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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Tech stack wars in 2024 — With the amount of technology products out in the market, how do they perform in reality? Join our next tech stack wars challenge on Oct. 16, 2024, to hear about the latest in technology for tax practices.

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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.

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.

Misconceptions about digital asset tax compliance are common. With business tax returns now requiring taxpayers to affirm their taxable digital asset transactions, it is even more important to ask the right questions. Educating yourself and your clients in this area is important to fulfill your due diligence requirements as a tax practitioner.

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.  
•  Questionnaire for Individual Clients — Before accepting clients that are engaged in digital asset activities, there are certain questions CPA practitioners should have answers to.

Advocacy

• AICPA comments on the proposed Sec. 6045 regulations on gross proceeds and basis reporting by brokers, Nov. 8, 2023
• AICPA comments in response to the July 11, 2023, Senate Finance Committee letter on taxation of digital assets, Sept. 8, 2023   
• AICPA comments on the IRS draft 2023 tax forms digital asset question, July 28, 2023

Other resources 

• IRS Digital Assets  — Resources and guidance available on the IRS.gov website

Transcript

On today's podcast, listen to hear more about how you need to carefully ask your clients about their digital asset activity.

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 Nik Fahrer. He's a senior manager at FORVIS in their National Tax Professional Standards Group. He's been with us before talking about this topic, and I'm delighted to have you back, Nik.

Nik Fahrer: Thank you for having me back, April. I'm excited to be here.

Walker: You are our digital asset expert on the podcast. No pressure. We're going to delve into some questions that [are centered around that] here we are in February and we're getting ready to start talking to our clients. We're going to talk a little bit about that. I feel like the more I learn about digital assets, they have different names- cryptocurrency, virtual assets, the more I need to learn.

Hopefully today we're going to help you be able to have a conversation with your clients. Maybe your client is more knowledgeable than you are or you just need to get up to speed. That's our focus for today.

I'd like to start with what are your most common misconceptions that you encounter about digital asset tax compliance when you're thinking about working with clients?

Fahrer: Sure. I really like to break this down into four different categories. I think the first category is, do we have a taxable event? There's a big common misconception out there, especially with clients, that maybe there needs to be some education and educating our clients. That just because you invest in crypto and perform some trades, but haven't settled back to US dollars, doesn't necessarily mean that you don't have a taxable event.

Let's take an example. Let's say I buy some Bitcoin and then I trade that Bitcoin directly for Etherium, then I trade that Etherium directly for Solana. There's multiple taxable events in there because the IRS treats cryptocurrency as property. Even though I haven't settled back to US dollars and cashed out, a lot of clients think, I haven't traded my crypto back into US dollars, so I don't have to report it on my tax return. That's actually false. Those trades in that example, from Bitcoin to Etherium, that's a taxable event, and then from Etherium to Solana, another taxable event.

The second bucket, I would say here is completeness, so really making sure that we have all of our sources and transactions accounted for. What do I mean by that?

Another example, if you have a client that comes to you and says, hey, I transacted in crypto in 2023 and I need help reporting that. Clearly identifying what were all of the exchanges that they used, what were all of the wallets that they used, and does that account for all of their transactions. Like we just mentioned in the previous bucket, do we have a taxable event?

Almost every single transaction in the space is going to be a taxable event. We have to make sure that we can account for all of those and have the proper records. It can be difficult to track them all down because it's so easy to just open up a new wallet.

Third bucket, I would say, is understanding the character of the gain or loss. I mentioned earlier the IRS says this is treated as property. That doesn't necessarily mean that all of the transactions are capital gain or loss, some of them could be ordinary.

Some examples would be mining income, staking income, air drops, hard forks. All of these in the eyes of the IRS are likely considered ordinary income at the fair market value at the time of receipt.

One question you want to make sure that you're asking your clients is, not only can you give me list of your transactions of trades, but you also want to make sure that you're getting a list of transactions for some of these ordinary income items, which may be listed separately.

A lot of times our clients are using a software provider to generate a [Form] 8949. Well, those ordinary transactions aren't necessarily going to be captured on that [Form] 8949 because that [Form] 8949 is going to be your capital gain or loss.

Second, within this third bucket of the character of the gain or loss of NFTs, the IRS has come out and said that, are likely treated as collectibles and those could be subject to a higher tax rate as well. We want to make sure that we are capturing those NFT's and marking the appropriate box and letter associated letter on the [Form] 8949.

The fourth bucket, and I would say this one probably gets looked over the most, is are there any additional surtaxes associated with the client's activity? For example, net investment income tax. A lot of our clients are not CPAs, they're not accountants [and] are not aware of this may be additional tax that their capital gain or loss may be subject to. It's making sure that we're having these conversations with them so that they're aware that the max capital gain rate is 20%, but may be subject to this net investment income tax, which is an additional 3.8%. That's important when we're thinking through estimated tax payments, things like that.

Of course, there's self-employment tax if you're in the trade or business of mining or staking, for example, and that could be up to 15.3%. Then the additional Medicare tax of an additional 0.9% on maybe the net self-employment earnings associated with mining or staking or some of these other activities.

Just to recap, the four buckets that I would really say are, one, making sure that we identify all of the taxable events. Two, completeness. Making sure that we have all of our activity in some sort of Excel spreadsheet or [Form] 8949 that's generated from a software. Number 3, what's the character of the gain or loss? Doesn't necessarily mean it's always going to be capital. Could be ordinary. Then four, what additional taxes may be applicable as well? Net investment income tax, self-employment tax, additional Medicare tax, things like that.

Walker: Thanks Nik. That's super helpful. Definitely things I've heard too and probably misconceptions that I have as I'm still learning and try to understand and wrap my head around these topics and how the IRS treat digital assets compliance.

Another thing I wanted to bring up, and you've likely seen it, the IRS just did an announcement about it. We've talked for several years — I should have gone back and looked and seen how many years there has been a digital asset question on the 1040.

But, in addition to that, they've tweaked the language throughout time. But in addition to the 1040, there's also now that same digital asset question about, did you receive sell, or exchange or otherwise dispose of a digital asset? Those are going to be on business returns and also trust returns for 2023.

Just thinking about that, how are you thinking about getting that information from clients? Probably the same situation as you have been already for individuals. But any tips and tricks on navigating those questions that might be new for people?

Fahrer: I think this is a very important topic because that question is subject to penalties of perjury. So we want to make sure that we're probably erring on the side of caution and making sure that we're capturing this information from our clients.

One thing that we do is we add this question to our client questionnaires. Every single one of our clients fills out a questionnaire, and we word it almost verbatim to the question on the 1040, and now these other forms that you mentioned. Did you essentially transact in digital assets? I'm oversimplifying it, but that's basically what it's asking. Put that question on your client questionnaires and that's a really easy way to get that information from your clients.

Maybe another suggestion is consider adding this as a question to your client acceptance process as well. When you're first going through the process of having conversations with clients or whatever that intake process looks for you and your firm, consider adding that as a question to your client acceptance process.

Then I always recommend getting ahead of it as well. Get a good idea of the types of records that your clients can provide on the front end. This goes back to client acceptance as well. Good records go a long way whenever we're talking about reporting digital asset activity.

If a client can't provide you with good records, or maybe for example, they provide you a spreadsheet with hundreds or thousands of transactions and you have to go in there and manually calculate cost, basis, and proceeds. It's very time intensive, very costly, and that's going to help you understand what to quote them on fees. It may also help you push them in direction of maybe trying to sign up for a software like a CoinTracker or Ledgible or Cryptio, or Koinly.

There's several different softwares in the market where clients can go out there and connect their wallets, connect their exchanges and it will do a really good job of summarizing almost all of the activity on your behalf and generate [a Form] 8949, generate supporting schedules and things like that. Most of the time you're going to run into scenarios where there's software, it's an extra expense, but it's going to more than cover its cost to save you all the headache and time that you're going to have to calculate everything manually.

Walker: Definitely, some unique challenges in tracking and reporting digital assets as opposed to if somebody is just holding securities or mutual funds in a brokerage account, that's pretty easy. There can be some complicated transactions in there, but it's not the same thing as digital assets.

Then, like you said, there's so many different, usually if they're transacting, it's going to be a large number of transactions, that Excel spreadsheet could look like a nightmare, I would imagine. Any best practices or strategies or tips, and you mentioned some softwares and things, when do you see that a client has made the flip from I can just track this in an Excel spreadsheet to needing software?

Fahrer: Yeah, that's a really good point.

Maybe to add some context to why we even have these Excel spreadsheets. [Form] 1099 reporting is not currently required for crypto transactions. Typically clients get to 1099B at the end of the year for their stocks and securities. Those transactions are all summarized for us and it’s super easy as a practitioner to then take that information and transfer it to the tax return.

Whereas here there is no [Form] 1099. Maybe going back to the misconceptions that we talked about earlier, another misconception is that a receipt of a [Form] 1099 triggers the tax reporting requirement. Most of us know that's not true. It's not the receipt of the 1099 that triggers the reporting requirement, it's the taxable event itself, but our clients may not be aware of that. That's why it's even more prudent to ask these questions on the front end of, did you transact in digital assets, to get a better understanding of what all needs to go into the return?

I also think that self custody is something that's unique to this industry, if you will. We have the concept of you control your own assets means that there may not be a third party intermediary. There may not be a broker to keep track of your cost basis, and then that burden falls on the taxpayer. If the taxpayer is unable to provide records or proof of cost basis, the IRS is going to assume it's zero, which is the worst case scenario.

But to go back to your question April and really answer it more directly, I think if you have a client that has more than 20 transactions in a single year, it's probably worth it to work through one of those softwares that I mentioned before to get them to sign up for that, connect their wallets, their exchanges, and hopefully bring in everything in one central location and automate a lot of it.

Then I think there's some good resources out there too on how to stay up to date and understand maybe some changes that are going on in the industry. We have an AICPA web page that's dedicated to this topic. It's a very good resource.

There's also a questionnaire on that web page that you can download. It goes through and is basically built for practitioners to know what questions to ask. We don't know what we don't know if you're not in the space. This is a great questionnaire to go out there and just cherry pick what you think would be beneficial to ask your clients. This is a resource for you.

The IRS also has a website that is specifically dedicated to digital assets. If you just google IRS digital assets, I'm almost fairly certain it's going to be one of the first ones that pops up. It has all of the guidance that they've ever issued in this one single web page. Then of course, there's several people that are very vocal on LinkedIn and Twitter [X] that you can follow and good resources there as well.

Walker: Perfect. Thank you for highlighting those resources. The questionnaire is what spurred wanting to have this discussion. Nik actually did a few videos for us on the website related to that questionnaire, and we wanted to dig a little deeper. In the show notes I'll put a link to our digital asset page and that's going to have that questionnaire as well as like you said, other resources, it also links to the IRS.

One thing I wanted to note is the IRS does do I think a good job of [what] you might just be struggling with, hey, that question [on the tax return] — How do I answer it? Is there a way for me to answer no? There probably is an answer. I think we discussed this, but I wanted to say you have to answer that question. If we didn't say that specifically [earlier], I wanted to say that you have to say yes or no.

The IRS provides ways that you must check the box yes, if they did this- received digital assets for payment or digital assets for this or that. Then it also tells you a couple scenarios for no. Again, I'll put link to those resources in the show notes linked to the questionnaire. Which is great, especially if you have clients who are really in this space.

I wanted to share that Nik is on a Digital Asset Tax Task Force with the AICPA. That is a mouthful that I had to say very slowly. So thank you, Nik for doing that. I have a couple of other members of that task force and we're going to do some follow ups.

Nik referenced that there is no 1099 for digital assets you may be aware about. There are some reporting requirements that are coming in future years that we're going to have somebody who's going to talk about that. We're also going to talk about what happens for digital assets if you've experienced a loss. There's some tricky tax rules related to that. Just wanted to give a little bit of a teaser for that coming up.

Nik, you provided a lot of great information. I'd just like to give you an opportunity, is there any final thoughts as you're thinking about this topic or any good advice for our practitioners that are listening.

Fahrer: I just want to say thanks again for having me, April. We have a saying at FORVIS, if you see risk seek help. I would just encourage our listeners. If you come across a client where there may be some complex situations with digital assets, don't hesitate to reach out to somebody in your network that may be able to help you. It's very ambiguous right now, we don't have a ton of guidance and I would just encourage you to reach out to those in your network that may be able to help.

Walker: Perfect. In closing on these podcasts, I like to think about us taking a journey together towards a better profession. In doing that, I'd like to hear about my guest other journeys outside of the world of tax. Nik, I'd love to hear a page from your travel journey bucket list or a memorable trip that is on your mind.

Fahrer: I'm actually really excited to travel to Alaska for the first time this upcoming May. Really excited about that trip.

Walker: Nice. Are you doing a cruise or just exploring around in Alaska?

Fahrer: Yeah. Just flying into Anchorage and then renting a car and trying to explore as much of it as possible as part of the shoulder season. Not everything will be necessarily open yet. I really want to make it to Denali, but we'll see.

Walker: Okay. We'll have to follow back up on another podcast that will, sorry, probably be about digital assets, but I appreciate you being able to talk about it in such an understandable way. Thank you again, Nik.

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 and mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accounts. You can find us wherever you listen to your podcast. 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 it with a like minded friend. You can also find us at aicpa-cima.com/tax and find other episodes as well as get access to all the resources that we mentioned a lot on this episode. Thank you so much for listening.

Daniel Moore, CPA, Owner — D.T. Moore and Company, LLC, discusses the recent Department of Labor rule on determining the classification of workers as either employees or independent contractors under the Fair Labor Standards Act. He also highlights the potential legal and financial risks associated with worker misclassification.

The rule, effective on March 11, 2024, aims to align with judicial precedents, reduce misclassification risks and offer more flexibility for businesses engaging with independent contractors.

Factors for worker classification under this rule are:

• Opportunity for profit or loss that a worker might have
• Investments of resources by the worker and potential employer
• Degree of permanence of the work relationship
• Nature and degree of control an employer has over the work
• Extent to which the work is integral to the employer's business
• Skill and initiative of the worker

Dan highlights the importance of considering both IRS and Department of Labor rules when advising clients on worker classification and how to best communicate this change to clients.

 AICPA resources

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

·       Employee or independent contractor? DOL issues new guidance, Journal of Accountancy, Jan. 10, 2024

Other resources

·       RIN 1235-AA43 published in the Federal Register — Department of Labor (DOL) rule

Transcript

April Walker: On today's podcast, listen to hear more about a recent Department of Labor rule that talks about independent contractors and employees.

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, lead manager from the Tax Section, and I'm here today with Dan Moore.

Dan is an owner of D. T. Moore and Company in Ohio, and he is another great volunteer friend of mine. And he's been on this podcast before, so welcome back, Dan.

Dan Moore: Thank you.

Walker: Today I thought we could spend a few minutes letting our listeners know about a new rule that the U.S. Department of Labor recently published in January. We're still in January when we're recording this, so very recent. It revises guidance on determining who is an employee and who is an independent contractor under the Fair Labor Standards [Act].

Just to set the stage a little bit, I'm not and Dan's not, an employment attorney, nor do we pretend to be one on TV or on this podcast.

We're going to approach this discussion as CPA tax practitioners and communicating this change to your clients. Because I'm sure you'll know and I'm sure as you're listening, you have clients who have struggled with this issue. It's not a new issue. It’s just, it’s a hard one to wrap our heads around.

So, we're going to talk a little bit about that. I will provide a link to the rule in the show notes. If you want to read more, it's very long, but we're not going to cover all the aspects and background about that rule. But just a quick little background on it.

In January 2021, the Department of Labor released a rule that was subsequently rescinded. This recent rule that was announced on January the 9th of this year, 2024. It replaces that guidance. It maintains that it's doing is [being] is more consistent with the judicial precedent. The rules that have been challenged in court and how the courts have come down on it. It also will reduce the risk that employees are misclassified as independent contractors, but also more flexibility, for businesses that still do engage with people who are in business for themselves and consider themselves independent contractors.

Let's start with an easy question, Dan. I'm sure it's easy. Maybe it's not easy. What's the definition of an independent contractor?

Moore: Thank you, April. It's always great to do these podcasts with you and I always enjoy the topics that you pick for me.

This one's a little bit challenging because independent contractor — it just depends to me where you're standing in the conversation. And although you can maybe reconcile and come to some conclusion under one aspect of the definition of an independent contractor, say, in the world of tax, when you step over to Department of Labor and you look at the Fair Labor Standards Act, you're standing in a different conversation.

And so, I may have figured it out on the tax side, but now I'm looking at it from the Fair Labor Standards Act. And now I've got to re-reconcile this whole concept as to whether or not someone is an independent contractor.

Independent contractors fall under a bunch of different names. You could call yourself an independent contractor. You could consider yourself to be self-employed. You could be doing freelance work. You could be involved in the much broader gig economy that is very popular and talked about frequently now. The tax aspect is going to be a little bit different about the Fair Labor Standards Act.

And first, before I define an independent contractor to the best of my ability based on the new announcement, I do want to touch on what the Fair Labor Standards Act is.

The Fair Labor Standards Act establishes a minimum wage for employees. It establishes the qualification or the right to pay overtime, record keeping. It discusses child labor law. It covers nursing mothers, 40-hour work weeks, breaks, how tips are to be paid to employees that are in an industry in which they receive tips as part of their compensation, and it prevents retaliation by an employer against an employee. There's a lot of things that the Fair Labor Standard Act covers, and the Fair Labor Standards Act covers employees, but it doesn't cover independent contractors.

So now we have to define — what is an independent contractor? — to see whether or not these set of rules do apply to independent contractors? And what we'll see as we go through this conversation today is although someone may seem like they're an independent contractor, once you apply the rules, for Fair Labor Standard Act purposes, they may be considered an employee in which you now have to apply all the Fair Labor Standard Act rules — an overtime payment would be one big one…a time and a half paid over 40 hours worked in a work week. A lot of these things are now going to apply to someone who may be sitting in the seat as an independent contractor, but fair labor standards are going to still apply to them.

So the easiest way — not necessarily easy — is we need to define what is an independent contractor. And that really isn't an easy question, and we have lots and lots of court cases to define it. [What] it really comes down to, is whether or not there is a matter of economic reality, and that the worker is economically dependent on the employer for work, thus an employee, or are they in business for himself and therefore potentially an independent contractor?

Like I said, there's a lot of different names, but also think of this too on the employer side with the Fair Labor Standards Act. The Fair Labor Standards Act is also there to protect the employer. Because if all employers are playing on the same level playing ground, then —your competition — it creates fair competition.

By establishing a 40-hour work week and overtime rules, that all plays a standard playing ground for all employers in which we're all going to play by the same rules in the sandbox. So now we have to look at who does this apply to? It implies to employees.

But how do we handle independent contractors and are independent contractors considered to be an employee?

And that's the big question of the day that this announcement in January (lovely time for new announcements to come out) This new announcement sets into play of, okay, independent contractor, are they subject to the Fair Labor Standards Act?

Walker: Gotcha. I was not trying to give you a trick question to start off with. I did know it was not a super easy question, but yeah, that's clear as mud for me.

However, thank you for that — doing a good job of setting the stage for us.

Now we know where we're going, how would one determine whether someone is an employee or an independent contractor under the Fair Labor Standards Act — once this rule is effective, which, noting that it is March 11th when the rule is effective.

Moore: Yes. First, we have to determine if an employee is a worker or an independent contractor. The rule came out with these six factors that you need to consider in determining whether or not someone is going to fall under employee versus independent contractor.

Now, this is not a true-false question. This is not, select A, B, C, or D as your answer. These are all subjective interpretations of these rules. And really, not one factor is weighted against the other. You have to just look at the rules [as a] stand alone. Try to apply them to your situation.

