penalties.

More recently, in the partnership context, we've seen some new life, if you will, that's been breathed into the superseded tax return, and this really deals with the centralized partnership audit regime or the BBA for Bipartisan Budget Act. It's critical in terms of how partnership tax returns need to be amended under CPAR BBA, that we preserve the ability for our clients to file superseded tax returns instead of having to file administrative adjustment requests under CPAR.

Walker: We were talking a little bit before we started this conversation about sort of a policy that you guys have around partnership returns and I'm sure some of our listeners, you're familiar with BBA and AARs, but it's still a new concept. We're still learning about the complexities around that so talk a little bit about how you've decided to do superseded returns for your partnerships.

Walsh: Baker Tilly has developed a firm policy that without written consent to the contrary from our partnership clients that all of our Forms 1065 must be extended even if the clients are going to timely file their Forms 1065 prior to March 15th and we do that strictly for purposes of preserving the ability to file a superseded return. Really the policy at issue there, I think, is two-fold.

First and foremost, the BBA CPAR rules are esoteric and evolving, and so just the administrative costs and the time that it makes to file an AAR under CPAR as opposed to, for lack of better term, amending the old-fashioned way via a superseded return, the superseded return is going to take a lot less time.

I know this isn't a BBA call, but the second reason is that under the centralized partnership audit regime, to the extent that a partnership files an administrative adjustment request, the partners in that partnership no longer receive amended Schedules K-1, so the partners can never go back and file amended reviewed year tax returns. Instead, partners in CPAR partnerships have to account for any adjustments that are made to a Form 1065 in what we call the adjustment year, meaning the year in which the administrative adjustment requests [are] filed.

By way of example, if we were filing an administrative adjustment request on a 2023 Form 1065 today, the partners would account for those changes on their 2024 income tax returns, they don't get to go back and file amended 2023 tax returns anymore, so that comes with a host of logistical problems that are unique to CPAR. It's because of those considerations and many others, our clients are essentially mandated to extend to preserve the right to supersede.

Walker: Got it. Are there any other circumstances you can think of for other types of returns that it might make sense to file a superseded return — and just as a second part to that question, I know for partnerships we’ve talked about why it makes sense to do that, but any other types of returns and situations where it might be in the client's best interests, also in your best interests, in having to deal with all the complexity.

Walsh: Any situation where you're filing an income tax return, whether that be at 1065, an 1120-S, an 1120, or even a 1040 to the extent that income tax return has statutory or regulatory elections on it, many of those statutory or regulatory elections cannot be on amended income tax returns. They need to be on timely filed original tax returns.

One that we saw a lot that came up last filing season was clients who are Qualified Opportunity Funds (QOFs). The way that you elect to be a Qualified Opportunity Fund is on a timely filed original tax return. To the extent that a client's income tax return missed that election, had they superseded and discovered it over the summer months, that client would have preserved the right to make the Qualified Opportunity Fund election and avoided a very costly and time-consuming private letter ruling with the Office of Chief Counsel.

Walker: That's what your clients are looking to you for, is that advice and help. You're making taxes not be such a horrible experience, or that sort of thing.

I was thinking again, here we are in early March, there's discussion of this pending legislation that has passed the House and is in the Senate. Not sure where that's going to go. Lot of angst. I've been hearing about the retroactivity of it. Again, we're not sure where that's going to go, but to me, that was another reason I started really thinking about and talking about this topic and want to make sure, what are your thoughts about that?

Walsh: As it relates to potential tax legislation, like yourself, I have gotten out of the game over the last five years of predicting what Congress will do, but I would say that our clients should not be afraid to extend and just wait to file. I think a lot of us have this temptation or clients want to get their tax returns filed as soon as possible and certainly, I understand the need to get some closure on the 2023 tax filing season and be over and done with.

Filing a superseded return can be helpful, but it does cost time and money and filing superseded returns, while in a legal sense are protected and honored by the IRS and no one doubts them. They can create some confusion at the service centers.