In my opinion, it almost comes down to, we have six factors. Do we have four to two, yay or nay, in determining whether or not someone should be really considered an employee for purposes of the Fair Labor Standards Act? So, you have to analyze them all on their own. This is going to lead back to court cases and precedents that is from the past, but also looking at the future at all of these tests.

So there's 6 factors I'm going to just go through real quick — each 1 of the 6 factors — and then I'm going to go back to each 1 and just add a little bit more detail to each one.

So, as you're sitting there, and from my standpoint as a practitioner, when I'm sitting there talking to my client, I'm going to say, okay, let's look at the six factors.

• The first 1 being the opportunity for profit or loss depending on managerial skill.

• Factor 2 is the investments by the worker and the potential employer.

• Factor 3 is the degree of permanence of the work relationship.

• Factor 4 [is] the nature and degree of control.

• Factor 5 is the extent to which the work performed is an integral part of the potential employer's business.

• Factor 6 [is the] skill and initiative [of the employee].

Now, again, subjective and many factors. Subjective on both the independent contractor, employee side versus the employer side. To what level of skill or the ability to profit? It’s going to be dependent on a facts and circumstances test, and it’s going to be dependent for each employee.

Lots to think about as I'm talking to someone, [to determine] whether or not they're an independent contractor for the Fair Labor Standards Act.

Factor 1 — I have to look at, okay, rule number one, what is the opportunity for profit or loss depending on managerial skill? I almost think of this as, are you punching a time clock and getting paid based on the number of hours worked? That's probably going to be an employee situation.

Or are you approached by a company to provide a service in which you, as the contractor, evaluate that project? You look at what, you think, the amount of time is going to be, the materials, the labor…do you determine what your profit margin is going to be on that job, what level of profit margin you're going to bid out that job for? There's a lot of factors in which you're looking at the actual profit and loss of that project, in which you probably would be sitting more in an independent contractor situation.

The common industries — not to beat up on the construction industry — would be typical, whether or not someone is sitting as an independent contractor. In this case, if you're really just showing up and doing the job as you're instructed by the company that you’re doing the work for, you’re probably going to fall under the employee test.

But if you're bidding out the job and you're determining how quickly you can [do] the job, determining how much profit you want to make on that job, you're using your managerial skill, then you would probably fall under independent contract. So again, that's just one of six tests that you're looking at.

[Factor 2] Now you have to move on to the next test, which is investment by the worker and the potential employer. And in this scenario, if you're showing up and the employer is providing mostly all of the tools and materials that you need to do the job…You're showing up and they're providing you, say they're providing you software, they're providing you office space, computer equipment, supplies, all of that's provided. You're just showing up and doing the work. You're probably going to be sitting in the employee side of things.

Whereas, on the flip side of it, you have your own equipment, you have your own tools, you're purchasing better equipment to make you more efficient as you're doing these jobs. In this scenario, you would be sitting more on the independent contractor side of the conversation. So again, the amount of investment and the type of investment you're making in that job would determine whether you're an [independent contractor] or an employee.

[Factor 3] After investment of the worker and the potential employer, let's take a look at the degree of permanence of the work relationship. This is the third prong of the question.

And you're looking at if you're going to the same work location day after day and it seems to be more permanent. That is almost as if you're going to work like anyone else, it's as you're looking at it as your job, and you're really not going out to work with another company. Your priority is given to this one company.

You're going to have a degree of permanence with that relationship that's going to lean towards more of an employee relationship. The flip side would be, you know what, I'm going to work maybe Monday, Tuesday this week, and Wednesday. I'm going to go do some work for another contractor on another project. Thursday/Friday, I might go work for someone else on a different project. The following week the makeup of that work could be completely different. And so there isn't a degree of permanence. And so that would lead more towards an independent contractor relationship. Again, that's factor three.

[Factor 4] Which then leads us into factor four, which is the nature and the degree of control. And when you're looking at the degree of control of the employer, the company that the individual is doing work for, are they setting the schedule?

Are they, having the independent contractor/employee show up every day to the same location at which they are given their duties for the day…sent out to various projects? Throughout the day, they're being monitored. They're doing check-ins with the company to see where they are on the project.

That level of control is really going to lead towards more of an employee status versus an independent contractor. Where an independent contractor may say, okay, I'm going to work on this project for you for the first part of the day. Then I'm going to go work on different projects for another contractor and switch it up. Or maybe they have their own project that they're working on.

[Factor 5] Now we move into the fifth factor is the extent to which the work is an integral part of the employer's business. If the individual is showing up to work and the work that they are doing is very integrated into the overall process. Maybe it's manufacturing and they're coming in every day and they're doing a very integrated part of the overall product development or what they're creating. That integrated part really is part of that process in which that would lead to, in most cases, the individual being treated as an employee, unless it's a very skilled process that is very infrequently used.

If someone's coming in and stepping in, integrated into the process, they're most likely going to step into an employee versus the independent contractor side of things where they're doing work for the company. Your accountant that is doing bookkeeping work for you that's not integrated into the overall process of what the business is in making money doing, then that individual would be sitting in an independent contractor standpoint because they're not integrated into the process of the overall product that the company is making.

[Factor 6] Then finally, we're looking at that sixth factor, and that is the skill and initiative. So again, skill and initiative, that's very subjective. What level of skill is the individual providing for the job?

If you have an independent contractor coming in to do something that is very technical, that very few people do…it's an integrated part of the job, but it's something very technical, and you may only need them on an infrequent basis to complete a project, that situation would generally lead to someone being independent contractor.

However, if they're coming in, they don't require specialized skills in performing the work. They don't necessarily require training in doing the work. They're being supervised. They're being trained on the job. That really could lead to being an employee relationship. So again, very subjective to the level of skill that the individual is doing.

And you have to look at it…and I think by industry. I'm just thinking, looking at my clients, I have some clients that are independent contractors. The work that they do is very specialized. And in some cases, there are very few, maybe in the region, individuals that are doing that type of work.

They pick and choose who they're going to work for and they freelance, they go out, they do that job, it is an integrated part, but they're very specialized, and they're not frequently used. They sit in an independent contractor position versus an employee position. Somewhat clear as mud.

Six factors that we're looking at, trying to say thumbs up, thumbs down. I don't think it's still an easy answer to that question.

Really, at the end of the day, I'm looking at this [and saying] — do I need to apply these rules? Do I need to make sure that if someone comes in and bids a job for me, [do] I need to do some record keeping to see how many hours they're working for me? And if they go over 40 hours, I'm going to have to renegotiate maybe that bid or that contract or figure out what the hourly rate is for that job to determine whether or not you paid them a minimum wage and whether or not they've been paid time and a half for that project. If they're sitting in the independent contractor seat, but really when you look at the factors, they would be considered an employee for the Fair Labor Standards Act.

And this is a very broad definition.

Walker: Great. just to recap a little bit, for our listeners. You have to think about this from your perspective as you're hiring people. Obviously, we're going to talk more about why do you care about this? Why are you spending time talking about this? And we'll delve a little bit into that, in a second.

Dan did a great job of going through all the six things, but it's each six things could be their own probably 30-minute conversations about what they mean, but that was great.

Something I, as I was preparing for this, I'm not sure that I necessarily understood this, and I think we alluded to it a little bit, but I want to make sure we're clear.

This six-factor test, this new rule that's effective March 11, does it override, or does it change the way the IRS determines worker classification, or other federal, state, or local laws that may provide standards for employee classification? How am I thinking about this?

Moore: This is an answer that we don't [know] often in the world of tax. Our answer is usually — maybe, or it depends, we need more information. When the Department of Labor comes out to answer this question, the question of whether or not does this override, does this change IRS determination of worker classification, when the Department of Labor comes out and says no, that is a pretty stern answer.

It's not an "it depends” situation. It doesn't override or change IRS classification because IRS uses its own classification. [It’s] own standalone set of standards, the Common Law Test, which is completely different than the Fair Labor Standards Act and the rule that just came out. When we're looking at the Common Law Test, and just real quick on the Common Law Test as IRS looks at it, you're looking at relationship considerations, behavioral considerations and financial consideration.

We may determine that someone is an independent contractor from a tax standpoint, from an IRS standpoint, but that doesn't mean they're not considered an employee for Fair Labor Standards Act when we apply those six tests that we just went over. So, a hard no on the IRS standards. Does that make things any easier for us?

Absolutely not. It does not. And then you have to look at federal law, there's state law, there's local law, and all these laws apply to employees. The best rule to follow and the rules that you should follow, again we're not labor law attorneys, but you want to apply the law that has the most protections for the employee.

So certain laws may have higher standards than others, and you're going to follow the law that protects the employee the most in this situation. And so again, still confusing. We’ve got two bodies of law, when we’re looking at IRS and Department of Labor. There's so many other factors and other things to consider when you're looking at employee versus independent contractor, but this is not changing the IRS law.

Walker: Okay, that's helpful. Let's talk about why as a tax practitioner, you care about this classification enough to spend time talking about it with your clients.

Moore: I get this question all the time. I work with a lot of startups, in particular. The startups that are like, I have this person, they're coming in, they're helping me out. They make their own schedule. I'm just, I'm scared. I'm not ready to put them on payroll. They're fine with being an independent contractor.

But that doesn't work. And a lot of times I find, particularly small businesses that are starting out, I look at them and I say, the first thing is that person could change their mind when it comes time for them to file their tax return and you may have had this wonderful agreement that they're an independent contractor and they go to file their tax return, guess what? They may not think they're an independent contractor any longer when they realize the impact of the self-employment tax. I have that conversation [that] you need to put your individuals that are working for you on payroll. They need to be part of payroll.

And then as the business grows, I have the discussion that, you know what, you started out, you had a friend helping you out. You have this independent contract relationship. That relationship has grown into something. more than what it originally was, and now it really seems to me like this independent contractor person is really an employee, and now you've hired more people, and you put them on payroll, but you have someone else doing really the same work that you're paying as an independent contractor, and I really think you can't have two people sitting in the same position doing the same work, treating one as an independent contractor and one as an employee.

These are all challenges that startup businesses have. We particularly have these conversations with our clients that are in the construction industry. [There] really [are] no bright line test here on who should be an employee versus an independent contractor? And you have to look again, these six factors, you have to look at the IRS rules to determine whether or not they're considered an employee versus an independent contractor.

Walker: Very good. When you get those red flags that arise as you're having those conversations, and you think that there's an issue, you talked about that — that you're having the conversation — but how do you put them on notice? What are your recommendations? Do you refer them somewhere? What are your next steps?

Moore: You try not to scare your clients into compliance, but we have a lot of stories that we can tell that are very scary that have turned companies upside down. They have turned small family-owned businesses upside down.

In a recent case, I had a construction company that had really what seems to be an independent contractor relationship with someone that was doing work for them. This individual had their own LLC — their own construction company. They came together to work on a job and that independent contractor fell, was severely injured and passed away. Now this construction company is having to deal with the fact that there were workers comp issues and are being sued over this issue from the family — the surviving family of the individual that passed away.

Maybe at the end of the day they'll rule and say, you know what, you did have this, independent contractor relationship with this individual. They [won’t] fall under workers comp laws and there won't need to be a payout under workers comp, but it's cost tens of thousands of dollars. There's a lot of legal fees involved with that time and stress of this is massive. And so those are just the war stories.

I say, you really need to sit down with someone that is skilled and understanding about labor law to find out what your real risk is in the worst-case scenario. Those are rare situations, but when they [happen], they affect your business. They affect your family and they affect your health. And you have to make a very hard decision, on making that relationship with an independent contractor.

There's so many factors. There's fair labor. There's IRS rules when it comes to independent contractors. You have to look at unemployment laws, workers comp laws, the list goes on and on. And to make sure that you're properly protected, you have to really think. I think a lot of companies need to think very hard about that independent contractor relationship. And many will probably discover, you know what, I want to sleep at night. I'm going to flip this individual to an employee.

Walker: Great. yeah, like you said, it's not about horror stories and it's not about scaring. But part of our job as trusted advisers are to let people know, hey, there's potential payroll tax obligations and liabilities, but then there could be also these [other consequences]. You don't want them to come back to you and say, hey, you never questioned this. You never said anything was wrong with this. I think that's important. And that's the point of why we're talking about this today. Any final thoughts as we're wrapping up, Dan.

Moore: Yeah, so I'll remove the gloom and doom. The scenario could arise that you have someone doing work for you as independent contractor, under these rules, the individual would be able to go to the Department of Labor and say, okay, I really, truly believe that I fall under Fair Labor Standards Act, and I was not paid overtime by this company that I was doing work for.

Department of Labor comes in, they do a ruling, you may have to hire an attorney to help you navigate this situation. Then you have to pay overtime, calculate that, look at your record keeping. That could be penalties assessed with it. So that's just a simple, someone said, you know what? I worked 45 hours, not 40 on that job and I didn't get paid time and a half. And so, a very minimal kind of situation that could eat up a lot of time within the company.

Walker: Thank you so much for walking us through this conversation today. It was not an easy, breezy conversation, but it was one that I think we needed to have as hopefully our listeners will take something away. In closing on these podcasts, as you know, since you're a repeat guest, I like to think of us taking a journey together. An Odyssey, if you will, towards a better profession. In doing so, I like to hear about our guests other journeys outside of tax. So, please share a page from your travel journal or bucket list or something you've got on the horizon, Dan.

Moore: So, I won’t do a travel, but I will say just on my own personal journey and pursuit to mindfulness and clear mind. I love to collect audio books that I'm going to find the time to listen to and I never find the time to listen to them. This morning I did a swim and this morning I was pretty excited I finally got my new headset to work. That I can now listen to books while I'm swimming. This morning I got a 40-minute workout in and also got to listen to 40 minutes of a book that I would not otherwise have made time.

Walker: Tell us the name of the book.

Moore: it's on NLP, Neuro Linguistic Programming. I should probably listen to that definition a little closer, but it's just really looking at our reactions, the words we use and also listening to how your employees and your clients are speaking and the way they're speaking really can help you to better understand their thought processes that are going through something. I think it's a great tool to have this time of year when we are face-to-face with all of our clients.

Walker: Wonderful. You’re improving your body, you're improving your mind, all at the same time, that seems like a win-win for everyone.

Thank you again so much, Dan. I'm sure we'll have you again. I'll try to pick an easier topic next time.

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 feel free to share with a like-minded friend. You can also find us on aicpa-cima.com/tax to listen to our other episodes as well as get access to resources mentioned. Thank you so much.

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.

This Tax Section Odyssey podcast episode takes a deeper dive into the Organisation for Economic Co-operation and Development’s (OECD) initiative on Base Erosion Profit Sharing (BEPS) 2.0 which sets to reform the internation tax system with Pillar 1 and 2 tax regimes. In addition to the complexity of such international regulations, the political landscape for U.S. implementation is uncertain, and potential action is needed from Congress.

Cory Perry, Principal, National Tax — Grant Thorton Advisors, and Vice Chair of the AICPA’s International Technical Resource Panel (TRP), highlights that while many U.S. companies may not face larger tax bills if these regimes are adopted in the U.S., the administrative and compliance challenges are significant. The AICPA has submitted comment letters to the OECD, Treasury, and the IRS, focusing on simplification and clarification of rules.

AICPA resources

OECD BEPS 2.0 - Pillar One and Pillar Two — The OECD BEPS 2.0 sets out to provide a tax reform framework allowing for more transparency in the global tax environment.

What you need to know about BEPS 2.0: Pillar One and Pillar Two | Tax Section Odyssey — The OECD BEPS 2.0 project is an international effort to reform the international tax system that addresses transfer pricing, profit allocation and tax avoidance.

Advocacy

Comments to Treasury on tax issues of OECD Pillar Two, Feb. 14, 2024

Comments to Treasury on Amount B of OECD Pillar One, Dec. 12, 2023 

Other resources

OECD BEPS — Inclusive Framework on Base Erosion and Profit Sharing

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 my colleagues Reema Patel and Lauren Pfingstag. They are colleagues here with me at the AICPA. They are international experts and legislative experts. We'll get into more of that as we're discussing.

I'm also delighted to have with me Cory Perry. Cory is a principal with Grant Thornton Advisors and their national tax office. He's also, and more importantly for our discussion today but probably not more importantly for his day-to-day, the Vice Chair of the AICPA's International Tax Resource panel and Chair of the OECD taskforce. That's what we're going to be talking about today.

If you are a follower and listener of this podcast, you might recall a few episodes ago we did a higher-level background on OECD's tax regimes — Pillar 1 and Pillar 2 — just laying the groundwork. Today we're going to talk more about why we think you need to be familiar with these concepts. Even though for today they may not be relevant for any of your current clients.

We're also going to delve into the political landscape and where we are today and what that could mean for the US tax system related to international tax legislation. Reema, I'm going to let you take it away for the next little bit.

Reema Patel: Thanks, April, Cory, welcome. I know a lot of us have been hearing about the OECD Pillar 1 and Pillar 2 for awhile now. Many countries have also implemented it this year and some are implementing it next year. I guess the most basic question we can start with is, who should care and pay attention to this?

Cory Perry: Absolutely. It's a wide impact in tax, but it only impacts the largest of the large companies. I would say it has a high threshold, 750 million of consolidated revenue and two of the four preceding years and you have to be taxed, want more than one jurisdiction. We are talking about very large companies but these days, even middle market companies are easily starting to bump up against that threshold. We're not just talking about the Fortune 100. We're talking about middle market and above companies that should care and think about these rules.

Obviously accountants that serve those types of companies, those larger companies. I think many of those companies themselves not even be fully aware that they're subject to these rules or may not have fully thought through how they're going to comply. The other thing I would add, there is a bit of a misconception out there that this is a corporate multinational problem. Although that is primarily where it is, it also impacts pass-throughs, partnerships and S corps that are parents within these groups can be equally subject to these rules.

Rules don't always necessarily apply at that level, but they are applied to the group as a whole. I know there's a number of practitioners out there that have clients that have grown over time and might have reached this level. It's by no means going to be the majority, certainly going to be a large minority, but I suspect many will have clients out there that might be impacted or if you're in-house at your company might be impacted.

Reema Patel: Like you said, it is for large corporations currently with consolidated revenues at 750 million euros and more. What are you seeing with the clients right now? Any challenges that they're being faced by technology? Gathering data points? I know you have to comply with many foreign jurisdictions as well as the US. Can you speak a little bit to the challenges that you're seeing just as a practitioner as well as from a client perspective as well for them.

Cory Perry: Absolutely. Companies are really still trying to get their hands around this as are practitioners. Even the rules aren't fully baked. The OECD is still releasing new guidance every couple of months on quite a frequent cadence. So the rules continue to evolve and how companies are approaching it continue to evolve as well. As far as challenges, interestingly enough, from what we're seeing, many companies are not actually seeing larger tax bills.

You'd think tax legislation, tax change like this is going to hit the bottom line and there are certainly companies out there with lower/no taxed pockets of income or that are in low-tax jurisdictions. But what I've found is the vast majority, particularly of middle market companies, are generally not in many of these low-tax jurisdictions, if at all. They are in higher tax jurisdictions, think of the US's top five trading partners- for example, Canada, Mexico, China, and Japan and the UK all have rates above or even some cases well above 15%.

The idea is to reach a minimum level of 15% and once you're above that, there may not be additional top-up tax to be paid. It may not be necessarily for all taxpayers an item that's going to really be a cash tax impact. But where we're really seeing the challenge is more on the administrative and compliance side to this.

It is a very significant undertaking to comply with these rules. It's just a massive effort that's required in order to get your hands around what needs to be done, get your systems updated so that you can comply and collect the information or the data at the right level, clean the data, so on and so forth. There was a lot of complex calculations that need to be done. In some cases there may be even third or four sets of books that need to be kept that you may not have been keeping our tracking in the past.