To the extent you are filing an income tax return that you felt could be changed via retroactive legislation that's going to come in the next few months here, I would be inclined to wait first, then supersede, then amend, but waiting is probably the most prudent thing right now in terms of time and professional fees and sending two originally filed income tax returns to the service center.

There's the law of it and again, superseded returns are acknowledged by taxpayers and the courts and the government, but as we know, filing two tax returns with the IRS can present its own problems administratively.

Walker: For sure. I've been with the AICPA for eight years and I felt like in that time, I've been part of that discussion of extension is not a bad thing. Sometimes it's hard to help both parties. Sometimes CPA tax practitioners want to get it done and just be done with it instead of extending the workload.

Sometimes it feels like the client doesn't understand an extension so that's part of your obligation is to explain to them and help them understand that it does not extend the time to pay the tax, but you can help them with that. There's a lot rolled up in that for sure, but I completely agree with you. It doesn't make sense to hurry, in my opinion, hurry up and file at this point.

Walsh: You used a key phrase there, which is, I want to be done with it. I think that's what the client actually wants and I think what we're saying is that hurrying to file an income tax return today that could be subject to legislative change, you aren't done with it.

Actually, now you have to go back and amend it or supersede it, which brings its own problems so there's the aspect of checking a box today and feeling like we've done all that we can but in the large scheme of things, rushing to file just for sake of checking that box could create issues you're dealing with well into 2025 and after.

Walker: You mentioned this a little bit, but filing a second return might cause confusion with the IRS, even though they're absolutely allowed to do it. I was thinking about and I was reading, I think, the Taxpayer Advocate had a blog about this, about some of the confusion and about statute of limitations and how that actually works with superseded returns, because I think that might be a confusing issue.

Walsh: Two questions baked into there. In terms of the IRS processing superseded tax returns, and then we'll talk about the statute of limitations.

But on the processing side, the IRS is so understandably sensitive to things like identity theft right now, and to the extent that there are two income tax returns with the same EIN filed in relatively close proximity to one another. We've seen superseded returns set off the alarm bells at the IRS in terms of identity theft. Understandably, and we're always able to work through those things but once an income tax return is with the identity theft unit at the IRS, it's going to take quite a bit of time to process that.

The other issue that we've seen with a superseded partnership return was that we did receive some matching notices because the IRS's system was essentially — they had processed both K-1s. The IRS was saying, “Hey, you didn't pick up this Schedule K-1 and we were saying, “We did pick it up. Tt was superseded and replaced with another one.”

In both instances, we were able to work through those things with the IRS, but of course, it takes a little bit of time and effort. Superseded returns are a do over, if you will, and it's helpful in that respect, but you can run into some administrative hiccups where I wouldn't rely upon it if you don't have to.

In terms of the statutes of limitations, there is some conflicting advice, some chief counsel advice out there in terms of what effect a superseded tax return has on the IRS's assessment statute under Section 6501 and the taxpayers refund claim statute under Section 6511. There were some chief counsel advice that I think caught the practitioner community a little bit off guard that said— the taxpayers refund claim statute and the IRS's assessment statue followed the originally filed tax return, not the superseded tax return.

Of course, chief counsel advice is not the law, it's not binding on taxpayers, it's the IRS's interpretation of the law, but it seems like there's at a minimum — there's some gray here or some confusion about whether or not when you file a superseded tax return that actually extends refund claim statute.

Say you file a superseded 2023 tax return this fall, I would not assume that you have until the fall of 2027, the superseded tax return date, to claim a refund. I would conservatively assume that the government is going to take the position that it was the originally filed return that starts to running of the statute.

Walker: That's good to think about and know. Sometimes things might come up and it might really matter. But like you said, it's some conflicting advice and it's good to think about these things. Do you have any examples we've talked a little bit about all of these things, but where filing a superseded returns significantly impacted the taxpayer situation?

Walsh: The centralized partnership audit regime, so going back to CPAR. Under the centralized partnership audit regime, to the extent that — let's try not to get too technical here — but that we're filing an administrative adjustment request and it's called a negative adjustment, a taxpayer favorable adjustment. We want to file an administrative adjustment request to claim a credit to reduce income, to increase expenses, something that goes in the taxpayer's favor. Under CPAR, those items are reported in the adjustment year, but CPAR creates in the adjustment year non-refundable credits that do not carry forward.

We call this the CPAR doomsday scenario. We've had clients that were on extension and we're able to file a superseded Forms 1065 and instead of filing an AAR under CPAR, they received second K-1s and were able to claim the benefit of the second K-1 when they timely filed their partner level income tax return prior to October 15th.

Without the superseded return, best case, they wouldn't get the benefit of that until they filed their 2024 return next year and enter the worst case scenario under this CPAR doomsday scenario, the benefit of the AAR could go away.

Walker: That's a big deal. Definitely, again, as I came into this, I knew that it was about AAR, but I didn't know how much. Definitely a Part 2 I feel is coming where we delve into all the things about AAR and the things people need to know because I'm still learning about it for sure.

Walsh: Well, if everyone follows our advice and they extend their 2023 returns, we could do that podcast after 9/15 because they could supersede up until then. If they're like most CPAs and tax attorneys, they want to know what they need to know today and that is you need to extend even if you're going to timely file.

Walker: Absolutely. Colin, this has been great and super informative. Do you have any final thoughts as we're thinking about superseded returns — the March 15th date coming up?

Walsh: Yeah. I think we've gone a long way as a professional community and dispelling the notion that filing an extension triggers IRS inquiry or your audit rate goes up or the IRS doesn't like extensions. That's simply not true and I think we should continue to dispel that notion. Let's squash that one right away. Some of the examples that we've come up with here may seem esoteric and rarely applicable, and that's true.

I think maybe nine times out of 10, you could accomplish the same things in an amended return that you could accomplish in a superseded return.

But for that 1 out of 10, where it really matters, where you need a regulatory or a statutory election or you've got the CPAR mess, it can be very helpful. I encourage everyone to extend. It is rare in tax that we get a chance for a redo and you will get a chance for a redo. That's my message heading into next week here.

Walker: Wonderful. That's great advice. Colin, you're a first-time guest. Welcome. We're so delighted to have you.

On these podcasts, I like to think about us taking a journey. It's the Tax Section Odyssey we're taking a journey together towards a better profession. And in doing so, I'd like to get a glimpse of my guests other journeys outside of tax. I don't know if you like to travel or you have any trips planned or anything like that or a bucket list trip. What's on your mind on that today?

Walsh: I have three children under the age of six, so there will not be a lot of international travel on my horizon here.

This summer, I live in beautiful Madison, Wisconsin, and my family's actually doing some construction in our home and we're going to spend a month traveling around Wisconsin. We're going to start in Door County, Wisconsin, which is one of our favorite places.

We're going to head over to Lake Superior and spend a week up there and then end in Northern Minnesota. I'm going to be taking three children under the age of six on the road. Say prayers for me, but we're excited to do it in a few short months here.

Walker: For sure. It's a part of the country that I haven't been to very much. I'm a UNC Tar Heel and we're playing Minnesota this fall and I'm like, we need to go up there because I've never been to [that area].

Walsh: We call it the upper Midwest. It's quite beautiful. A lot of lakes and mountains and it's great. Definitely get out to Minnesota and check it out. I encourage you.

Walker: Thank you again so much, Colin. Again, this is April Walker from the AICPA tax section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind.

This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcast and please feel free to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax and check out our other Odyssey episodes, as well as get access to resources mentioned during the episode.

The tax treatment for digital asset losses can be a complex area. Not to mention, misleading information can cause confusion for tax practitioners and taxpayers alike. Learn more about the intricacies of how realized digital asset losses are reported and why it likely makes sense to avoid having the digital asset be considered worthless or abandoned based on the current tax treatment. 