The rule started out with a simple premise. It was going to be a book tax based on books. That sounds simple. But it quickly evolved into a very complex tax regimes that sits on top of all the other global tax regimes that are already in place. If it wasn't complicated enough before, now we have another layer over the top making it quite complex. That's certainly been the biggest challenge is how do you deal with all of this change and international tax complexity when you're operating across borders.

Reema Patel: Definitely, I guess it just keeps piling all the time. Three sets of books, four sets of books. We don't even have CAMTI [rules] out yet. Speaking of which currently, it looks like, as we mentioned it's for large corporations, but what do smaller firms and CPAs in the industry need to know? I'm sure they're not getting into the nitty-gritty details of how to calculate pillar two taxes and all the top up taxes on different regimes.

But we don't know if the threshold does get lowered, more companies will get pulled in, possibly. What should they know? How can they keep up with and at least be aware that it's out there?

Cory Perry: I think at this point I would say it's more of a client service point. It's being aware of the potential risks in an area where your client might be subject to these rules. I don't expect many firms will have many clients that are going to be impacted. In fact, many firms might not have any clients that are impacted. But it's making that identification and helping those clients understand whether they are impacted. It is getting a lot of press and it's in the Wall Street Journal, it's on NPR in the morning, it's certainly in the mainstream news.

Clients are interested in asking questions about it. It's understanding that it's out there, what it is and who it applies to. I think that's the most important part, I don't expect most smaller firms will scale up or hire experts in this area necessarily. But I think helping those clients with the identification - that's going to be greatly appreciated. You're highlighting a risk area for them that they might not have previously considered. Then helping them find a resource that can assist with this somewhat unique area of tax.

Whether that'd be another CPA firm in the US or more commonly, sometimes these are non-US firms because right now, as we'll talk about later, the US is not implemented these rules that could certainly assist. Again, flagging these as issues, being aware of those thresholds and who it might apply to is probably the area I would focus right now and making sure that your base has been reviewed. And they understand whether they're going to be in or out these rules.

Reema Patel: Definitely. I guess just building on what you said. It's been in the news everywhere. We've also heard in the news — What's the U.S going to do? The US hasn't implemented or enacted any part of pillar two regime yet. Until they do or they don't, the U.S. multinationals are going to have to comply with this. They have to comply in the foreign jurisdictions. They have to comply in the U.S. as well. But there has been limited guidance issued. [There was] a notice earlier in the year, and then the recent proposed regs on dual consolidated losses.

But none of them really went into detail. It was just like scratching the surface. There's a lot of guidance that the U.S. taxpayers need. I know the AICPA's submitted a few comment letters to the OECD, to Treasury and the IRS, and you've been heavily involved in some of them. Do you want to just speak to a little bit on what we highlighted in the comment letters, some of the recommendations and concerns we raised in hoping for some future guidance.

Cory Perry: Sure. You made a good point there with scratching the surface. I think there's a lot of ground yet to be covered by the IRS. As I said earlier, this is a complex system that lays on top of a complex system. The US [tax] system is undoubtedly the most complex tax system out there. There are a number of different interesting and intricate ways in which these two systems interact. The IRS is working diligently, but I think [they are] only beginning to understand where some of these issues and gaps might be in regulation.

They're trying to hit the bigger ones first which they've done with then notice package and the regulations. The notice addressed primarily, but not exclusively, foreign tax credit issues and how the US is going to view these new taxes, really novel taxes that have been created under this Pillar 2 system. And how that's going to interact with the US foreign tax credit system. Then just a week and a half or two weeks ago, they also released proposed regulations dealing with a number of dual consolidated loss issues. One of the major issues they addressed was the Pillar 2 area. The dual controlidated loss rules, those very complex rules, but suffice it to say they are rules that are intended to address double-dipping of losses between two systems.

Really, now that we have this overlay, we have this third system that you have to contend with where losses can be used in the U.S. and in that third system and that makes that already challenging system quite complex. I would say a detailed discussion of our comment letters is probably a little bit weedy for this discussion but I'll give some themes and some areas that we focused on in those comment letters. The first I would say is a call for simplification. That was really our focus with most of our efforts in this space. We asked for exceptions and safe harbors from application of some of these very onerous rules.

We focused on areas where there wasn't much opportunity for abuse but there was a lot of opportunity to save taxpayer's and CPAs time and effort to have to do some of these calculations that might be, in some cases unnecessary. Or you could make various safe harbor type assumptions. We focus on simplification. Clarification was another area where we focused on. There's a lot of gray out there and there will continue to be. But we focused on a few areas of gray within these rules that we had identified that we thought the IRS could add clarity. Beyond those, we also provided some comments, or we're working on some comments, not just to the IRS, but also to the OECD.

There we were focusing on, again, clarification and simplification but with U.S. and multinational corporations in mind. Really the focus is on some of the safe harbors that are out there. There's transitional safe harbors that allow for shortcuts, if you will, that make the work much simpler. But many of those are temporary and they're set to expire in a couple of years and we're making some comments around those. One of them being a request that those be made permanent for taxpayers in an effort to simplify this very complex system.

April Walker: Thanks so much Cory. You did a wonderful job for me. Definitely not an international tax expert by any stretch of the imagination and it was made it easy to understand where we are. I'd like to pivot a little bit now and have Lauren take us away. I don't know if anybody knows but there's an election coming up in a couple of months and so I thought it would be interesting if we would talk about what does our political landscape mean for what the U.S. is going to do around this? Lauren, tell us what you know all around this area.

Lauren Pfingstag: Thanks for inviting me to join the podcast, April. Cory, I think a lot of professional congressional watchers would say in this space that there's going to eventually need to be some action taken by Congress to move Pillar 2 forward. What would that look like right now?

Cory Perry: It's certainly a challenge, I would say in our current environment to move Pillar 2 legislation forward. To give a little bit of background on where it's been. Historically from a political sense, the Pillar 2 rules have been a core aspect of Biden's tax platform. He attempted to move them through the Build Back Better bill a few years ago, that ultimately failed in the Senate. But they remain, and they were in his most recent greenbook, a core part of his plan. I believe they will continue to be a part of the Harris tax platform. I have no reason to believe that will change as well as the Democratic agenda going forward. It has broad support on the Democratic side. The Republicans side historically had support there but more recently they've been openly critical, I'll say of Pillar 2.

They've noted their concerns in public forums and expressed frustrations with the negotiation process. There are certainly some challenges there. It's not impossible that we could see some legislation move forward in the short-term particularly if we had, for example, a Democratic controlled government. If we had a Republican controlled government, I think the chances go down. With that said, there are some other factors on the horizon that could influence this from a political perspective. The Tax Cuts and Jobs Act, tax cuts for individuals expire in the end of 2025, beginning of 2026. Many of the favorable business provisions like the GILTI rate, the BEAT rate, the foreign derived intangible rate, and a variety of others.

Those are just the international ones, but those are set to expire the end of 2025 for tax years beginning in 2026. That sets up an interesting opportunity where perhaps we could see some compromise, maybe a budget reconciliation bill where it's not along party lines, depending on which way the government swings. Obviously, we might need some collaboration there. If we don't have a democratic government, we might see something later in 2026 in terms of legislation. There is a path forward although it does look like a challenging one.

Lauren Pfingstag: Is it true that implementing part of Pillar 2 legislatively would potentially raise revenue over a 10-year budget window? Meaning, if Congress were to move forward with a piece of legislation that put Pillar 2 into play, that they would raise a certain amount of money that could be used to pay for other provisions and a larger let's call it end of year 2025 tax bill?

Cory Perry: Absolutely yes. It would be a revenue raiser. Right now, if it's not imposed, other countries might be taxing the United States under the way these systems operate. Subsidiaries, for example, could be taxed in the U.S. if it's in an effective rate less than 15%. There's certainly revenue on the table and free revenue. If you think about it, you could tax in the U.S. or you could tax it in the foreign country. If we tax in the U.S. first, they're not going to tax in the foreign country. It is a revenue raiser. I think it was scored that way in the Build Back Better bill.

It would certainly be a pay-for those types of extensions of those expiring tax cuts that I mentioned. That's why I think it could be a lever that could be pulled in those negotiations to help further the Pillar 2 legislation in US in exchange perhaps for some of those other items.

Lauren Pfingstag: Particularly if the Democrats, as you said, did win control of the White House, the House and the Senate this November. I think this is more of a note rather than a question, but I think West Virginia Senator Joe Manchin, who was one of the most, if not the most moderate Democrats in the Senate, was instrumental in pulling Joe Biden's vision for Pillar 2 out of the Build Back Better bill. When you look ahead into 2025 and you think through the different Senate races, Senator Joe Manchin is retiring, you no longer have Senator Sinema from Arizona who is retiring.

It's hard to pick out who in the Democratic caucus in the Senate, at least in 2025, could play, or would want to play the role of a Joe Manchin and maybe stripping that out of a democratic tax reconciliation bill if we get to that Democratic trifecta of power. I'll be keeping my eye on that for sure.

Cory Perry: I wholeheartedly agree. Keeping their caucus together was a challenge last time and it seems like it could potentially be easier at least.

Lauren Pfingstag: This is obviously just holistically like a weedy, thorny topic. In my conversations across D.C., I have only met a few people, and I don't count myself among them — who really understand this. It's incredibly complicated and if you were in a room with the tax aides who staff members on the House Ways and Means Committee and the U.S. Senate Finance Committee and you could deliver one or two key messages to them about this, what would you want to tell them and have them relay to their bosses?

Cory Perry: I think there's a couple of key messages and themes here. One, I would say the world is moving forward with or without us in terms of pillar 2. At some point, I think there was thought and perhaps that thought might still exist in some, but I think there was a thought that this wouldn't move forward without the US and some of the larger economies like China and India signing on. But that's shown not to be the case. It's been enacted and legislated in the E.U..

All the E.U. member states have adopted it. There's dozens of countries across the world at this point with many more being added every month. It certainly has broad international support and it's moving forward with or without us. What does that mean? I think that means US multinationals in particular might face some challenges if U.S. doesn't enact legislation.

If U.S. enacts, there is a benefit from that. They would pay the tax most likely at the U.S. level. They'd be able to file returns at the U.S. level. They'd be able to work through the U.S. government to use the information exchange mechanisms to make sure the foreign countries have received the reporting that they need and not to mention it would shut off the under taxed profit rule (UTPR) which is beyond the scope of our discussion today but it's a complex rule. I'd describe it as the backstop rule. Effectively if no other rule taxes that rule comes in and imposes that tax.

If the U.S. doesn't do anything, subsidiaries could be taxing the U.S. As I said earlier, the U.S. profits through that under taxed profit rule, as well as other subsidiaries of the U.S. that the U.S. could tax. There's certainly revenue opportunities that are on the table that seemingly will go to other countries if we don't act. It would also go a long way in simplifying the US's approach to compliance. Because they'll be less of a need to orchestrate the two systems if we adopted one of them and made it part of our law. I think it would be easier to coordinate the two. Just overall for those reasons I mentioned earlier it would make it much simpler for U.S. multinationals in the long run.

Lauren Pfingstag: Thank you for taking again what is a difficult subject and making it digestible. That is a skill and we appreciate it.

April Walker: Yes, I echo those thoughts, Lauren and I'm also incredibly grateful for you joining because you bring a different perspective, Lauren, to this conversation and very fascinating. I was listening on the edge of my seat hopefully everyone else was. And I'm appreciative to Reema. Reema is very well-versed in international tax so I'm grateful for her to be able to ask questions that I couldn't pull off. I'm very appreciative to you Reema. Cory, I'll give you the opportunity to just as we're wrapping up final thoughts on this very heavy weighty topic?

Cory Perry: Just the closing note that I would leave is, if you think you're subject to these rules or you think you have clients that might be subject to these rules don't wait. Engage with your advisors or with your clients now. Review structures and start planning for pillar 2. The sooner that companies and accountants act, the better prepared that the taxpayer will be for the changes that are ahead. There's things that can be done now that will significantly reduce reporting in the initial years, simplify the overall process that may not necessarily be available if you wait. It's coming, it's right around the corner and that should start thinking about it now.

April Walker: Perfect. I would be remiss if I didn't say [you can find] in our show notes a landing page on the AICPA's website where you can find resources and we're continuing to work on those resources. I will put a link to the show notes in there.

Just in final closing, a little bit of a lighter topic. The name of this podcast is Tax Section Odyssey so I'd like to think about us taking a journey together, toward a better profession and in doing so I'd like to get a glimpse of my guest other journeys outside of tax. Cory, tell me a page from your travel journal or a memorable trip or something you'd have on the horizon?

Cory Perry: Sure. I regularly take trips to Taiwan, that's one of my favorite countries to go to. That's where my wife's originally from. We met in college and have been married for many years now, but I have two young boys who love to travel with me, although it's sometimes challenging to travel with them, but I still enjoy it very much. We go to Taiwan usually every year, every other year to visit her family, travel around Taiwan and see Taipei. That is a reoccurring and memorable trip journey.

April Walker: Wonderful. As I'm doing these I like to add to my travel list because I love to travel.

Thanks again, so much I'm so grateful for Cory, Lauren, and Reema. 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. I encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and I encourage you to share with your like-minded friends. You can also find us at the aicpa-cima.com/tax, where you can find other Odyssey episodes as well as get access to the resources mentioned during this episode. Thank you again so much and thank you 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.

On this podcast, Mark Gallegos, a partner at Porte Brown, provides advice for getting ready for tax season. He discusses the importance of preparing staff, communicating with clients, managing workloads, taking care of yourself, and setting expectations. With the right preparation and mindset, the next few months leading up to April 15 don't have to be too difficult.

AICPA resources

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

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

On today's podcast, listen to hear how to get a jump on your to-do list for tax season.

April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast. Happy 2024. On this podcast we offered 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 Mark Gallegos.

Mark is a partner at PorteBrown. He's on the Tax Practice Management Committee, which I'm the liaison for and he's quickly become one of my favorite volunteers. Don't tell any of the other volunteers, Mark, but I do mean that. Welcome.

Mark Gallegos: Thank you for having me appreciate it.

Walker: We're recording this today on January the 17th and as always, there's a lot of noise in the tax world. There's potential for tax legislation, there's an impending government shutdown, there is filing season is getting ready to start in a couple of weeks.

I thought it would be nice to remind our listeners to take a deep breath, first of all. But, then I'd love to hear what's on the top of your mind as we're getting ready to take a leap into tax season. How does that sound Mark?

Gallegos: Sounds great. I think there's a lot to unpack there.

Walker: Absolutely. Start at the very beginning. What are the top couple of things on your to-do list today? What are the most urgent items that you're trying to get accomplished in the next couple of weeks.

Gallegos: Yes. Right now, there's a number of things.

One, from the firm's standpoint, making sure everyone's up to speed on everything we do to get ready for tax season. We're already in the flow of it as a firm from the audit department and accounting and consulting department. But for the tax side, really getting them up, ramped up and ready to go.

As a firm, we are very processes- and procedure-driven. We break out into teams and trying to figure out what's the best practice for us as a firm to truly make sure everybody is prepared as we go into the preparing business returns, trust returns, individual returns, and everything else that goes with that.

We spend a lot of time trying to meticulously make sure that our system is proper, so we're doing a lot in that area.

Then you have making sure everyone's up to date on all tax law changes that are effective for this filing season. The good thing is headed into the beginning of this year, there's not a massive amount of tax law changes.

However, yesterday there was an agreement between Senate Finance Committee and the House Ways Committee regarding a potential tax legislation. Again, just an agreement, not law. But as I look at that and I start to communicate with the firm, some of these things could create issues within our firm, in our planning.

One, if these provisions are enacted, when would that happen? How does that impact our tax season? How does that impact the software provider we use to be able to roll out any changes so that we can be streamlining this process. You have that going on.

At the same time as a firm, dealing with our clients. One of the things is communicating with your clients. So at the early part of this stage, letting clients know, there's potentially is a government shutdown that's looming. We've let them know in the fall, but here we are on January 17th and we still have this throughout tax season that we may have to deal with, which affects a lot of things, not only the client, but also us.

If there was a shutdown of the IRS [could] furlough two-thirds of its employees and then you would have assistance centers closed. But the reality is if you have to paper file returns or if you have to call the IRS or if you [hear] I got this notice. We set the response in on behalf of the client. Clients say, Mark, what is the status of this and you can't talk to the IRS now. You can't get a response, but they keep getting a notice saying, you owe money, just automatically coming out.

Those are the headaches that I always say could take your tax season as a preparer off track. It's the client is assuming you're handling something, you're relying on the IRS hopefully to resolve something and in the meantime, you're just that middle person trying to field the questions and resolve it. If they get shut down in some form or fashion, it really comes into play where we get hampered.

Communicating with the clients, communicating with the staff, communicating with just everyone in general [that] this is looming out there. Let's do everything we can to get on top of it now, let's not wait on things, let's be proactive. I think that's one thing I believe that's very important.

The other thing is that we can't file a tax return until I think January 29th…is when they opened the E-file system I thought I saw. We got time before we have to file returns, and even with having software completely ready, not every form is out of draft yet.

But with that being said, small clients, rentals, and small businesses, get those books in. If they're using QuickBooks or whatever, get it in and let's get going on this stuff. Let's not all push it off [and then say] wow, it's February 28th and we got all these returns we want to try to get out the door. The more you can do up front, the more you are going to make your life easier as the season goes on.

Again, we don't want anyone working so hard that they're all stressed out right now, we need their energy for later. On the other hand, it's not a sprint, it's a marathon, and we need people in the firm to really manage their time. Sometimes we have to, as partners and as managers, manage their time for them. We need them at the end when we're trying to get all these extensions done or filing returns. How do we do that? All these things come into play [and] that's on my mind right now.

In addition to that, we got this new thing that's out there, beneficial ownership interest, part of the Corporate Transparency Act that started in January and we've dealt with as a firm. I'm sure every firm, every practitioner out there in some form or fashion is dealing with this right now.

As a firm, we have taken the position that we're not going to prepare it, we're not going to advise on it. We're not going to do anything. What we've done is we're letting all our clients know that. There's plenty of people in where we are in Chicago land area that do this and we're happy to refer them to attorneys if they don't have one, to other groups that do this, but we're not taking that work on.

We've come to that conclusion based on discussions internally with our outside counsel. But everyone needs to do that on their own to determine is this best fit for you and everything else going forward. If you are listen to this and you don't know anything about the beneficial ownership interests, recommend there's plenty of information out there on it.

Walker: We'll point to a couple of podcasts; we'll point them to the resource center. Absolutely. ASAP, you need to get on board with what's going on with that.

Gallegos: But it's an area that again, without getting into [the details of it], it doesn't really fall on the tax preparer side as far as the compliance aspect of it, from an IRS standpoint. However, what I have seen [with] questions coming from my client, is this part of FinCEN?

You guys file my foreign bank account reporting the FinCEN [Form]114, so why wouldn't you do this? Having those conversations, educating your clients as to what you can do, what's in your purview as a preparer and what's not. I think the more you communicate, the more your clients will value your service but also know that you're still their trusted adviser and you're here to help them get to the right people to do so. That’s it.

Walker: You gave me a lot to unpack there, Mark. Let's see. Let's start with you said you're getting your staff ready and you're communicating with your clients. There probably isn't a one-size-fits-all. But what's your best tips for communicating with clients if you're trying to do either mass communication or how do you wrap your head around that?

Gallegos: We can do mass communication as easily as an email blast. We have our news blog that goes out every week and so from that standpoint, we sent out. You and I know not every client reads emails or ignore them and you know how it is.

From that standpoint, it requires everybody in the firm to be on top of things. Meaning, we like to go out to the clients. We want to be in communication with the client. It's not like, April, you're my client. I'll talk to you next year. See you then. We're all year round. We do a lot of year-end tax planning for everybody. We really are heavily involved. [There are] a lot of touches throughout the year.