AICPA resources

• Digital assets and virtual currency tax guidance and resources —This hub is your go-to library for AICPA guidance and resources as well as current legislation, IRS initiatives and tax advocacy project
• Crypto loss tax reporting fact or fiction — With the prevalence of recent virtual currency exchange bankruptcies and digital asset volatility, taxpayers may have misconceptions on reporting tax losses. 
  
• AICPA comments on digital currency losses, April 14, 2023

Other resources 

• IRS Chief Counsel Advice (CCA) 202302011 — Memorandum that addresses the applicability of IRS Sec. 165 to cryptocurrency that has declined in value 
• IRS Digital Assets  — Resources and guidance available on the IRS.gov website

Transcript

April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast. Where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the Tax Section, and I'm here today with Annette Nellen. Annette is a professor and director of the MST program at San Jose State University. She's also a wonderful AICPA volunteer and has been on the podcast before. Welcome back, Annette.

Annette Nellen: Thank you.

Walker: This episode is Part 2 in a three-part series that we're focusing on digital assets here on the Tax Section Odyssey, a journey through digital assets, if you will.

Today's episode is going to focus on a common question that we get in this space, and that is how our losses on digital assets treated for tax purposes. A second underlying question as you're listening to this might be, what are the misconceptions? What are the things that you hear people saying…you read on the Internet about this topic that might or might not be correct.

Annette is going to really help us dig in to those. Annette let's start off at a basic level and remind our listeners, just basic digital asset 101. What do we know about digital assets in general, and what does that mean for the treatment of digital asset losses?

Nellen: Well, thank you April, the key guidance here came out in 2014. That is [IRS] Notice 2014-21, where the takeaway was digital assets. That notice actually just talks about convertible virtual currency. That is before we were using the term digital assets because that was actually added to the law in November 2021 with the infrastructure investment and jobs act.

But the notice talks about treat this virtual currency cryptocurrency treated as property. It is not treated as foreign currency for tax purposes. They answered several questions in the notice. Some were pretty obvious like if you're paid by your employer in a virtual currency, is that taxable? Yes, of course it's taxable. That's fair market value at the time they receive it.

But the key takeaway and what they said [if] something isn't addressed here. Basically go to the rules on the taxation of property transactions and that probably will answer your questions. Now it doesn't always because there are some unique features of how virtual currency, digital assets operate that other ones do not operate in that way.

For example, a virtual currency could have something called a hard fork. I'm not aware of any other property that really has a hard fork with something just breaks off from it and continues on its own. Doesn't have a good analogy there. We do occasionally run into situations where [it’s] not real clear.

That's a lot of ones where the AICPA Digital Asset Tax Task Force is trying to address those and seeking guidance from the IRS if they can point out. Because this is a question people have, what do you think the answer is? We can all be on the same page here.

Walker: Yeah, that brings up several good topics. I generally have converted to saying digital assets. We can also say virtual currency. We could say cryptocurrency, all of those being, at least in general, the same thing. If Annette says a different word or I say a different word, that's all what we're meaning.

Then also that there's some really tricky things that can happen with this type of property that's way different than some of the really complex investment type property. That's why we have to be on top of this and learn.

That was our message in Part 1. We cannot escape this. We can't just bury our head in the sand and pretend like it doesn't exist.

Annette let's take this a step further. What if a client comes to you and says, I had digital assets. This is probably a pretty common thing that happened in 2023. “I had these digital assets in this wallet and it dropped tremendously in value — like right now it's only worth $0.30 or something like that. Did I have a realized loss? And if so, how do I treat that realized loss?

Nellen: Well, that is a good question. It seems to be one that the IRS was getting as well because in January of 2023, they issued a Chief Counsel Advice 202302011. It had a few reminders in there, but doesn't address every type of loss that people might encounter with their digital assets or cryptocurrency.