With that being said, this time of year where you have clients, whether it's making sure they're getting their books in order or [they need] 1099s or whatever the case may be from a compliance standpoint in January. [We] reach out to them, not just on making sure you're getting things together, but here's some other things that I want to make you aware of based on the filing season, based on everything else.

Because what I have seen, at least with our client base, is most clients want to get things rolling and get done with this aspect of it. Whether they ought to extend later or not, that's a different story, but they want to know where they sit.

Like I said, so we have this system where we have not just the partner but managers and people that are in charge of clients and all the staff that are on those particular clients. It's all budgeted and all put together. And there's a team that literally is reaching out to all these clients.

For example, my clients, there's no way I can sit around just talk to every client all day, I would never get off the phone. So I have to rely on people and delegate that work down so that people feel empowered to do that. In doing so, one, it gives them the ability to build that relationship with the client. But two, really shows that as a firm, it's just not me and a few partners — it's everybody…has a key role in making sure that the client is up-to-date on what's going on. Not only what we want to communicate, but vice versa — what's coming from the client and so we are aware of whatever concerns they have. Very important.

Walker: Not everybody listening to this is going to be a big firm so they aren’t going to have a lot of people. But I feel as I talked to members and as I talk to CPAs, you hear so much about you doing everything. I think that's a good lesson learned.

Maybe you can't change that in January for this year but try to figure out ways that you can delegate work and client responsibilities and it's okay to let it go. I feel like that's a message that a lot of people need to hear if you're proactive about it and you're still staying in the loop, of course.

Gallegos: Very important there, April. One of the most important things, I don't care if you're a small firm or a large firm, I guess the bigger you are, you have more resources. But as a firm we even use, we have interns, we bring in. We have admin. We probably have more admin than most firms our size and we use the admin for all kinds of functions. The reason why is the more I can delegate down.

I think sometimes as a partner we can get to these assumptions of how important we are. Oh, everyone needs me and I'm that important, blah, blah, blah and all this. Maybe it strokes our ego or whatever.

But the reality is, if you stepped away for a few weeks, these clients will be taken care of. You really not as important as you think you are. I think the more you learn to delegate — I have learned in my career — the more free you are to say I'm working not in the business, I'm working on the business so I'm truly helping this place grow and I think that's important.

Walker: Yeah, great point. You also talked about starting strong in January, like having a good January and that to me leads into hopefully a smoother tax season. Again, there are some out of your control. Is there going to be a tax law that's going to have retroactive changes? We don’t know right now yet again, Wednesday the 17th; we don’t know. Hopefully we'll know more soon.

I liked you [saying] it's a marathon, not a sprint. How do you manage that increased workload? People like to control their own schedule. I certainly like to control my own schedule, but I also sometimes I need to understand what are my priorities. How do you make that balance work?

Gallegos: One of the ways is we budget. Every client got a budget, whether if I'm using taxes for an example, tax prep, tax review, partner review, signer review to admin. Every step of the way, we’ve got a workstream step and we got to put some time to it. Again, it's not a perfect science, but the more you do it, the more you realize how much time [things take].

Then from that we have some amazing people in our firm that take all that and budget. Okay, April, you are one of my staff, I'm going to assign this client to you and it's for X amount of hours, it's going to fall in this week or this particular day, or I need you to be at this client. We're managing schedules that way.

Workload management, the planning that is involved is all year round. Again, things happen, people get sick, people leave, people come in. It’s constantly changing — it's fluid. But understanding how we work and do the workload management that makes sure that if I have two staff and one person's working a crazy amount of hours and the other person's not. The person not working most likely is because they just don't have the work assigned to them.

As a partner, I can get caught up [with] my own work and I know I need to get work [done] but I'm just not pushing to do that. When we have people managing this process, we know that it gets spread out more evenly. It helps the workload management so no one is truly working more than the other person. That's important, very important. We're a team and everyone needs to help out in some aspect of it.

I think that is probably one of the best things we do as a firm to help our employees and keep that longevity. We don't work crazy hours and because of that, we get a lot of work done. I wouldn't say it's the easiest amount of hours, but a reasonable amount compared to what I’ve seen out there.

Walker: Got you. Yeah, that's good. That's probably a whole another podcast episode where we can talk about and delve into that. Because that's not a 20-minute conversation, but great point.

How are you personally handl[ing] the stress and long hours that come with tax season? I know because I've gotten to know you over the last little bit how much you love your job and tax and so you probably work a lot, but hopefully you also take some time for yourself. How do you manage that?

Gallegos: Yeah, I do love my job. I love what I get to do. I find it a privilege. On the other hand, making sure that I'm healthy in the process because if I'm not healthy than all this is for naught. I wouldn't say I'm mechanical, robotic, I guess it could be viewed sometimes, but I get up early in the morning and go to the gym and workout. Again, depending on the day, the week and where it is in the season, I go and I feel great. Even if it's like just stretching and light or whatever, I feel great. It kicks my day off on a positive note. Then from there, you head into the office and you just manage your day properly. Whether you're going to clients or whether you're dealing with staff or whatever the case may be.

Then making sure that eating somewhat properly. It's so easy to like, I don't have time to get lunch or I didn't bring anything so let's hit a vending machine and that can get ugly quickly. You could just be eating sugar and carbs and everything that's probably you're not supposed to do. The idea is to try to manage your eating.

And then get some sleep There's no sense in work[ing] into two, three in the morning and then turning around and trying to do this again day after day. I know I talked to professionals that do this. I don't know how they do it and function. Get a solid night's sleep, whatever. If you need six hours, eight hours, whatever it is, you've got to figure out how to get that.

At the same time while you're doing all this, whatever your hobbies are outside of work, you still got to do it. I've always had the habit of Monday through Thursday I work my hard, longer hours within my little schedule. Then Friday, I’m always done at five. I don't care what's going on. I don't care if the deadline is Monday. I'm done at 5:00 and I'm gonna enjoy Friday night, whatever that looks like. Saturday I'll work, but I'm out working past 3:00 or 4:00 in the afternoon.

I've done that my entire career no matter whatever other pressure [there] is, and it's just my own way of keeping tax season in balance. So again, I always say everyone is different and everyone's got to figure out what works for them, but truly keeping things you like in your life. Just because it's tax season, it doesn't mean the rest of your world shuts down and it shouldn't.

I think some of the stress that gets created in this is probably from our own doing. I'll give you a prime example. You're working and you're like, I'm going to get all this done this week, and then a client calls, no, I'm going on vacation, I need my return now. And then okay figure out how to get this done even though it's not scheduled. And oh, there's another issue. All these things pop up and we just let all that stress just get to us. Oh my gosh, how am I going to handle this. Instead of just, hey, it's fine. Take a deep breath and let's just put it into a process, and let's just get it done in the order, and communicate what expectations look like, etc. You feel so much better because everyone's on the same page. No one's putting the pressure on you, we're just doing it mostly internally and you feel better. So again, we sometimes just got to get out of our own way to make things happen.

Walker: You're right. I probably needed to hear that today myself. Because even though I don't work in practice anymore, I still have like crazy things going on and deadlines, so I also need to hear that. Take a deep breath. Step-by-step. Wonderful. So I like to hear your best advice for our listeners to ensure a smooth and successful tax season.

Gallegos: So number one, I think besides taking care of yourself, that would be number one, because if you can't take care of yourself, you're going to be no good to the rest of your team. That's number one, to manage your stress.

Number two, make sure that people that work for you are valued. Make sure that they know they're valued. Whether you're providing mentoringship or coaching to them, giving feedback. If you're someone who reviews tax returns, and you find errors or you find things that need to be adjusted, make sure you let them know what those are. Not, “I'm so busy. I'll let you know after tax season”. Because you won’t, and everyone thinks they're doing a great job.

The prime example of that — you could review a bunch of returns three weeks after a person prepared 20 returns, and they made the same error on all 20 of these returns. So the sooner you can get in and see, what little errors or what adjustments can be made and communicate that. Communicate it with some sort of grace of, it's okay, we all make mistakes. Because I know and I'm sure you did when you're a staff person, on the other end of these things, sometimes the feedback, especially if someone's in a hurry or maybe not in the greatest mood, can come across as the mistake I made is the worst thing in the world.

Again, I want my people to understand, it's okay to make mistakes, that's why we have a review process, that's why we check things. Let's learn and grow from it together and have fun doing this. Making sure your people are taking care of. You see that they're struggling. Let them go home or wherever you need to do to make sure that this is a place that is not only trying to get a lot of work done, but it's a great place that they want to invest in for their career.

Then beyond that, making sure you're managing your clients, they're not managing you. I know that's always a battle. The reality is they're paying you for a service because you have knowledge and you have the experience to provide them something that they can't get from someone else. Because of that, you have to let them know, based on my schedule that just because you called or emailed doesn't mean I have to drop everything now and turn to you and get it done. Then they have to understand expectations. But if you're always dropping everything to help them, then they're just always going to assume you're going to get it done. It's nothing against them, they're just like Mark responds to me. So why is he not now?

So again, understanding that, setting clear expectations with your clients is great leadership for the rest of your firm too, so they see, if Mark's doing that, then maybe I can follow the same methodology. I think that's good. And learning from each other in the process. That to me if you can find a way, there's no perfect sauce to this, but if you can find a way to start working towards that, I tell you, this three-and-a-half months or whatever it is to April 15th, it's not that bad.

Last week I was at Fort Lauderdale speaking, and then I flew back and then we had 14 inches of snow, and then it's been like -15 degrees here. I'm going to say tax season doesn't bother me when it's -15, but as it starts to warm, and the sun comes out and spring is in the year. Boy, it makes it harder, right? The more upfront we can manage some of this, we get to the end and everyone's going to be happy.

Walker: Lovely. I think [that is all] great advice. If you are a listener of this podcast, you know what's coming next, which is in closing on the podcast, I like to think about all of us taking a journey together towards a better profession. Tax Section Odyssey — we're journeying. I like to get a glimpse of my guests other journeys outside of the world of tax. You said you were in Fort Lauderdale, but that doesn't count because that sounds like it was a work trip. Give me a page from your travel journal, or a bucket list, or something you've got planned for the horizon.

Gallegos: For this year I have a beach house already reserved in July for the Outer Banks, North Carolina. Every year, I always go to the Outer Banks. I love the Outer Banks. Why? Because it's the ocean, the beach, and because I've gone there so much, I find it a place where I can relax. Where you could just sit back, relax, have a good food, spend time with your family, and just enjoy the water and the beach and the sand. Again, I look forward to that. I do other little things throughout the year, but that to me is like the one thing I look forward to more than anything.

Walker: Wonderful. The Outer Banks is beautiful. I’ve been there many times being from North Carolina but highly recommended. Thank you so much, Mark. This was insightful, delightful. It was a great way to start off our podcast season for 2024.

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 podcasts. 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 on the aicpa-cima.com/tax and check out our other Odyssey episodes, as well as find resources that are mentioned. Thank you so much and have a wonderful start to the tax season.

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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The Corporate Transparency Act (CTA), enacted Jan. 1, 2021, requires many entities to file a beneficial ownership information (BOI) report with the Financial Crimes Enforcement Network (FinCEN) beginning in January 2024. Its goal is to increase transparency about who owns or controls an entity and deter money laundering activities.

Tune in to this podcast episode to hear from Melanie Lauridsen, Vice President, Tax Policy & Advocacy — AICPA & CIMA, Roger Harris, President and COO — Padgett Business Services, and Larry Gray, Owner —Alfermann Gray & Co LLC, on the latest with regards to BOI reporting.

What you’ll learn in this episode

• Background on BOI reporting (0:57)
• Professional risks associated with completing BOI reports for clients (1:50)
• Advice for CPAs considering an engagement (3:58)
• Roger’s take on the unauthorized practice of law (UPL) (5:32)
• Larry’s view on how he’s handling this UPL (7:33)
• How to communicate to clients about BOI reporting (11:00)
• Recommendations on managing risks (13:51)
• How to relay changes that would impact reports to clients (16:40)
• FAQ from fellow practitioners (19:02)
• Final thoughts (25:13)

AICPA resources

• Beneficial ownership information (BOI) reporting — Access resources to learn about the beneficial ownership information reporting requirement under CTA.
• Risk Alert: Navigating Corporate Transparency Act/Beneficial Ownership Reporting – Risk alert from AON, issued Oct. 17, 2023, and updated Nov. 30, 2023.

  Other resources

• FinCEN's Beneficial Ownership Information — Access FinCEN’s comprehensive information on BOI reporting, including a reporting rule fact sheet, FAQ and newsroom.

Transcript

April Walker: On today's podcast, listen to hear more about the Corporate Transparency Act and beneficial ownership reporting.

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 AICPA Tax Section. Today I'm joined by Melanie Lauridsen, she's AICPA's VP of Tax Policy and Advocacy.

I'm also delighted to be joined by Roger Harris. He is president of Padgett Business Services, who represents the interests of small businesses who are clearly impacted by this reporting regime that we're going to be talking about today.

Larry Gray, Larry is a CPA who owns his own accounting practice and represents tax professionals and their considerations regarding BOI reporting.

Just want to do a quick background before we delve into the questions today. As you likely know, the Financial Crimes Enforcement Network, which is also known as FinCEN, establish a beneficial ownership reporting requirement, which we will refer to today as BOI, under the Corporate Transparency Act and that requires many businesses to report information on their beneficial owners, and that starts January 1st of 2024.

We're recording this today on December the 14th, and that January date is definitely rapidly approaching. We've actually done a podcast on this before, some other more details, but we wanted to provide some information based on what we know now around that reporting requirement, provide some clarity when we can on questions that we've been hearing.

I'd love to start out with you, Melanie. Let's start off by talking about just general professional risks related to CTA that CPAs are facing right this minute.

Melanie Lauridsen: Sure. As you know, a lot of people and firms, there's not a lot of information with BOI and they are debating is this something that they can or can't take on as an engagement for either themselves or the firms.

There's a couple of things to know overarching and that there are risks, whether you choose not to or if you choose to take on this type of engagement and the first one is failure to advise the client that this reporting requirement even exists.

You wouldn't want a client to come back to you and say, you knew about this. You didn't say anything to me and now I'm facing these fines and penalties and keep in mind, the fines and penalties are pretty steep, we’re talking up to $10,000, two years in jail time and you would never want somebody to come and point the finger at you if you knew that they had this filing requirement.

The other overarching risk that people have is as we get closer and closer to the deadline, it's become more of a topic of conversation and people can just ask you for advice. There is hesitancy there that you should have because providing any off-the-cuff advice could lead to incorrect information if you don't have all the specifics and can also lead to violations because you don't know what is happening at that state level.

There is something called unauthorized practice of law. I just need to be clear that no state bar has made this determination of whether it is unauthorized practice of law for non-attorneys to be providing advice or working within the BOI engagement.

Well, I can also tell you is there is an AON members insurance program risk alert, and it really has outlined all the different risks and how to manage this engagement, so I highly encourage you to take a look at that.

Walker: Yeah, that's great. We'll dig into some of those a little bit later and talk to Roger and Larry about them. But let's say that a firm is considering providing services related to BOI. What would you say to them, if they're asking you like Melanie, what should I do? Should I take on this engagement or not?

Lauridsen: That's a common question that we get. But here's the thing about this engagement. There is no yes or no answer. It's not a blanket, yes, you should take it on, no, you shouldn't take it on. So we really encourage people to take a look at their scenario.

The first thing that they need to know is they need to understand their own risk tolerance as to whether or not they want to take on this engagement. The second piece is they really need to understand their clients, and the needs of those clients and the level of service that you would be providing to that client. Then, of course, you would have to take a look at inventory. What are the realistic risks that I can mitigate to prevent unwanted outcomes?

I need to say that with any engagement and I don't just mean BOI but every time we take on any engagement with a client, there are levels of risk associated. BOI is new. There's still a lot of guidance that needs to come and so I think a lot of people are a little bit panicked by it because they just don't know when we don't understand everything associated with it.

I'll also say that different firms and different peoples can come to different conclusions and that's okay. It just depends as they take inventory within themselves. Again, I'm going to reference the risk of work that came out because that really does walk people through that.

Walker: All right. Roger I'd like to bring you into the discussion now and just we'll start out with just a flat-out question.

To lay your take on whether you believe engagements around BOI are considered unauthorized practice of law or UPL.

Roger Harris: First of all, thank you for inviting me today.

No, I don't think they are. I just recently had a discussion with our corporate attorney because the BOI, as you mentioned, it's right around the corner and people are questioning what should they do and what should they not do and I think we're going to find that our clients are going to fall in a couple of buckets.

One is where it's pretty straightforward, it's a single member, corporate or LLC. There are no other owners out there that is remotely considered could fall under the bill, our rules.

But then you get into a case where there may be this person lurking in the background that could have this substantial control or whatever the terms they use and we're trying to make a determination about how does this person's situation fit into the law.

I think that's when we get into that case, that's when stretching over into whether it's practicing law or just giving advice that we're not qualified to give. I think we're going to find that the clients are going to fall in two basic buckets, ones that are pretty straightforward. We can probably assume into a lot of points Melanie made. We're willing to accept the risk because nothing is risk-free even if it's cut and dry.

Those we can probably help and then there's going to be those others where we're going to have to defer to an attorney to make a determination because not only is it somewhat ambiguous, it's brand new, and we don't have any history or cases or guidance or anything to help us make a determination, so it's going to be in our best interests to let the attorneys take that risk.

Walker: Even the form, we haven't seen the form, we will see it on New Year's day as we are recovering from New Year's eve, we all log in to FinCEN and look at the form. I don't know what I'm envisioning. Larry, I'd love to hear your take on this and how you're handling this issue with your clients.

Larry Gray: Well, first, thank you for the invite, and just real quick, I think in parallels; I want to speak as a practitioner and a small community, but also I do Missouri Society of CPAs presentations. So, I presented this as late as of yesterday. They both come out the same way.

I think first, we have to decide how we're going to assist the client, which means we're in this game because where the client's going to go. As far as I look at it as two groups and I'll say what I said yesterday to about 500 practitioners.

I think first thing is this coming year our clients we currently have in business, we have 12 months to find out what happens and Roger and I in earlier conversation, we both are on the same page there. We're going to wait toward later in the year to let it flush out.

FinCEN day before yesterday, updated the frequently asked questions; almost weekly, they update it. I think in that light, we got to first know our client and then know their business. And then that's when we take the risk assessment and I can say as a small practitioner, there’s going to be the majority of my clients, I'm going to be able to say, here's what you need.

I don't really feel it’s unauthorized practice of law if you say put in your name, your address, and your driver's license number or your name, address and your company's ID number.

It's when it's that section of the law that says substantial control. At that point in time, we got to pull the attorney in to do that. But again, I think every practitioner has a responsibility to service the client.

I think first thing, and Melanie, I’m going to steal part of what you said. Speaking, I follow three different malpractice companies, I talk to attorneys, we had one law firm at every of the five locations, and they were talking about this same BOI.

And, the fact is, the two biggest mistakes we can do is not advise it at all to make them aware, and then off-the-cuff advice. But in between that, we are a value resource, we want to keep our clients, we want to give them a professional service and I think part of that professional service is to keep them compliant without practicing law. And again, I will go back and summarize it.

As long as we're not over there, and this is a lay person, I'm not an attorney. But as long as we stay away from what is substantial control and it is that sole proprietor. If it's a husband and wife — they're the company, they’re the beneficial owner. So, when I look at my clientele, the majority of my clients, I want to be able to say, here's a fact sheet, this is real facts. You can do this. Here's where you go.

But if we have a question at that point in time, then I think risk starts to set in. Who is your attorney? That's the group we have now. The group that starts January 1st is the newbies and they have a time period 30, 90 days in order to get right.

When they come in and say I'm a new client or I'm setting up a new entity, I'm going to say who is your attorney and I'm going to coordinate that and I have to do that starting January 1st. I think we have two types of clients, know your client, know their business, and you're going to be able to do this.