The fact pattern at Chief Counsel Advice was that the person had purchased a cryptocurrency at $1 per unit, and by the end of the year, it was trading for less than $0.01. That's something also unique about this virtual currency or cryptocurrency. It can certainly be trading for far less than one penny. That itself raises an interesting question because tax we're usually rounding everything up to $1. If something's worth less than a penny, does that mean it's worthless? Probably not.

Now, in that fact pattern though, where that cryptocurrency had dropped to below $0.01 It also was still, of course, owned by the taxpayer. They hadn't done anything to have a realization event. It was still actually being traded on at least one cryptocurrency exchange. It was still possible that they could have sold that in what would have been actually an on chain transaction.

Now, the Chief Counsel Advice does not go into doesn't matter if you sell it on chain, meaning you go through the normal like the blockchain transaction, actually get that completely transferred to somebody else versus I had the code for this. I'll write it down on the piece of paper and sell it to somebody. But then technically you still arguably have the code. You could have even memorized it. It didn't go into that, but it did state that with this fact pattern — worth less than a penny, you still owned it and it was still traded at least one exchange, you did not have a realized loss. They also said it wasn't worthless and that arguably makes sense. It's not worthless because you could still actually trade it. There's some place you could get somebody to buy that from you. Of course it's not abandoned, you actually still own it.

This Chief Counsel Advice did tell us that it's not a realization event, you don't have a loss. It does talk a little bit about the general rules on worthlessness and abandonment, but it doesn't talk about how would you know if a cryptocurrency had become worthless? How do you abandon a cryptocurrency? But I do want to state and I'll probably state this more than once.

Today, you don't want to have worthless or abandoned cryptocurrency because that results in an ordinary loss because there's no sale or exchange of a capital asset. You don't have a capital gain or loss, you have an ordinary loss.

But remember deductions and losses are matter of legislative grace. If you can't point to a code section allowing you to claim that loss, you cannot claim it. If you look at Code Section 62, 63, and 67(g) and this Chief Counsel Advice highlights Section 67(g). The only place this loss, if you did have a worthless or abandonment loss on the cryptocurrency, the only place it would fall would be as a miscellaneous itemized deductions subject to 2% of AGI limit — which for 2018-2025 is not allowed at all. The taxpayer would have been better off selling that before it became worthless so that you at least have a capital loss on that. So, a lot in that answer there.

Walker: It was a lot to unpack there. A lot of times I feel like I think when you're thinking back on worthlessness and whether something has been abandoned, a lot of times people want to convert it from a capital loss to an ordinary loss. That's generally where they're going with this. But that's really not the case in this scenario, at least that was presented in the chief counsel.

Nellen: Another thing to bear in mind here is that while you think, if I had worthless securities, I get a capital loss on that. That's because there's a special rule at Code Section 165(g). Maybe just a quick review of a few more code sections. What is a capital gain or loss? That's defined at Code Section 1222. Two key things you need for a capital gain or loss is a sale or exchange of a capital asset.

Now, if you're holding cryptocurrency for an investment, yes, that's a capital asset, but abandonment and worthlessness are not a sale or exchange. It's not a capital loss. It'd be an ordinary loss. What makes worthless or abandoned securities a capital loss is Code Section 165(g). But it's limited to securities, where it says, if you have worthless securities, treat it as if you had a sale or exchange on the last day of the year, that's what's then causing you to have sale or exchange of a capital asset producing that loss for you.

Then the Regs under [Section] 165 note that abandonment is the same treatment as the worthlessness, but the cryptocurrency is not a security. I know people say, oh, but look at the head of the SEC is saying all of it's pretty much a security. That is not necessarily true for. I don’t know about securities law, but that's not the definition for tax purposes here. You're ending up with an ordinary loss.

Then I've seen on web pages and among practitioners, oh, ordinary loss, great. We claim that above the line. Now again, you saw the point to a code section. Again, if you go through Code Section 62 defining adjusted gross income, Code Section 63 and 67, really defining taxable income and allowable deductions. There's no place where it falls other than it's a miscellaneous itemized deductions subject to 2% of AGI limitation, which actually is still allowed in California. California never conformed to that, but for federal purposes, and probably most states [in] 2018-2025, that loss is not allowed.