Walker: Great. Thanks. And Roger, I'd like for you, we talked a little bit about this. There's such a lack of awareness about this issue with the businesses, with attorneys, and we're trying to do our best to really get information out there to make sure our CPAs and tax practitioners aware of this issue.

What do you see as ways that you're reaching out to clients? Or what ways would you recommend reaching out to clients about this issue and thinking about that, the knowledge and awareness piece?

Harris: I think that's probably…I've said this many times for something that impacts this many people, this is the most misunderstood law that I've seen in years.

There's such a lack of understanding. Again, we're a couple of weeks away from the new year, there's, as you mentioned, attorneys that don’t know anything about it. I bet the awareness, and the small business community is minimal unless an adviser has actually come to them and make them aware of it.

Within our community, I'm not sure that the awareness is where it needs to be, so we have a huge lack of awareness. One of the things that we're telling our people, I’ll refer to something that Larry references. He and I talked about…we're not in a hurry to fill out forms, but we are really in a hurry to inform that we're going to take this filing season.

We will interact with almost all of our small businesses to make them aware of this requirement because most small businesses think most law exempt small businesses where this one targets. They probably, if they heard about it, felt like that doesn’t apply to me. I'm a small business; it doesn’t apply to me.

We're going to spend the filing season to really inform people. Ask for their patience while we dissect liabilities and rules and ever-changing landscape, and take advantage of the fact that we have the entire year. But I know we worked early on with AICPA on developing some communication that has gone out because I think you guys recognized early on the lack of awareness and you’re to be congratulated, we're happy we could have helped with that.

But I think everybody in our industry needs to really focus over the next few months on informing people about the law, the seriousness of it, the penalties that are available if you fail to comply and ask for their patience while we try to figure it out how to administer something that while well intended doesn't really fit well in anybody's business model.

Not just the initial filing, but the potential for updated filings when subtle things, little things that have never been important to us change like somebody's driver's license changes. None of us, I don't think it probably ever been concerned about the exploration of our clients’ driver's license. But in the world of BOI, it might be pretty important.

Walker: I want to talk about something, that is, if firms have decided, made the decision to evaluate the risk and decided to provide these services, what recommendations would you say on managing their risks, Melanie? You take that one to start with?

Lauridsen: Absolutely. Just like any engagement, you need to have very thorough documentation. Documentation is a key.

With BOI, I would recommend people to talk to legal counsel right off the bat to understand the nature of the work, particularly in their jurisdiction. Again, I can't stress enough that this isn't a yes or no, whether or not you should take on the engagement.

There's a lot of factors that come into play, including your jurisdiction laws and also your insurance carrier. What are they saying? How are they handling this perspective? Again, have thorough documentation, acceptance procedures, make sure that you talk that through with the client if you are going to take it.

I would say provide a distinct and separate engagement letter if you are going to do BOI to address specificity of BOI. And, if you're not going to take on this engagement, make sure you have very clear language and all your other engagement letters saying you are not doing BOI work with it. Then of course, you have to keep up-to-date, Larry.

Gray: Just to follow up on the last two questions. One, Melanie, I think you had a very important point.

The thing I stress is the engagement letter. This year we're putting in a paragraph in all of our engagement letters saying this engagement is not part of BOI. But I think it's so important even in our engagement letters for BOI. we’re very specific because, at this point in time where we're at, we're going to determine what we're going to look at with the client, look at their business and say, yes, we can help you and here's what we're going to do.

Now we haven't gotten to the point of we're going to do a frequency update to keep compliant. If the client says we had to change, we want to educate them. But I think the engagement letter is so critical to be very clear to where it starts and where it stops.

And, then Roger, back on the communications. We're putting it in our newsletter. We have a trifold out front. I'm doing a YouTube on it. I'm reaching out to do some local speaking engagements — free. Things like the real…we're offering it to banks because it is so critical.

But one of the most important training elements and communication is our staff. The staff needs to know where we're at on this because my biggest concern with a staff of about 10 is the off-the-cuff advice. We have there inside the building, there's going to be three-point people to take care of that situation. I think communications and training.

Walker: Roger, you mentioned about the change. We worry about change in somebody's driver's license or what have you.? How are you thinking about letting the client know that they need to let you know or how are you tracking that information or how are you not tracking it? I guess is a better part of that question.

Harris: Yeah. That's something we're actually looking into right now because I think all of us have the desire to want to help our small business clients. Because, know they're coming to us to help them with this, and so we're trying to balance a client's desire and protecting ourselves.

I think we're all going to settle in and find the right mixture of what we do, whether we just do advice, we do advice and initial filings, we do advise the initial filings and updates. Whatever we settled in, we have to be very clear in our communication what we will do, what we will not do.We can't leave anything for interpretation.

Then we need proper engagement letters and whatever. We all start with the same goal; we want to help our clients. We know we are a resource that they want to call them. We're trying to find a way to help them, but also protect ourselves and we'll settle in on that.

We don't have the answer yet. The only answer we were told about updates is be clear. Be clear that you're either doing it or not doing it. Don't leave it up to interpretation, so that when something doesn't get done, the excuse is I thought you were doing it. We're clear in that. Now we're trying to figure out how to be clear and whether or not we can do it or be clear and tell him we're not going to do it.

Lauridsen: I'm going to chime in here and I'm going to add onto what Larry said and then what you said, Roger, about clarity. Also, with engagement letters and in communications with the client, be clear as to what your scope is.

For example, you guys have talked about this straightforward entity arrangement where you know who the beneficial owner is. When they provide you that information, it's clear that you're not providing advice to them. They're giving you that information and you're handling it from an administrative perspective to help them out. It has to be made crystal-clear that you're not providing advice on that.

Walker: Roger, I am on various webcasts doing Q&A and I get the same questions over and over again. I'd love if I could pick your brain on a few of the frequently asked questions that I get.

Let's start with schedule C, disregarded entity LLCs, are they required to file?

Harris: Probably the best way I can answer that is because it's like everything in the world we live in — it depends. That's the answer that we all give.

Think about it this way. Did you register that entity with your state? I can't speak for all 50 states. I know here in Georgia, if you're a sole proprietor or single, you don't do anything, you just become one.

But if you have any registration with the state and you meet the other qualifications about number of employees in size, then, I think it would apply to you.

Again, it may be dependent on where you are, and do you need to register your entity? Again, this is part of the problem. We have no history of court cases, nothing to look back. I'm falling back on the broad rule.

If you register with your state, this applies if you're within the size and others.

Walker: I'm in North Carolina and if you create an LLC, you have a yearly LLC report requirement, which to me says you registered with the state.

If you're having to continually file an annual report that feels like registering to me. But like you said, we're going to have to flush some of this out.

Another question I get…because on one of the exemptions it says accounting firms, just very brief accounting firms. But then if you dig into the FAQs, it says something more specific. Are accounting firms which are people listening today for the most part, do they need to file?

Harris: All the exemptions that are listed, be careful and read what they really mean. They're not as broad as we would like to think they are, there are very specific examples in there. I would say that most of the people listening to this podcast are not covered by that exemption, though there clearly are some.

But Melanie, I'll let you speak from the AICPA standpoint, but it's like anything. When it's taxes or something we read until we get where we want, then we stop reading. Don't stop here. Keep reading because you're not going to be as happy.

Lauridsen: So Roger, I think you'd make a good point. The FAQs within FinCEN’s FAQs, they have the list of the 23 exemptions and one of them says accounting firms. But that's just the title because when you actually read and dig into what that means, it's the accounting firms that are registered under Sarbanes-Oxley to be able to do public audits for public companies.

There aren't too many of those companies that are registered to be able to do these audits, I would say, like Roger said, the majority of those listening to this most likely don't qualify for the exemption and do need to file.

Walker: Another question I see a lot, what about inactive entities. There is an exemption. But again, like you said, you've got to follow through the whole thing.

I think it's six things that have to be met. But what is your thoughts on things to consider for active entities? Then I'll add on, if you dissolved or terminated during the year, is there a requirement to report that? Do you have to say I'm done reporting?

Harris: I'm going to be honest, I certainly hope so that you can take yourself out of this mess at some point if you're out of it. But those are some of the challenges.

There's reporting agent requirements. If you become a reporting agent, you're there forever if you've set it up. But if you are a preparer or whatever they call it and you want to change, there's all of these things about how you change this or how you change that, what you do that I don’t think are crystal clear and I think we have some guidance that says if your entity has done that, you mentioned these six things, you're inactive, and a $500 a day penalty when you don't really know the answer, what's the safest thing to do?

Hunt through an attorney or do it because it's cheaper to do it than to put yourself out there for penalty because again, we have no history of how a situation will be looked at by FinCEN and determine whether you complied or not complied. And that's why we find ourselves in a, listen, for all the criticism people give the IRS, at least they've got guidance, we've got history, we've got things to fall back on. For most of us, this is the biggest interaction with FinCEN.

Walker: Only with FBARs and I think that's what trips a lot of people up is FBARs are reported on or can be reported with a tax return and so people are just so confused.

Just to clarify, is there a report, is there something that can be filed with your accounting software? How do we think this is going to do? Melanie.

Lauridsen: With regards to how you can file. When you start FinCEN, there is no form out there. They have not released it. There will be software on FinCEN's website, supposedly January 1st. We haven't seen it, it's not live, it's not out there.

What FinCEN has also said is they are working to be able to provide third-party software similar to what they did with the FBAR, where third parties or third parties on behalf of, in this case, small businesses will be able to file for them, but that is coming down the road for right now. According to FinCEN, you have to go to their website and be able to file there. Again, this goes back to the whole point of there's just a lot of information…a lot of unknowns right now.

Walker: Absolutely. I think that's maybe the theme of this. The theme of this podcast is the questions we can answer, the questions we can't, which seems to be more can't than can, but hopefully it's providing some information.

Those are my main, I'll say, frequently asked questions for me. What to do now is, Roger, just think about any final thoughts you'd like to share with our listeners as we are evolving through this requirement. This is definitely not the last you'll hear from us. We are continuing to monitor and provide resources as we know more but just as here we are middle of December getting ready to approach this requirement, what would you like to share?

Harris: I think the advice I would give to the listeners is the same thing I'd give to our people is, first of all, over-advise in terms of the requirement to make sure that everyone is aware of it. That we're aware of it more importantly, but we're going to take advantage of the time that we've been given to find out some of the details that we've discussed here.

So be very aggressive in telling people about the requirement. Be a little hesitant in doing anything until some of these questions that we can answer, we hopefully get answers to and then make sure that you have all the bases covered when you decide how you want to offer this service.

Make sure you have the engagement letters in place, make sure you have the errors and omissions insurance in place, make sure you have the attorney relationships that you need. We will help our clients.

I think at the end of the day, this will settle to somewhere where we'll find our role, we'll find the attorney's role, we'll find the roles that we can all fit and we will help our small businesses comply. But let's take advantage of the fact that we have time to do it, let's be cautious.

But I think, as I said earlier, we all want to help our clients. That's what they come to us for, that's what we want to do. But we have to do it in a right way. The thing that scares me the most is I had a practitioner tell me, how hard is this. It's a form. We fill in forms all the time and I thought this a like all the forms we fill out all the time, so be a little careful. Let's be careful, but let's try to help our clients.

We'll find our role. I think we're just never land right now where we're still trying to let it settle, but we'll find our role and we'll do a good job and we have the best interests of our clients at heart and I think as long as we're cautious, that will serve as well.

Walker: Wonderful. Thank you, Roger and thank you so much for joining us today. Larry, can you give me some final thoughts as we're thinking about this requirement?

Gray: Yeah. The final plot would be as Roger and Melanie and I have said, you've got to decide what you're gonna do. You have to at least make the client aware, that's a given.

I think beyond that, what you have to realize is be clear in the engagement letter. I think also, you have to stay current. As I said, FinCEN is updating the frequently asked questions. They updated eight of them, two days scope, but it's almost weekly. Now what I have to do is look at the small engagement guide that they have, which is very good. But there's frequently asked questions. That guide hasn't been updated yet.

I would say clear communications including your engagement letter and I think the other thing is stay current on the FinCEN website. You can go online and ask to be sent out notifications. We will work through this and your current clients, you probably want to wait till later in the year. Melanie, April, I so thank you for including me.

Walker: Thank you so much, Larry. Melanie, I'd love for you to give some final thoughts. Just as I'm thinking before you go, just there’s…and hopefully you'll hear today, there's a variety of approaches to this. There's a variety of ways that you can approach it and you don't have to know right now, but it would be helpful if you have thought about it and thought about the risk so that when you are dealing with your clients during tax season, you are able to say, here's the requirements. I'm not going to do it, but he can hear some alternatives, or I am going to do it, but you will have to provide me the information and I can help you with the reporting.

If there's any advice that needs to happen. It cannot come from me, it has to come from an attorney. That's my final thoughts. What about you, Melanie?

Lauridsen: I agree. This is new and it seems scary, but keep in mind back in the day, even the practice of tax was considered unauthorized practice of law. So things evolve and things change.

I think once we get more clarity, it will settle and ultimately, Roger can talk about those too. When he's approached lawyers, a lot of the lawyers don't even know what they are. We've found that they don't want to take on this engagement and who does that leave the small businesses to turn to?

I also know that CPAs and tax professionals, it is in their nature to want to provide services to their clients. Larry and Roger, and I echo the sentiment have said over and over again, we'll figure this out. We just need a little bit more time, a little bit more information, and I think we're going to get there to be able to help the client. I do think it's our responsibility to be able to provide a service and I'm not saying it has to be a why, but it did provide a level of service to our clients.

Walker: Wonderful, thanks. Alright, thanks everyone. Again, this is April Walker from the AICPA Tax Section. This community 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 this 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 life founded friend. You can also find us at aicpa-cima.com/tax, and find our other episodes as well as resources mentioned during this episode and others. Thank you for listening and wishing everyone a safe and healthy holiday season.

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.

Marna Ricker, Global Vice Chair, Tax — EY, has held various leadership roles including most recently the EY Americas Vice Chair – Tax. She engages and inspires her team to provide unique client experiences and create digitally enabled services.

On this podcast episode, Marna shares her insights on how to blend and balance soft skills with technical skills — touching on how to develop each set and how emerging technologies influence future accounting professionals.

What you’ll learn in this episode

• How the tax industry has evolved over the years and advice Marna would give to her younger self (1:15)
• Key skills leaders are looking for in employees today (4:15)
• Can soft skills be learned? (6:18)
• Balancing technical changes while also developing leadership skills (8:23)
• How artificial intelligence (AI) is set to influence tax professionals’ skills (10:52)
• Final thoughts (16:00)
• A page from Marna’s travel journal (17:15)

AICPA resources

• Reimagining your tax practice — Tackle today’s top practice management issues with insights and tips from pioneers in the tax community. The Reimagining Your Tax Practice webcast series will tackle these issues and more in a Q&A roundtable series with tax pioneers from the profession.

Transcript

April Walker: On today's podcast, listen to hear the importance of balancing soft and technical skills in a digital first world. 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 Marna Ricker, she's EY’s Global Vice Chair of Tax. Marna, I just listened to a podcast you did with Tax Notes where you really delved into some heavy-hitting international tax topics. But thankfully, today, our discussion is going to be a little bit softer.

We're recording on a Friday so we're a little more relaxed. Your technical skills are definitely honed. Spent 28 years at EY and I think as I was doing some digging into your background, I think we're just about the same age or we’ve been in the career the same time. I was just at a conference earlier this week and telling my story about starting off in Big Four. Except it was Big Six at that time.

Welcome and I'd love to hear your thoughts on how the tax industry has evolved over this time in your career and what you would tell that fresh-face, eager tax staff that you were, if you could give her advice knowing what you know now.

Marna Ricker: First of all, thank you for having me and I agree it is a great Friday and we're in the holiday season, so it's really nice to be with you.

Yes, 28 years of doing this and obviously similar tenure to you. It’s changed a lot and so let's just get into that.

I really on this precipice of a once in a generation, maybe once in a century change. We're rewriting old tax codes and we're moving from a bricks-and-mortar world to a digital world and a multi-jurisdiction landscape and so we have government scrabbling with a poly-crisis stemming from COVID, a war climate crisis and many disasters.

We have rising inflation, although maybe that's coming into control. I'll leave that to the economists. We have the geopolitical conflicts and all of that obviously is created really significant global economic impact. When you see that the administration's evaluating the role of tax plays in supporting fair and equitable recovery of economies and all while incentivizing green behaviors and decarbonization.

Walker: That's a lot, right?

Ricker: It's a lot. Exactly.

Whenever you see that tax at the heart of that new global tax regulations such as BEPS. Finally, in all of that, a little bit more cloud and platforms and adoption of new technologies such as generative AI and you see the transformation of businesses around that.

Tax and finance functions really end up at the heart of driving that. So, careers in tax are changing things. That's what technology and automation and no job looks and feels the same. That was the context of all of that.

To answer your exact question, is that tax policy ultimately what I wish I knew was tax policy ultimately plays a big role in driving the outcomes for governments.

What do they want to see? What is its place in economic, fiscal, and monetary policy? It's really a force for good. It plays a significant role in important invaluable role in the whole ecosystem. It's one that I love. It's one that I'm very proud of and really helping our teams, helping my younger self find a place inside our tagline at EY is, building a better working world.

Finding that purpose is really fun and that's what I wish I knew when I was in my early twenties and bright eyed about going into tax.

Walker: I feel exactly the same way. I really was never that involved in politics or really cared about legislation, honestly, until I came to the AICPA about eight years ago and I really was like, knowing this makes such a difference in knowing how the sausage is made just makes a huge difference. I think that's really cool.

Marna, definitely you're a leader in tax. As we're talking about this evolving profession, what are the key skills you're looking for in employee's today?

We hear so much about the pipeline issues and getting people excited about accounting. You've still got to do your job as like hiring the best people for your place. Where do you look for in skills in your employees as you're hiring them?

Ricker: It's a great question and it's such a good career.

April, you and I have loved our careers and so I'm passionate about this issue, and so attracting people into the profession, and I'd say there are three big things that I think we're always looking for and tax technical and tax accounting are table stakes.

There just a price of entry into the profession and yet the industry and the way we're living our lives consuming, working at the technology advances, the conversation we're having today, we're seeing a lot on technology skills and so we're hiring cross STEM, mathematics as well. Because again, it's really high critical thinking skills and so a lot around technology, digital, math, STEM, skills as well.

At the same time, we're certainly seeing the soft skills, leadership skills, communication skills, high collaboration skills, ability to work with others, are really important in communicating really complex topics.

Tax technical topics are really important as well. Those three really critical thinking, tax technical, tax accounting, technology, STEM, math, and then obviously the soft skills around communication and collaboration ability to work with others. Empathy type skills are really important in this profession.

Those were the top three I'd say that we're looking for in the hiring and development and successful professionals.

Walker: I agree. I feel like I'm really primed to have this conversation because like I said, I was just at a conference that was talking about all of this stuff.

I'd love to know what you think about, we are talking about balancing soft skills, technical skills, different skills like technology. Do you think soft skills can be learned? Or how do you find that person that maybe they have the start of it, but how do you develop that, what's your preference?

If you have somebody who is like really strong technically and they had a glimpse of soft empathy. I don't know. I feel like it's like the spectrum and balanced.

Ricker: I do. I think maybe only so far. That might be the way I'd say that and so I think we're a human centric organization and we've done a lot of work with Oxford.

We really believe humans at the center if that's the right way to say it. You take your technical skill, and we add technology to that. We really understanding real human emotions and the way to drive the organization forward.

Again, you are who you are ultimately, but I absolutely think you can round that out and you can deepen trust and you can deepen your skills around that. We spent a lot of time training around that. Anyway, so we really do spend a lot of time on that and your ability as a leader to foster diverse and inclusive environment where you can come and bring your whole self to work. You and I just even in our earlier conversations, you can just show up as who you are.

You can be who you are and then you perform at your highest level as well. We spent a lot of time around that in investing in inclusive leadership skills and becoming better leaders, transformative leaders who bring their best selves to work every day.

That's probably what I care the most about and certainly what I've had the opportunity to do for almost 30 years here at EY. That's the way I'd say. You're only going to go so far to rounding that out. But I think the environment and the culture is really what is most important and allowing that to come forward.

Walker: Just quick follow-up on that for yourself personally, how do you balance, or do you have any tips on how to balance, like keeping up with all the technical changes, but then also making sure you're continuing to develop your leadership skills.

Ricker: It's a great question. I'm highly focused on time management, which might be my superpower tip, but I'm going to jump on a truly like you have a certain amount of time every single day, every single week, every single month, every single year.

I'm really focused on what is it I need to get done and how am I going to balance my time accordingly? You're only as good as the team around you as well and allowing them to have opportunities to grow and to learn.

Maybe one thing I learned really early is if it's something you already know exactly how to do, don't do it twice. Pass that opportunity, that learning and growth opportunity on to somebody else who hasn't had that experience and that is something I think a lot about. If an opportunity comes to me that I've already done it already know how to do. I'm going to pass that on.

Walker: I'll appreciate that too. Everybody wins.

Ricker: Yes, exactly. I have an amazing team around me and I get to be on amazing teams too.

I think that's building high-performing teams is I think the heart of it, that balancing, might be the right way to say it.

The other thing I would jump into April that is I am a passionate person around technology, around generative AI in particular, that is obviously about a year old now. We're just passing that moment around gen AI.

When we learned on ChatGPT-4, and in particular, and all that now that we're seeing out of other organizations. That is one where you think about the opportunity to have a second brain, a co-pilot next to you. I'm sure we'll jump into that topic a little bit. Like when you think about balancing and you think about being uber productive and the ability to really accelerate where we're headed. I'm really excited about that.

Walker: I think it's funny. I was at breakfast with some friends this morning and they're like triathlete friends that I hadn't caught out whether awhile and somehow we got on this topic of AI and all the cool things it can do for you personally and professionally.

I feel like it's such a booming every day, something new happens. But as you think about it, since you brought it up, I'd love to know what you think. How do you see AI and all of these emerging technologies that are happening? How do you see it changing the tax function?

Ricker: I am so with you, I'm going to give up personal on really quick April since you said that this morning. Similarly, I set aside 30 minutes really early this morning to write a letter, a personal lawyer recommendation to somebody. I ended up just using Bing chat to do it and I just kept prompting and prompting to make it better. It took me seven minutes. I mean, to your point.

Walker: No, that's amazing.

Ricker: I had 23 minutes to drink my coffee.Anyway, so you got your question was how is it changing the tax function.

To just to jump into that so I really feel like AI’s moment is now this is something that's here to stay it's making all of our lives. Like I said, I just gave a personal example it's making all of our lives better. It's a transformative technology it is really changing the tax world now and it's changing both obviously in our business, how are we going to deliver our services?

It's changing obviously how tax departments ultimately will get their jobs done and then it's obviously changing governments and tax administrations and how they'll get done. We're seeing it, really seeing it everywhere. Maybe I'll just, here are some examples.

I think that's I think about it, keeping up with ensuring compliance with laws and regulations as well. That's transfer pricing policies, ESG policies detecting discrepancies and real-time data using predictive analytics to spot challenges before those problems or risks. Think about it streamlining compliance processes and enabling real-time data sharing between taxpayers and tax administrators making that process even easier for both. Think about it lowering tax controversy.

Because again, you're predicting ahead of time what we're going to see and able to make real-time adjustments. Then think about inside of an organization, a new era of forecasting and optimizing decision-making is because again, it's going to automate complex calculations and allowing tax departments in your organization so real-time adapt to changing regulations and market conditions. Because again, it's going to be predicting and analyzing and prompting you about what's coming.

I could go on and on with examples, but really powerful and it's when its ability to predict and analyze as opposed to needing to be told. Again, we're seeing multiple applications of that already inside of our own organization. It's been really fun to do we have invested almost $1.4 billion. This will continue with a unifying platform that brings all that together called EY.AI, clever naming there, they're focused on obviously education, learning, and development our own professionals through what we call EY Tax Copilot and that's really where we're focused on getting our own people educated as quickly as possible so we can continue to take advantage of all the rapidly evolving technology that's out there so very fun for us moving forward.

Walker: That's cool. We are advocates for all members of all firms sizes at our organization, of course. But we have a lot of small firm solve for our listeners and you guys have, like you said, you have money to put into a policy, but definitely, I think for smaller firms they'll eventually be able to benefit from some of that knowledge that you guys are working on now.

I think our message is, don't be afraid to play around and figure things out and make sure that you're obviously using security measures and not putting personal information in there, but just because you're a small firm, your AI is not going to take away the role of a very important tax adviser.

That there's still a role for or at least that's my opinion. But if you are shying away from this completely, saying, no, this is not good, then I feel like you're just really losing out on some of these really cool things that technology can do.

Ricker: It's the opposite. I look, eat what I would say is think about the intellect, the tax technical in the judgment that comes with the work that we do. Tax work that we do, that will be even more in demand. Because that ultimately is what are the clients and what obviously individuals and companies value. The ability to have something that makes you even more productive and able to do that type of work, which is what gen AI does, it helps us be far more productive and being able to spend our time in that type of work is really powerful.

When you were asking me about what would I tell my 30-year younger self that having that with me alongside me for this last 30 years, it makes you even better at that type of work. I can't wait to see what our young professionals, how smart they are going to be in, how experience they're going to be, and what their careers will look like. Having had the benefit of a copilot, a second brain right next to you for 30 years. They're going to be extraordinary professionals.

Walker: Yes, I love that perspective. It's not one you always hear, but I'm an optimist and I look for the bright sunshine all the time. I appreciate that perspective.

Marna, this has been great. I'd love for you, given a ton of advice, but one more piece of advice that you'd like to give to our next generation of tax leaders who are looking to build those soft skill, build the technical skills, lean into technology. What do you have for them.

Ricker: Maybe it's again, this will be you and I as optimum optimism, maybe my number one would be reach for the stars. Just go for it. Whatever you want your career to look like as a tax professional, I would absolutely be that, but it's hard for me to do one.

If I can just add one more, would be that would be one because I think it's an extraordinary career and I think it's so dynamic and interests and so that would be one. My second would be take good care of yourself. I take great care of yourself, take care of your family, and then take care of your fellow colleagues. I just think this whole concept of being great builders, a teams and great builders of your colleagues is the most important thing you could do because it'll continue to give you and it'll give those around you extraordinary opportunities. That would probably be my biggest piece of advice.

Walker: Love that, yes, self-care and then just being kind and considerate to others. It always circles back.

All right, I don't know if you've listened to this podcast before, but if you haven't, or even if you have, in closing, I liked the name of our podcasts is Tax Section Odyssey so I like to think about as taking a journey together towards a better profession. I love to hear a glimpse of my guests other journeys outside of tax. Share a page from your travel journal somewhere you recently been that was amazing or memorable trip you have planned.

Ricker: I love that. So I just was in India, April, and talk about an amazing country truly. It is so on the rise from Old World to the New World and its blend of all of that together is one of my favorite countries in the world for that reason.

The culture is so rich and it's, it's kind and it has such high ambition and where it wants to go and such work ethic to get there and so anyway, it's just a beautiful country and so anyway. I just got to spend, I was lucky enough to get to spend almost 10 days there and so I just it was just a joy.

Walker: I assume it was a work trip, but hopefully you had some ability to do some fun things.

Ricker: I always carve out time for fun and my family is my two great boys and amazing husband. But I also have a great work family and so it was just a joyous time and it's a very special country.

Walker: I've never been. I keep a list as I'm doing this, I keep adding things to my travel bucket list. I'm going to have to add India there, awesome.

Marna, this was so fun. I didn't even feel like work, so I hope you feel the same. Enjoyed it. Thanks again for listening. 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 follow us so you don't miss an episode if you already follow us thank you so much. Please feel free to share with other like-minded friend. You can also find us at aicpa-cima.com/tax. We find our other Odyssey episodes, as well as getting access to resources that we mentioned. Thank you so much for listening and hope you have a wonderful holiday season.

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 2017, Congress made several permanent changes to the taxation of foreign earnings with the enactment of the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 . The TCJA imposed a deemed repatriation (Sec. 965). In the Moore v. United States case, the constitutionality of this policy is being challenged.

Listen to Tony Nitti, CPA, Tax Partner — EY, and Damien Martin, CPA, Tax Partner — EY, discuss the pending case live from the 2023 AICPA & CIMA National Tax & Sophisticated Tax Conference, as well as the top tax cases of all time.

What you’ll learn in this episode

• Background on the case and case law history involving U.S. taxation (0:44)
• Deeper dive into the history of U.S. tax law (11:41)
• Hylton v. United States, 3 U.S. (3 Dall.) 171 (1796) (20:38)
• Temporary income tax enactment (23:47)
• Pollock v. Farmers’ Loan & Trust Company, 157 U.S. 429 (1895) (26:06)
• 16th Amendment (28:36)
• Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955) (34:13)
• Lead up to the Moore case (35:20)
• Advice for how to explain the Moore case to clients (41:24)

IRS resources

• Section 965 Transition Tax — IRS webpage detailing Sec. 965, including an overview, what taxpayers are impacted and what potentially impacted taxpayers need to know.

Other resources

• Charles G. Moore, et ux., Petitioners v. United States — Case whether the 16th amendment authorizes Congress to tax unrealized sums without apportionment among the states.

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 in person at the National Tax Conference with Tony Nitty and Damien Martin, both partners at EY.

They have a session here that's titled, “The Top Tax Cases of All Time.” If that's not a high bar to set, I'll be surprised, but I thought it might be fun to go over some of the highlights of that session on this podcast episode today.

Damien and Tony, I'm going to be here if you need me, but otherwise, I'm going to let you guys talk about the top tax cases of all time. Take it away.

Damien Martin: All right Tony, I don't know how we get better than that saying — the top tax cases of all time. But, I’ll let you set the stage here because we're not just going to geek out like we usually do. We're going to do that.

Tony Nitti: Somebody likes his buddy. I don't know how high up our gratitude needs to go. I don't know if it's April or the AICPA planning committee. I don't know if it's the Supreme Court in the United States. I don't know if it's a power even higher than that, whichever one you believe in, but somebody is looking out for us because, like you said, the description for this class is Tony and Damien are going to talk about the top court cases of all time.

As you alluded too, yeah, we were totally geek out on that. But, I know we were both a little bit worried that it would be more of an academic exercise and there wouldn't be any real practical takeaway.

It's not like everyone's going to go back to their respective offices and be better off because they understand the finer points of Duberstein or North American Oil. We were a little worried. But then we get this gift. We get this gift out of the State of Washington. A little court case involving $14,000 in disputed tax that the district court dismisses in favor of the government. Ninth Circuit does the same. But the Supreme Court of the United States decides, we're going to listen to this case.

Now it changes everything for you and me because when these oral arguments start in a couple of weeks, mid-December, everybody is going to be talking about this Moore case. And when I say everybody, I don't just mean like the people at AICPA National Tax, or people make their living in the tax world. It's gonna lead morning talk shows and it's going to be the front page of papers.

It's because while it's a small case, the implications are potentially huge. If I were to have to convince you, Damien Martin, why you should be paying attention to Moore and why all practitioners going to have to be able to talk about this stuff with their clients? What if I were to tell you that if the Supreme Court rules for Moore gone from the code goes section 965, the mandatory repatriation tax that was born as part of the Tax Cuts and Jobs Act, and potentially along with it, a couple of hundred millions of dollars of, did I say millions, a couple of hundred billions of dollars of federal income tax collected by the government.

Would that be enough to pique your interest?

Martin: You had me at a Supreme Court tax case, but when you're going to add billions to the hundreds of billions at that I'm sold.

Nitti: Okay, you're sold.

I don't make my living much in the international regimes. So, if it were me alone, I don't know if that's enough to pay attention, but what if I were to then say that depending on how a Supreme Court were to rule, also gone for the Internal Revenue Code could be all of the Tax Cuts and Jobs Act.

Everything we've spent the last few years getting our arms around lower individual rates, lower corporate rates, doubled the state tax exemptions, 199A, all of it gone. That would be interesting, right?

So, I'm going to listen to this conversation. Then what if I were to layer on top, buddy, that depending on how the Court would rule, it would open up the possibility soon stripped from the code could be all of pass-through taxation. No more subchapter S, no more subchapter K, no more S corps, no more partnerships. Say goodbye to all the pass-through regimes.

Now, everybody is going to be like, I need to stand up and take notice. How can one case potentially jeopardize all of that?

Martin: That's like a third of the code or something, but I'm a little bit…and you have to help me out here, Tony, because you said $14,000 was like $14,729. A third of the Internal Revenue Code itself. I'm a little bit like those are not the same thing.

You're going to have to bridge that gap for me here as to why something about $14,000 is in front of the Supreme Court.

Nitti: I'll do that. You're not alone with that one-third number. I think that's the same ratio that Paul Ryan, the former Speaker of the House, put on this and said, depending on how Moore goes, we can be kissing goodbye to a third of our tax law.

What makes this cool as we go through this process is in order to understand exactly the answer to the question you just asked, like, how is this possible, you and I need to go through the same cases that we would have been going through if Moore had never come to be only now we get to do it in a context that's meaningful for people here at the conference because they can take this information they're going to learn and then go back to the respective offices and actually use this in the coming weeks.

That's why I say somebody likes us because we get to have the same conversation that we both would have loved anyway, but now feel better about ourselves that we're adding some value to the people who are actually listening.

Moore, like this is not a complicated set of facts. There's nothing about the facts that speak to just how meaningful this case can be. It's a married couple out of the state of Washington. They retired, and in 2006, they have a friend and the friend sees a need in India to get small tools in the hands of farmers.

He conjures up this idea to form a company based in India, and the Moore's are intrigued and so they invest right around $40,000 for a 13% interest in this corporation's stock. It's pretty much the facts right there. Now, time goes on and the corporation does well, I think better than anybody could have hoped it would do. It's making some income year over year, but none of that income was distributed to the Moores.

In the international regime that we operated under at that time, when you have income being accumulated in a controlled foreign corporation, or CFC, generally speaking (and we'll get into one of the exceptions later in Subpart F), but generally speaking, U.S. shareholders don't pay any tax on that CFCs income until it's repatriated to the US in the form of a dividend.

Years are going by and this Indian corporation is making money but it never once repatriated anything in the form of a dividend to the Moores, so the Moores is never once have any taxable income as it relates to this investment in this corporation. Then 2017 rolls around.

Do you remember what happened in 2017, Damien Martin? What changed your life in 2017?

Martin: It's quite interesting. I can remember a lot of late evenings reading a lot of texts and that's different than usual, I guess. I'm not exactly sure but we had the Tax Cuts and Jobs Act.

Nitti: So the Tax Cuts and Jobs Act comes along. As part of that TCJA, and this is a world that you and I don't live in as much as others, but as part of that regime, they are going to switch us from a worldwide system of international taxation to a territorial system.

Really as a way to shortcut that explanation — in this new territorial system, if US shareholders own stock of a controlled foreign corporation, some of that income is going to be subject to the GILTI regime. But when the money is eventually repatriated in the form of a dividend from the CFC to the US shareholder, it won't be subject to tax.

But you can't just flip a switch and move from a worldwide regime to a territorial regime because there were trillions of dollars stashed overseas that had never been taxed in the US. Suddenly we put up a green light and say, you're free to repatriate those dollars and there won't be any dividend income at the US level, that income would never be subject to US tax.

To prevent that windfall, what they did in the TCJA is they added Section 965, mandatory repatriation tax. The mandatory repatriation tax says, look, we get that you haven't gotten these distributions from the CFC but at the end of 2017, we're going to pretend that all 10 percent or more shareholders of a CFC have received their pro rata distribution of the CFC’s income accumulated from 1986 until 2017. You're going to pay tax on that deemed distribution and then now you can move forward in the future knowing that any distribution you get will be tax-free. We're going to pave the way for this move to a territorial regime.

Now for the Moore's, that means my share of this income over the last 2006 to 2017, 11 years or so is about 132,000 bucks, as I recall and so we're going to pay tax on that right around $14,700. They get to thinking and they are like something doesn't sit right with me because I'm paying tax on $132,000 of income. I never touched the income. I never got a penny from this corporation. It doesn't feel right.

And so they immediately challenged, as I said, and the district court dismisses and rules in favor of the government, appealed up to the Ninth Circuit. Ninth Circuit does the same. Now, the Supreme Court is going to hear and they're going to hear it because of why they're disputing it and why everyone has to stand up and take notice because it's not just a run-of-the-mill argument about $14,000.

The Moores are saying, and when we first introduced this concept, it's probably not going to make a lot of sense to a lot of people, but we'll drill into it a little bit. The Moores are saying that Section 965, this mandatory repatriation tax, is unconstitutional. That's a big deal.

They say it's unconstitutional because the 16th Amendment grants Congress the power to levy and collect taxes on income from whatever source derived without apportionment among the states and that's the part that's going to trip people up, but we'll get there.

What they're saying here is, when's 16th Amendment says we can tax, income has to be realized. I have to have been made richer in my individual capacity to have to have something severable from my investment in the CFC that I can go and spend however I want. I never had any of that.

If this 965 tax isn't taxing something that fits under the definition of income, then it is required to be allocated among the states based on relative population. Now, is that surprise you, or is that something where perhaps in your free time you are a constitutional scholar and I'm not privy to that, but I'm guessing for most of our listeners there, I don't know what you're talking about as far as taxes allocated based on population.

Nitti: There's going to be a recurring theme. I think there's a lot of our knowledge about what's happening here comes from popular culture and that's okay. However you get it as long as you get it, that's what matters.

What they're doing as we drill in a little bit more here, is we need to look at two clauses of the Constitution at a high level and then we'll understand how they came to be. But as I said, 16th Amendment says, you can levy and collect taxes on income from whatever source derived without allocating among the states.

Then you have this Article 1, Section 9 Clause 4 of the Constitution that says all direct taxes must be allocated among the states or based on population. It's a very simple argument by the Moores. What they're saying is income has to be realized. You can see it right there in the 16th Amendment where it says is income from whatever source derived. That means it has to be derived from a source. There's this realization requirement, and here under 965, I never got a penny.

You're just forcing me to pay tax on something that I never received and so it can't be a tax on income. What is it then? It's a tax effectively on my ownership of stock in this Indian company, and that is what we believe to be a direct tax on property.

According to Article 1, Section 9 Clause 4, direct taxes have to be allocated among the states based on population. I know how weird that sounds but to understand if the Moores are correct in this argument, we honestly have to go back to the very birth of this nation and get a grip on how these two provisions of the Constitution evolved and then what subsequent court decision said that the Moores are ultimately relying on and so going back to the opening remarks here, that's why this works out so perfectly for us, because we would have been going through most of these cases anyway.

Martin: That's right. It's fascinating because it seems like something like income, the income tax, direct tax, these would be defined things. But maybe as we often see, and this is why you said it's back to are going through the cases and whatnot it actually isn't clear and maybe that's exactly why we're talking about it now.

Nitti: No, I think that's well said. We're going to get into an issue that I think has plagued the United States government for 200 years. This is a very meaningful piece of this country's history and to understand where it started, we truly have to go back to the constitutional convention in the late 1700s. Now, you were a music major, were you?

Damien Martin: I was.

Nitti: I'm guessing the extent of your familiarity with the Constitutional Convention is from your repeated viewings of the Broadway musical Hamilton.

Martin: That definitely again, pop culture is what did you learn to write out. We're going to do a little Hamilton here, is that we're here to sing for us?