Also just odd stuff out there as well. There are some websites, at least the ones I've looked at, it says right at the top, worthless cryptocurrency. We will take it and they'll take it for some set amount, which is a fraction of a penny. But it's troubling that they're saying at the top of the website, worthless. Now if it's really worthless, why are they giving you anything for it and that you're arguably already having a transaction with the person.

Probably that does generate a capital loss from the sale or exchange of that. That'd be an example where it'd be nice if the IRS could say, even though you didn't negotiate the price, because that website is going to give everybody the same fraction of a penny for your "worthless". But again, it's arguably not worthless as I'm taking it from you. But that'd be viewed as a valid sale or exchange. We didn't negotiate the price, but again, we're talking about a price for something is worth less than a penny, would they ever come back and say, hey, if that's the main feature, just worth less than a penny, it's worthless.

In the letter that we sent off, the Digital Asset Tax Taskforce, we sent off a letter in April 2023. The Chief Counsel Advice is quite helpful, but it doesn't address everything. If one of the things that we asked was could you tell us what you think would indicate that a cryptocurrency is worthless and how you could actually abandon a virtual currency? Because then taxpayers would know how to avoid those situations, because that's not an ideal tax result for an investor.

Walker: Those are some great points and like you said, I will definitely put the chief counsel memorandum in there and also some of the letters that the Digital Asset Tax Taskforce has done and continues to do. While we're on that topic, let's talk about some more things that we might have done around digital asset losses. You do reference that letter and we'll put that in there and other guidance that's needed.

Referring back to that website I guess they're probably not saying worthless as in worthless for tax purposes. Maybe that's where they're going with that. But still it's very misleading for consumers as well as probably for tax practitioners who might not operate in this space.

Nellen: The taxpayer who's done that [and] transferred it there. I believe that actually is an on chain transactions, so that's good because that's indicating there was some way you still could transfer it.

Because one of the questions we've asked the IRS, both on the letter and when we occasionally meet with them is, what if it's the blockchain is down, nobody's verifying these transactions on X coin because it's over 9,000 virtual currencies out there. Maybe one just seems to be gone, you can't transfer anything. Would that indicate it's now worthless, because maybe sometime in the future, it'll get reactivated. Plus probably if you had the code on a piece of paper, there's somebody out that it will probably buy it from you for five dollars or something just to say, hey, maybe it will go back into business. Which is why I think these websites are taking all these things that people think are worthless, which clearly aren't worthless, somebody's making a market for these items.

Would that be a permissible transfer when it wasn't on chain. Just I wrote down the code, but arguably do I still have access to the code and then had convinced the buyer [that] I [have] erased it from my mind. I've burned the piece of paper and any other place I wrote it down. That's another topic that I hope the IRS will address it some time because it’s also relevant if you're gifting virtual currency to your relative. Do you have to do it on chain to make sure it's a valid transaction that everybody would know. Yes, it’s on the blockchain that just got transferred and you no longer have any access to it at all, only the recipient.

I would certainly say if you're going to make a gift to somebody, do it on chain, that's more likely should be a valid gift because you relinquish every ability to access that. But these are examples that come up. But it would be nice if the IRS could tell us what would make something worthless, what would make a cryptocurrency abandoned.

But I do hear from practitioners, so someone trying to do that because they think this ordinary loss that I can claim against my wage income and other income, that's not the case. I will encourage you to take a look at the chief counsel advice in the code sections it's referring to and we have an analysis of that in the letter as well.

But it does get confusing because people might just do a Google search and come across things that sound convincing. But remember, we're respected practitioners, we need to be looking at the law itself. Is that any support for this answer in the law itself?