Nitti: I will, but I would like to dispel a couple of myths about Hamilton. While undeniably entertaining, there are some historical inaccuracies. First of all, it turns out most of our founding fathers, not actually talented rappers.

Nitti: You wouldn't know that, but that's the truth. But we're talking about that cast of characters here at the Constitutional Convention were talking about Hamilton and James Madison, William Paterson, they're all there and they're figuring out the road map for this new country.

They recognize that they're going to have to generate revenue at some point, pay the bills, but they're particularly sensitive about the whole tax issue because of the whole relationship gone bad with England. They add a section to the Constitution, which the exact citation escapes me at the moment, but basically says, look, we can levy taxes, and then we also are going to look to primarily collected revenue from duties, excises and imports.

The only requirement for things like duties, excises, and imports is that they've got to be assessed uniformly throughout the country. You can't have one rate on federal tax for something in New Jersey and a different rate in New York. Fair enough.

But then there's that first part of that clause where they do have the ability in addition to duties, excises, and imports to collect taxes. What's that going to look like?

They start to kick around what a tax regime may take shape as in this new government of ours, and right away, the southern states start to freak out a little bit. The reason they freak out is because that time in the country's history, what they thought would be the two most likely forms of tax, are one what we call a poll tax or just a tax per head or tax for being alive, being a person, so every person were going to have a tax or whatever, 50 bucks.

Then the second most likely tax would be a tax on land. Just take acres of land and apply a rate per acre, and that's going to be your tax. To understand why both of those taxes scared the hell out of the South, it's probably best to take the second one first. Like this idea of a tax on acreage of land.

The South relative to the North at that time and large swaths of relatively unpopulated land that wasn't highly productive, and so you had fewer landowners with more land and less income that would have to bear the burden of this tax on land if it were simply assessed based on acreage and the people on that acreage.

Then, as far as why they were worried about a poll tax or tax per head, this is where you might say, Tony, and you just got done telling me that the South was more thinly populated than the North, so you would think that a tax per head would hurt the North more than the South, what the South was worried about was, when you're talking about tax per head, how would Congress view slaves?

The South was very concerned that slaves would count in a poll tax. What the South did is they said, any other tax we're going to add here, that you might impose at some point in the future, we want a requirement that those taxes be allocated among the states based on population.

That if Connecticut and Virginia have the same population, they will pay the same share of some national poll tax or national land tax. That seemed reasonable and the North was open to it. But the North said, even still, if we're going to allocate based on population, we would like to count all your slaves for your population for purposes of allocating this tax.

The South said, if you're going to do that, then you got to count all our slaves for purposes of our representation in the House of Representatives, which the North wasn't nearly as keen on. What this led to is one of the darker moments of our country's history, but a compromise. You feel familiar with the 3/5 compromise Damien?

Martin: I am. It came up in elementary school at some point, to your point about going back in history books here.

Nitti: I only learned about it from a recent episode of It's Always Sunny in Philadelphia or Frank Reynolds was reading the Constitution on his phone to settle a dispute at the bar, but it is very much true and it is very much rooted in the tax law.

The 3/5 compromise was when the North and South, looking at the way they did, at slaves and how they would count for purposes of the direct tax said, we're going to split the difference and slaves will count as 3/5 of a person for purposes of allocating these direct taxes.

One of our darkest moments in our country's history is actually rooted in the tax law. Then what we're left with here is this provision. Article 1, Section 9, Clause 4, that says all direct taxes have to be allocated among the states based on population of free men and 3/5 of everyone else. It's all well and good, but here's the thing, buddy. It turns out, our forefathers were not altogether different than the people that you sit with in business meetings and the like.

What I mean by that is you can't tell me it doesn't happen to you all the time. You're sitting in a meeting and people are using buzzwords and you're just going. I assume everyone else knows what these words mean, but I have no idea what they mean, and I'm just going to sit here and pretend that I do and nod my head.

But it turns out that same thing man was happening at the Constitutional Convention, and we actually know this. Because here they are saying this very important term, direct taxes have to be allocated among the states based on population, but no one knew what a direct tax was.

We know it because in James Madison's notes, he notes that Rufus King, the rep from New York, raised his hand and said, what exactly is a direct tax? In his notebook, it says, no one answered. We move forward with this unbelievably important term. Direct taxes have to be allocated among the states based on population and nobody has any clue what direct taxes are.

A rough way to start our new country and its government, but we would not have to wait too long to get our first view of how the Supreme Court interpreted this direct tax law.

Martin: It's actually fortuitous for our tax court conversation or tax case conversation here, because now you can get to a tax case here.

Nitti: I think it's a case we would have gotten to anyway.

The reason we would have gotten to it anyway is because we've already talked about what's at stake, depending on how the Moore case goes for existing law, but it also has implications for proposals into the future.

When people think about things like a wealth tax, or even today I heard they're drafting up more language about a tax on unrealized appreciation for billionaires. That conversation and whether those types of taxes would be constitutional, would all start at this same origin.

What is the direct tax? A couple of years after the Constitutional Convention, Congress decides to levy taxes on the ownership of carriages for the conveyance of persons. Instead, I guess, and then interpret that how you will you own a carriage, you've got one parked in the garage, you're going to pay a tax on it.

There's this guy, Hylton, Daniel Hylton, H-Y-L-T-O-N, and he owned, I think it was 125 carriages, which struck me as being a bit excessive, but whatever reason he had 125 carriages. He's got a buck up on taxes for each of these carriages. Immediately he says, no, this isn't right because I shouldn't be bearing the burden of my carriage tax individually.

This is a direct tax. It needs to be allocated among the states based on population and it lands in the Supreme Court. What's meaningful about that is, who are the dudes on the Supreme Court at this time in the country's history?

The same dudes that we're just at the Constitutional Convention. We should get some pretty meaningful insight as to what they meant by direct taxes, and the court makes really quick work of this case.

They say, look, we've got to look at this logic. It's requirement that direct taxes be allocated among the states based on population. The only things that could possibly be direct taxes are those things that can reasonably be allocated among the states and yield an equitable result.

If we think about carriages. Let's just say for our sake that Connecticut and Georgia had identical population. They're going to pay the same share of this national carriage tax.

But if there are 10 times more carriages in Connecticut than there are in Georgia, then the carriage owners in Connecticut are going to pay the tax at one 10th the rate as the carriage owners in Georgia. Because either way, both states are bucking up the same amount.

If there's a lot more carriages to go around in Connecticut, the per carriage rate in Connecticut is going to be a whole lot less. The court said, no, this doesn't make sense. The only things that can be direct taxes are those that make sense to allocate among the states. Really that's going to be limited to a tax on people and a tax on land.

Which reiterates what we gathered from the Constitutional Convention. It wasn't long decision made pretty quick work of it and for the next hundred years or so, nobody really questioned it and it really didn't come up as an issue again.

But then we end up in the late 1800s and we need a temporary income tax. Congress enacts temporary income tax it doesn't look dissimilar from the one that we have today.

Martin: Before that though, no income tax?

Nitti: There may have been some brief moments, I don't know that they were income tax, I'm trying to remember.

There was like an insurance tax that popped up for a couple of years. It's a bunch of different things, but they need this short-term income tax, so we got graduated rates, we got taxed on service income, doctors and lawyers, we gotten tax on rental income. Doesn't look very different than today.

Of course, they start taxing income and a taxpayer called Farmers Trust says, once again, this is a direct tax, just like that carriage tax, it needs to be allocated among the states based on population. It's unconstitutional, I don't want to pay it. And it goes back to the Supreme Court.

You would have thought, based on the precedent we just discovered in Hylton, that the Supreme Court would have made quick work of this too, because how can an income tax possibly be allocated reasonably among the states based on population?

Go back to my example, Connecticut and Georgia, identical populations is going to pay the same amount of national income tax. Per capita income in Connecticut going to be a lot higher than per capita income in Georgia.

The people in Connecticut are getting away with one because they're in total paying the same amount as people in Georgia, but they've got a lot more income to go around. It doesn't make sense. But in a case that's been, I don't want to use the word panned because it's the Supreme Court, but in a case that's gotten a lot of criticism, they find that this income tax is a direct tax and violates the Constitution because it's not being allocated based on population.

The reason they did it was they said, look, we all agree that tax on the land itself, ownership of land is direct, so how's most income earned in late 1800s America? It's cultivating land, farming land, renting land, whatever it may be.

What they ultimately said was that if we know that a tax on ownership of land is direct tax and it stands to reason that a tax on the income that flows from the ownership of land is also a direct tax. Now, here's where the relationship to the present day becomes very important, because what they could have done, as they could have said, we don't like all of these taxes on income from land. We're going to strip them out and say they're unconstitutional, but the tax is on the doctors and the lawyers, that can all remain behind.

They didn't do that, they said we can't sever the part of this income tax bill that we don't like from the part that we do like, and so we're kicking the whole thing out. That's why we say the entire Tax Cuts and Jobs Act is potentially at stake because it is, depending on how the court would view things.

Nitti: Because we're talking about one thing to your point 965. But if it's all inseverable, then that's how you lose the entirety of it.

Nitti: There's your precedent for how that could happen from the Pollock v. Farmers Trust case where they said, "We don't like parts of this income tax law, so they all have to go."

Now, the more interesting part of that case, if you people are ever inclined to read it, is the dissenting opinions because they go after the majority pretty harshly for the reasons we've talked about, just that it doesn't make much sense to think that an income tax could be allocated among the states. But nevertheless, it's gone and so that's, I don't know, 1895 or so.

Congress is not going to take that lying down, they need their income tax. It takes them a while to get enough states on board, but they did something that would be unthinkable in modern times, they amend the Constitution. We get the 16th Amendment and what they could have done is just amend that previous Article 1, Section 9 Clause 4 about direct taxes and just do away with it or rewrite it in a meaningful way, but they leave that untouched and they create this third class of taxation.

Now we've got rule 1 that you can have duties, imports, and excises as long as they're a uniform rate. We got rule 2, that says direct taxes have to be allocated among the states based on population. Now we get rule 3 which says, "Congress shall have the power to levy and collect taxes on income from whatever source derived without allocation among the states."

We still have that direct tax provision, but in income tax isn't subject to that. That's what the 16th Amendment says and right now at this point you're probably going — The Moore’s argument is built on this concept, income has to be realized. Other than pointing at the language there that says from whatever source derived and saying it has to be derived from a source, which is the same as saying, realize, I don't know where their argument is coming from.

We're going to find in a minute that it's coming from some case law. But now that the 16th Amendment is passed, 1913 rolls around, Congress adds the modern income tax like the one you and I apply our trade in day in and day out now.

Just as we now have Section 61 which defines income, I think back then it was 22. But it did it in the same terms, a very catch-all that was meant to exert the full taxing power of Congress. It said, here's what's income and it lists out a bunch of stuff, interest, dividends, all that kind of thing, and then that catch-all at the end, or gains are profits from whatever source derived.

Same language as the 16th Amendment and so it's meant to be very broad, at least it sounds like it. We've got our modern income tax and again, at this point, hard to argue that there is a realization requirement unless you're really reading into the construction of the 16th Amendment.

But wouldn't take long, about nine years we end up back in the Supreme Court, a case we definitely would have been talking about today even without Moore and where this idea of a realization requirement comes from in Eisner v. Macomber.

Martin: What happened in that case, what's the situation there? What's the setup?

Nitti: Again, couldn't have a more simple set of facts.

Taxpayer owns shares stock in a corporation and they get a stock dividend. Stock dividend, think about, simple, me and you. We each own one share in a corporation where the only shareholders, corporations worth 20 bucks so each of our shares worth $10. Corporation decides tomorrow, "I'm going to get Tony and Damien one more share each."

Nitti: Company is no more or less valuable. We have, you and I more slices of pie, but the slices have gotten smaller. Instead of one share each valued at ten bucks, you and I now have two shares each value to five bucks, but nothing's changed. We just divvied-up the pie differently.

The taxpayer here and Eisner v. Macomber gets a stock dividend, which we wouldn't think based on the logic I just relay there that it would be a taxable event.

But the IRS they were still feeling things out and getting used to the new tax law. They say this is taxable to you. It ends up in the Supreme Court because taxpayers arguing that this stock dividend, how can this be income to me, I didn't really receive anything of value.

So in Eisner v. Macomber they get the decision in the sense that it shouldn't have been taxable income. But in doing so, they did two things that are come under a lot of criticism in the 101 years that have followed.

First, we've been talking about 16th Amendment income Section 22 from whatever source derived very broad definitions of income. Then Eisner v. Macomber comes along and says, income is gain or profit from labor or capital, or both combined. I know just hearing that off the top your head, you don't necessarily get a sense for how narrow and limiting that is.

But when we get to Glenshaw Glass and a couple of minutes, we'll see just how narrow that is relative from whatever source derived concept. Eisner v. Macomber is saying, for something to be income, it's got to be derived from labor or an investment in capital or both combined. That's it. That's all.

There's a lot of things that slipped through the cracks when you go with the definition that's that narrow. Not necessarily germane to this case, but still one of the major criticism of Eisner v. Macomber.

The second thing they did, was they said in this case the reason the stock dividend is not income is because you have this investment in capital in a corporation. But getting the stock dividend, you have not extracted anything of separable value from the corporation itself, something that you can, like I said before putting your pocket and go spend as you want. You have gotten another share of stock and all it's done is reduce your per-share value, but you haven't actually extracted anything meaningful from the corporation. That's why this shouldn't be taxable. That has been what's always been pointed to as the birth of this realization required.

Because in Eisner v. Macomber, they're saying you had investments stock. You didn't separate any value from that corporation in your individual capacity and so we shouldn't be taxing you on the receipt of a stock dividend. This is the big point the Moore's are building their case around that really the initial Supreme Court case after the birth of the modern income tax law interpreted the 16th Amendment is having a realization requirement and nothing that's happened after that should really change.

But what's interesting about Eisner v. Macomber is pretty soon after it was decided, you started to see even lower courts chip away at it, which is unique when you have a Supreme Court defining something as important as income, but lower courts just saying, that definition of income was helpful for a stock dividend, but I don't know that it should apply to everything. It just got more and more distance from that concept. Then it all culminated in another case we absolutely would have been talking about anyway in 1955, Glenshaw Glass.

Martin: Because of the significance.

Nitti: It's the modern definition of income. But I will admit I teach Glenshaw Glass in my master's programs all the time. I do it as extra credit on my exams.

What are the three components of income and Glenshaw Glass. But thinking about Moore has made me rethink what I've been telling people about Glenshaw Glass.

Martin: While at the same time, I'm going to ask you whether or not you're also including Eisner v. Macomber and now we're just more of a Glenshaw Glass.

Nitti: I always teach them Eisner v. Macomber. I was always down on the Eisner v. Macomber.

But Glenshaw Glass, I think I was interpreting it in the way that the Moores do. I don't necessarily know that I think that's the right way to interpret.

Another simple set of facts and Glenshaw Glass, you got a ccompany that's paying another company to manufacture equipment for them that they're going to use in their business. Deal goes bad, they sue, they win. In addition to whatever settlement they get punitive damages.

Punitive damages are not designed to make anyone whole. They are designed to punish the offending party. If you're the receiving party, it's just a windfall. Glenshaw Glass gets a windfall, and I'm sure you or I would have done the same thing at that point in time where knowing the Eisner v. Macomber defined income as gains are profits from labor or capital. None of that stuff is present here.

I've just got a windfall in the form of punitive damages. This shouldn't be taxable income to me. They believe it's not income. It ends up in the Supreme Court. This is where Glenshaw Glass really distanced itself from Eisner v. Macomber and said, Eisner v. Macomber was very helpful for determining if a stock dividend is taxable.

But beyond that, it gave us the modern definition of income and says, hey, this is income here because one, it's session well, it's been two, clearly realized and three, over which the taxpayer has dominion and control.

What's amazing about those three points right there is both the government and the Moores are looking at those three points to support their position about this case. The Moores are saying, look, it's said right there in problem Number 2, this is income clearly realized. Honestly, that's how I've always taught the modern definition of income. It has to be a session in wealth. It's clearly realized and over which you have control.

But what the government is saying, which I think is the right interpretation for whatever that's worth. But what I think is the right interpretation is that saying that in this particular case, we have income because these punitive damages were clearly realized, is not the same thing as saying it had to have been clearly realized to be income.

It's almost like they're just saying, we don't have to worry about realization here in this case because it's clearly been realized. But that's not the same thing as saying if it hadn't been clearly realized, you couldn't possibly be dealing with income here. You see that distinction.

Both sides are pointing to that and supported their position, which is pretty fascinating. From the government's perspective, as you go from Glenshaw Glass and bridge the gap from there to now, what they're just saying is, it's hard to fathom that 965 is unconstitutional because there is this requirement that income be realized when we have half a dozen provisions that we can point to in the existing code where realization does not seem to be required.

We already said, we have Subpart F that's existed since the 1950s. Let's say you own stock in a CFC that are in certain types of income, we're going to tax you on it even though it's not distributed. Yes, that's been pressure tested. All of these have except for 475, 1256 straddles that have an income recognition without realization has been pressured, tested in the courts and approved. Section 475, the mark-to-market regime for securities and dealers that hasn't been tested, but it was only recently enacted. One would think that would have been dealt with on committee level.

Then of course, how do you marry it with flow through taxation. We know with partnerships or S corps doesn't matter if you get a distribution, if the entity generates income, your share of it is picked up on your tax return. What they're saying, and this is pretty fascinating when you think about it. The government is saying, we get that, by and large, we don't tax income until it's realize, but you know why we do that? Not because we are required to buy the 16th Amendment, but because it's a pain to tax income that hasn't been realized yet. It's simply a question of administrative convenience.

If we wanted to tax Damien on his appreciation and is very substantial retirement portfolio every year we could. But it's just not easy.

If we wanted to tax you every time your house value doubles, we could, but we'd rather wait for closed and complete a transaction. Not because we have to, but because it's easier to but if we ever need to divert from that, we can, case in point.

Man, I don't remember the code section. It's up in the 800s I think we're I tried to stay out of, but if you flee the country. If you expatriate, you're treated on your last day as if you sold all of your belongings. You haven't sold them all, but you're treated as if you have on your way out the door, they collect their tax. No realization there.

Now to the Moore's credit, they've tried to do some interesting things with their argument. Number 1, they've crafted in a way that they're not forcing the Supreme Court's hand to throw out, for example, the entire Tax Cuts and Jobs Act.

They've crafted in a way where they really just focused in on 965 and not all of the Tax Cuts and Jobs Act. They're giving the Supreme Court a way out if the Supreme Court wants it to just say, hey, we're only going to focus our attention on 1965.

The other thing that Moore's are doing is they're acknowledging that Subpart F exists and pass-through taxation exists and things like that. But in their brief, they're pointing out reasons why those might be constitutional, but 965 is not.

For example, partnerships don't really exist. They're not a tax paying entity and S Corp, everybody affirmatively elects to be an S Corp. You get what you get what you ask for type of thing. They're saying that those are concept of what they call constructive realization. But with 965, there's none of that.

We're just being forced to pick up income. I don't know that I necessarily agree with the distinction they try to draw between Subpart F in 965, but that's not for me to decide. But that's the big thrust of their argument.

Whereas from a government's perspective, they're just saying that, listen, if you really want to get into the semantics here, we could argue that income has clearly been realized. It's just been realized by your corporation. There is nothing in 100 years of case law that prevents Congress from taxing shareholders on their piece of a corporation's income. You have all these different compelling arguments.

Who knows how this is all going to play out, but what's at stake, we already talked about it. It's a third of the code is you said plus a whole batch of potential future cases.

Martin: That's right. You just wound your way through history. You get Hamilton and I learned something new about the fact that all rapping…I guess at the time that they got the Constitutional Convention.