Another code section we raised in the letter, erase a variety of things. Could you address this issue? There's a Code Section 1234(A), which we don't see many cases on, but occasionally we do. Where it's basically saying certain terminations of a right to a capital asset would be treated as a sale or exchange, then giving you that capital gain or loss situation. What is a termination of a cryptocurrency? The fact that the blockchain is no longer having transactions and nobody is verifying these. The blockchain has somehow been destroyed and I guess you destroy all the software or something. Would that be enough?

Then you also have the issue of what about the part that is dealing with their right to a capital asset. Is that what cryptocurrency could be defined as?

We've also raised the question, well, what about lending digital assets? Because the word lending and then digital assets. If we're thinking about currency, we're lending currency. But remember, the Notice 2014-21 said that the cryptocurrency/virtual currency is not treated as currency for tax purposes, it's treated as property. It's like you're lending your car to somebody. What happens if it doesn't get returned?

Also, what about the income you're generating from that [digital asset]. Is that portfolio [or] is it a trade or business? Obviously relevant for passive activity loss purposes under [Section] 469 and a variety of other issues.

These are tough issues for the IRS to deal with as well and have the magic answer. They're doing research, but some places it might be that maybe you just need to have a position. Hey, if this happens, we would treat this virtual currency as worthless, then we would all be on the same page at least of how that is viewed. Then we also in our letters, always make the statement or asking for guidance. We'd like to have binding guidance like a revenue ruling, revenue procedure, regulations. A chief counsel advice unfortunately, it's not binding guidance. Of course, the law [code] sections and there's all citing to binding guidance code, regs, court cases, things like that.

Walker: FAQs they did a round of those.

Nellen: But some of them are just restating binding law. But there were a few in there that were new.

Walker: I think some of the terminology also gets mixed up in there too, and that's part of the clarification in the letters. This has been really helpful Annette. I feel like sometimes we come out of this with more questions or I do, with more questions than answers, but at least you've got us pointing to asking the right question around us as we're looking to do 2023 returns that have this digital asset activity. Any final thoughts that you want to leave us with on this topic?

Nellen: I encourage you with losses, do take a look at that chief counsel advice [memorandum], the letter that the digital asset tax taskforce prepared and some of these comment letters — plenty of ones from the AICPA, New York State Bar and the ABA often have a lot of background information as well. Because it's not always a lot of information out there tax-wise on these on what are relatively still new transactions you've been around since about 2009.

When again, always remember we need to go to the primary authority for determining what is the tax treatment of something because there's a lot of misinformation out there. Unfortunaty also from accountants and attorneys. Sometimes they're just saying a statement that they haven't really dug into or they don't really know enough about the digital assets to realize that there is something different out there. Or they forgotten about Code Section 1222 or things like that. But the taskforce continues to look at what is going to help AICPA members to deal effectively with their clients? Where could we benefit from more binding information from the IRS?

Walker: We're wrapping up and closing on these podcasts I like to talk about us taking a journey. We're taking a journey through digital assets. We're just taking a journey towards a better profession, or that is my goal. But I like to hear about my guests other journeys outside of tax. Annette, you have been on here before. But tell us a trip you have planned or a trip you have been on recently that was memorable.

Nellen: Memorable would be right before Christmas, I did take my daughter, son-in-law, 9 year old grandchild, and infant grandchild to Disneyland. That was nice experience and all that. More immediately, I get to go to the American Taxation Association, which I'll mention because most members probably don't know but that, but that's a very large group of primarily tax professors and a few folks from accounting firms. We are having our mid-year meeting down in Long Beach where I've a couple of presentations with the AICPA.

Walker: Nice. Anytime a beach is involved, I'm always like yes, please. Even if it involves also some works stuff. Great. Thank you again Annette for this very helpful walk-through digital assets, virtual currency, cryptocurrency losses.

Again this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listened to your podcast and we encourage you to follow us so you don't miss an episode. If you already follow us thank you so much and please feel free to share with a like-minded friend. You can also find this at aicpa-cima.com/tax, and find our other episodes as well as get access to the resources that we mentioned on this episode and others. Thank you.

Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices.

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