But again, I always had a mentor that told me this really honest say, subscribe to the Wall Street Journal because whenever a tax story hits the Wall Street Journal, that's the day that you're going to get a bunch of calls from your clients.

Now I'm sitting at my desk, Joe Client’s calling because of whatever article they've read winding through all of that, what do I tell him? Tony? How do I distill hundreds of years of everything you've just walked us through?

Nitti: The big takeaways are just the fact that the Moores are suggesting that if you have income that has not been realized, it's not really income at all that's being taxed, it's property ownership and that falls under a different purview of the constitution.

What really matters here is not whether 965 is going to go the way of the dodo, but what it would open up in terms of the potential for the rest of the code. Because as we said, you're talking about hundreds of billions of dollars at stake and 965 tax. Then people are going to want to know what does this mean that the next time I get a K1 from my S Corp and don't have a distribution that goes along with it? Can I sue that? It's unconstitutional.

If I'm required to market my securities to market the end of every year in the 475, can I go in and sue and say that's unconstitutional? Does this mean, because I could tell you this, if Moore is decided in favor of the taxpayer, they can forget these proposals.

They're kicking around for a wealth tax or like this billionaires tax on unrealized appreciation in assets under President Biden's proposal. They would fail this realization requirement, so it's a little case with huge implications. If you want to understand why we got to hop in the old way back machine and go back to the Constitutional Convention, and I'll take you through the evolution.

But it's really interesting stuff and obviously the timing is perfect because all arguments start in just three weeks I think. I think you're right, I think everyone is going to be talking about it and I think to the extent that people who are listening to this podcast can feel like they understand what's at stake? Why the argument is what it is? Maybe have a few thoughts of their own on how the Supreme Court may look at this thing.

The whole point is exactly what your mentor told you, which you don't want to have happen is somebody saying, we know about this Moore case and you look in with a blank stare and go. I'm too busy cranking out returns I don't know what you're talking about.

It's very rare that tax law rises to the forefront of the public consciousness and when it does, we've got to be able to speak intelligently about whatever's being bandied about and that is about to happen next month I had no doubt about that.

Martin: You want to be able to tell them more essentially is what you're saying. Yeah. I waited all this time but I guess that's ultimately why you say greatest tax cases of all time. How much bigger can you get in this concept of realization income? It's at the heart of what we do every day you and I.

Nitti: Even just take a more simplistic view than that, there's a chance that if we were doing this same session next year more depending on how it's decided might be on a list of the most important tax cases of all time.

We get a chance to deal with something in real time that I don’t think a lot of people are paying attention to now, but it could be all anybody's talking about in three or four months because no one knows how this is going to go.

The Supreme Court has been, how should we say, unpredictable maybe a bit? Who knows what direction this goes? But we were not being overly dramatic at the intro about what is at stake here. Like you said it, Paul Ryan said it, maybe a third of the code potentially either be thrown out with the decision which I think is unlikely based on the way it's crafted, but absolutely opened up for attack. If it's true that the 16th Amendment requires realization, then yeah, there's a lot of, Subpart F, I don't get how that's any different.

Nitti: When it opens up, although maybe it won't be the greatest case but there'll be like the greatest case that led to a lot of other cases, because you're talking about litigation that you're going to see if that happens. It's an interesting time and thinking about how all these pieces fit together. Even maybe the fact that I don't know if the thing that sticks with me, maybe as living in the individual, the human world.

The fact that actually absent that they would've paid more taxes as an individual at the individual rate. It would have been paid like 49,000 instead of the 14,000, it's fascinating aspects to this to the international side. It touches basically everything so it truly is fascinating.

Nitti: I know Annette Nellen said in her presentation today talked about how enjoyable it can be to actually read all these different briefs that have been filed and she's not lying.

The arguments each one has their own interesting point and counterpoint. I know some people are arguing that the problem with the mentor repatriation tax is that it tax you on your share of the CFCs income 1986-2017, even if you only acquired the stock in 2016.

I said, how can I be taxed on earnings that were accumulated before I became a shareholder? Allow me to introduce you to sub-chapter C because that's been happening for C corporations. If you and I buy stock in GE today and next month it makes a distribution out of income that was earned in 1914 doesn't change anything for us we have dividends income. That to me, that's again, something that's been pressured test it, so it's hard for me to understand that argument. It's going to be must-watch TV.

Martin: It's a Super Bowl for us tax geeks I think in a lot of ways.

Nitti: Like I said, this will extend beyond our little tax geek kingdom and go into the mainstream.

Martin: Next year April, maybe we come back and we really evaluate was more what it was kept up to date. But thank you April for hanging with us here.

Walker: I kept thinking that if Moore turns out a certain way then and the S Corp it goes away, then I don't know if Tony be employed next year. That's what I was thinking.

Anyway, thanks Tony for the history lesson, thanks Damien for walking us through this was so fun for me to hear it. Hamilton's one of my favorites and the only thing missing a little bit of rapping. Maybe that'll happen next.

Thanks again, you guys it was great. 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 follow us so you don't miss an episode. You can also find us at aicpa-cima.com/tax and find other Odyssey episodes. I think Tony sneaks in there on a couple of those, so you can go back and listen to some of those and get access to the resources mentioned during the episode. I guess once this airs we might have more information on the case, so we'll have to see how to follow along. Thanks everybody for listening and have a great day.

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.

The employee retention credit (ERC) continues to be a topic of conversation amongst taxpayers and their trusted advisers. Now that the IRS has placed an immediate moratorium on processing new claims to at least the end of 2023, additional considerations and challenges have manifested.

Justin Elanjian, CPA, Managing Director — Disputes, Claims & Investigations, Stout, chats with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, and shares best practices for navigating the current ERC environment.

What you’ll learn in this episode

• Current ERC developments and how Justin is assisting his clients (0:50)
• Tips for taxpayers who have already claimed the ERC (4:55)
• How to advise clients contemplating withdrawing their claim (10:31)
• Advice for helping clients that have not yet filed for the ERC (16:22)
• Statute of limitation issues and recommendations to consider (19:50)
• Office of Professional Responsibilities (OPR) guidance around professional responsibilities around claims (26:23)
• What Justin is seeing in ERC examinations (33:05)
• Final thoughts (41:34)
• A page from Justin’s travel journal (43:45)

Related resources 

• ERC guidance and resources — The rules to be eligible to take this refundable payroll tax credit are complex. This AICPA resource library will help you understand both the retroactive 2020 credit and the 2021 credit.
• ERC suspended: What happens next | Tax Section Odyssey — October 16 has sunset. Tune in to this podcast to hear fellow CPA practitioner Brandon Lagarde’s experience with the 2023 extension season and what to expect in 2024.
• Employee Retention Credit (ERC): Fact or Fiction? — Use this guide to educate yourself and others on common misconceptions surrounding the ERC.
• Employee Retention Credit Decision Tree — Download the ERC decision tree to help you with various decision points when working with clients to protect yourself/your firm from significant risk.

IRS resources

• IR-2023-169 — IRS news release on Sept. 14, 2023, ordering the immediate stop to new ERC claim processing.
• IRS ERC resource center — IRS hub for ERC information, including links to guidance, FAQs and the latest news.
• ERC eligibility checklist: Help understanding this complex credit — IRS chart is used to help taxpayers figure out if they may be eligible for the credit. Use this chart if you are considering claiming the credit or have already submitted a claim to the IRS.

Transcript

April Walker: On today's podcast, listen to hear more about next steps with the ERC.

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 realized that today is our 100th episode, so I'm pretty excited about that. I'm April Walker, a lead manager from the Tax Section.

I'm here today with Justin Elanjian. He is at Stout, and he works as a managing director in disputes, claims and investigations. You can see where his angle might be coming from with the ERC. Welcome Justin.

Let's talk today about the current landscape of ERC and how you're assisting businesses today in your current role.

Justin Elanjian: Sure. Thank you, April, for the opportunity to be here and to the rest of the AICPA as well.

It probably helps to start with the current landscape and setting the stage as it informs how we are assisting businesses and CPA firms in navigating the employee retention credit.

As we've seen over the last several months and, in particular, over the last six weeks, there's been some significant changes to the program, particularly as it relates to the processing of claims.

Six weeks ago, we had the moratorium on processing new ERC claims, which has produced a flurry of additional questions that may not have existed previously. Then, we also have the additional scrutiny that is being placed on service providers on taxpayers who were claiming the credit. That's coming through in the form of communications from the IRS, for example, when they announced the moratorium and issued a number of warnings over the last several months, but also notably through the increased level of enforcement in the form of independent claim exams.

With all of this, there has been this delay in processing ERC returns that have been filed before the moratorium. Of course, we have the hold on processing claims submitted after the moratorium was announced on September 14th, that creates some additional challenges for taxpayers who are in need of the assistance with ERC refunds.

With the concerns pertaining to promoters and aggressive tactics, the IRS has asked on multiple occasions at this point for tax professionals to step in and that's really where we're getting involved.

When it comes to taxpayers or CPA firms — frankly it's both where we're providing opportunity and support, is we're evaluating a taxpayer's position as to whether or not they have a basis to submit a claim. So that upfront analysis and in particular as it relates to the full or partial suspension criteria. As we know, that's the subjective one and the increased level of diligence that's required.

But what we’re also seeing here that’s not drastically different, are circumstances in which taxpayers, at their own will or at the direction of an adviser, are seeking a second opinion. Or perhaps they've submitted a claim and want to understand the adequacy of their claim documentation, the associated risks, the opportunities to augment the documentation, etc.

Most recently, where we're spending the majority of our time is in providing audit support. That's coming through in the form of these taxpayers that are in receipt of an IDR (information document request) pertaining to one or more of the ERC claims that have been filed. For the CPA firms that have offered ERC services, there's a suite of risk mitigation services and risk management services that we offer to assist them in protecting both their firm and their clients that they may have assisted.

Walker: Wonderful. Thanks, Justin. That's a great introduction into where we are and like you said, the landscape. You mentioned the moratorium and mentioned the scrutiny by the IRS.

Let's talk first about taxpayers who have already claimed the credit. How are you advising them and what considerations do you think are really important for them to be considering as you are the CPA working with those types of businesses?

Elanjian: Sure. Like many situations and this one not being drastically different, the first item to really focus on is assessing the current reality. When it comes to the employee retention credit, that's heavily focused on the basis for the claim that was filed. That's inclusive of the nature and extent of the documentation that has been produced to support that basis or substantiate that.

Since the inception of the program and frankly, even since the issuance of the various notices throughout 2021, we've continued to see this evolution from the IRS.

Frankly, we've seen it from the ERC market as a whole, and interpretations of the statute and changes to such. We've seen that through updates to the IRS FAQs. We’ve seen it through public comments by the IRS or press releases. And there may even be further extended into the supply chain general legal advice memorandum that was released in late July.

It's further observed by the IRS’s approach and the positions that are being taken in these claim exams that I mentioned or audits. We'll use those terms likely interchangeably throughout the course of this discussion. I know we'll talk about that in further detail later.

But when it comes to the taxpayers that have filed the claim, the first step is reviewing the nature of the agreement they have with whichever ERC service provider they sought assistance from.

To understand the responsibilities of the taxpayer as well as those of the ERC service provider. Service providers have mainly consisted of your tax incentive firms, your law firms, accounting firms, consulting firms and payroll processors. The nature of services and the extent in which they're offered vary not only by the type of business, but even within the type of businesses, the scope of services may differ and likely does.

It's a critical item to understand as we continue to see taxpayers that are operating under the assumption that the ERC service provider, whoever that was — I'm just referring to a third party that was engaged. That may have an assumption that the eligibility information and documentation to substantiate [ERC claim] was produced or evaluated by the ERC service provider.

There are various third parties who rely on taxpayer attestation and that the taxpayer understands the rules of the program. They've made a determination that they're eligible for the credit. They have asserted to the fact that they've identified and maintain the relevant documentation to support their claim. It's a really important component to understand — where might this documentation come from and who was responsible for producing it — as we consider the substantiation requirements in [IRS] Notice 2021-20 and specifically Q&A 70.

Then, once we understand where the information comes from, it's a matter of understanding the completeness of the documentation. We've continued to experience situations in which taxpayer has a narrative regarding our full or partial suspension of operations, but they don't have any supporting schedules, there's no details or evidence that corroborates the commentary.

And during exams, the IRS is certainly seeking this information, as well as copies of the government orders that were determined to be relevant to causing the business' limitation or restriction or other modification of the taxpayers’ operations. Really getting hands around the documentation that exists, so then we can then move into the next step, which is understanding the reasonableness of the position.

Now, short of very limited circumstances, the program, as we know it, is highly subjective and lack of case law and situations that some may perceive to be moving the goalpost.

Insert supply chain glam here, only makes that more challenging. I know we'll probably talk more about the OPR Guidance and tax preparer responsibilities.

I'll just briefly note that here, but we don't see this as necessitating or recreating the wheel or reperforming the analysis. But reviewing the documentation in the position to determine if there's a reasonable basis for the position, recognizing there's differences in interpretation of the guidance and applicability to the taxpayers’ factors and circumstances. That's really step one if you've claimed or you're working with a taxpayer who has already submitted a claim for the credit.

Walker: Another set of clients, [we’ve talked those who have already] filed the claim. Now let's shift to how you're advising clients contemplating the withdrawal program. Also, we don't have the details yet about the settlement program, but just in thinking about what are their options and what are their considerations?

Elanjian: It's a great question. I think this is where I would say the majority of taxpayers fall, is what do I do now?

The number of communications, the phone calls, the emails that are prompted every time there's a release of something from the communication from the IRS, or somebody attends an industry conference. ERC continues to be a topic and as a result of each of these prompts further discussion and in many cases it's very much warranted.

We have the point where we have understood our clients or if you're the taxpayer, your situation, the basis of your claim and the associated documentation. When we get to the point where we understand the reasonableness of the claim, we end up with this known unknown. We look at what are the options to consider and, April, as you mentioned, there's some that we have been informed of a process like the withdrawal program that was recently announced by the IRS or what we expect to come forward as it relates to the voluntary settlement program.

When the adviser or the taxpayer is evaluating what to do next, that is coming from the perspective of “we understand our basis for eligibility. We understand the documentation that exists or perhaps what documentation doesn't exist or where it may be lacking.” It's the next stage of evaluation. What do we do about this? When we're looking at, whether it's the withdrawal process or a settlement program as being considerations, that's heavily dependent obviously on whether or not they've received their ERC refunds.

As we know the withdrawal process provides an opportunity to effectively reverse a claim. Withdrawal of the claim if it has not been refunded but to the extent that it [hasn’t] been refunded, that's expected to be addressed with the details of the settlement program.

I think when we're looking at all of this and before making any decision, it's recognizing what's coming forward. As we see some of the communications from the IRS and we look at the moratorium announcement, it makes reference to more information that may be requested. It shifted the [IRS] processing from 90 days to 180 days, but further indicated that if additional information is necessary, that it could be much longer.

Then in light of the suspected fraud, abuse, or improper claims that have been filed, the IRS may seek more information. That's what I'm referring to now as maybe the more proactive type of information document request, which is the information document requests that comes before the refunds have been disbursed.

That's an important consideration as we think about the communications from the IRS where they noted that they believe that many of the applications that are currently filed are likely ineligible. And that it's at least anecdotally noted that they're seeing instances where 95% or more of the claims coming in recent months are ineligible. [They] are attributing that to promoters that continue to aggressively push people to apply regardless of the rules. That was the communication that came forward with the announcement of the moratorium.

What that presents itself is needing to understand their position and the documentation so they can determine whether or not they have an improper claim. Does that suggest that they may pursue the withdrawal process or wait for the details of the settlement program? Perhaps, but the subjectivity of the program and a lack of the historical case law also presents this alternative which I think is where we're [seeing] a majority of taxpayers falling.

Whether we care to admit it or not, there's undoubtedly taxpayers who may review their position, may review the reasonableness of their position and recognize that it is highly subjective, and choose not to pursue the withdrawal program, this settlement program, and take more of a wait-and-see approach.

It's known that the IRS will only have the manpower and the capital to audit so many of the claims and with more than 3.6 million claims filed. There's a possibility that taxpayer claims never get a second look from the Internal Revenue Service. That's probably the last bucket and I think it's probably the largest bucket that falls, is whether or not to take any action.

In all cases, first step before reversing a claim, before returning funds to the IRS is make sure that you understand your current situation or if you're the adviser, understand your client's current situation so that there's an opportunity to have the relevant information in front of you to make informed decisions on the next step.

Walker: I think those are great considerations.

Certainly, we're not advocating for playing the audit lottery. That is not what Justin nor I are saying. But it is a fact of the matter that there may not be a clear decision, there might not be a clear yes or no. Wait and see, may be the best approach at this moment.

There's another group of businesses that I'd like to talk about for a minute that actually haven't filed their claim yet. For whatever reason — hadn't gotten around to it — whatever the reason is. How are you approaching those conversations with those businesses?

Elanjian: Everything we just spoke about pertains to taxpayers who have already claimed the credit.

To your point, April, there's still businesses who are evaluating whether or not they should submit a claim. It's important to note as we've heard misinformation, as it relates to the moratorium, to clarify that the moratorium [does] not limit the ability of a taxpayer to file an ERC claim.

It's simply noted that the IRS will not process any claims filed on or after September 14th until at least 2024. That opportunity does still exist.

Some in the market may suggest that this is more of a timing consideration for a taxpayer. Considering claiming the credit in light of the heightened scrutiny and the IRS perception that the vast majority of claims recently filed are improper.

However, the guidance to taxpayers considering claiming the credit remains substantially the same as it was prior to the moratorium. With or without the assistance of an ERC adviser, it’s important that the taxpayer understands the rules of the program and how they may apply to the taxpayers’ facts and circumstances so that they can make informed decisions pertaining to their basis for eligibility and if one exist, submitting a claim for refund.

That's easier said than done as the moratorium certainly created some hesitation for taxpayers considering claiming the credit. But it shouldn't deter a taxpayer who believes they are rightfully entitled to the credit from submitting a claim.

Where this really comes down to of what's new as we think about the moratorium, or what’s an increased focus in determining whether or not to file, or perhaps when to file is recognizing that the opportunity to claim 2020 employee retention credits will expire due to the statute of limitations come April 15th of 2024.

If you’re working with a business that is evaluating claiming the credit, is unsure whether or not to submit or when to submit, once there's an appropriate basis to claim the credit. And of course, all the corresponding documentation and the calculations have been performed, go ahead and file. We want to ensure that taxpayers don't lose out on the opportunity to submit a proper claim before the expiration of the statute of limitations coming forward in approximately six months.

Walker: Very good. Shifting gears a little bit.

Hand in hand with the claim for ERC is the businesses' requirement to amend the corresponding income tax returns for the claim. Let's acknowledge we're not going to debate the fact [and] we agree that the IRS guidance requires amending the 2020 or 2021, obviously, depending on the year of the claim. That is a fact.

But given the moratorium, the fact that we know the IRS has a backlog of claims, let's talk about some of those issues around statute of limitations for those income tax returns.

At this point, nothing has happened to change the statute of limitations. What recommendations could practitioners consider?

Elanjian: Sure. It's a great question. April, I will acknowledge what the IRS guidelines require as it relates to when to amend an income tax return.

There's clear guidance from the IRS, we continue to hear and see income tax preparers look to address the ERC claim perhaps in a year in which the refund was received. Again, that is contrary to the guidance produced by the IRS, which illustrates that the income tax returns should be amended for the year in which the credit is determined, which was either 2020 or 2021.

Now, with that being said, going back into your question here about statute of limitations and what that would mean, it's something we continue to see surface more regularly as we're nearing the income tax return statute of limitations as it relates to 2020, which is coming due here in the next few months. Frankly, it's a dilemma for the tax practitioners that the IRS really hasn't provided a definitive solution for, at least not yet.

On one hand, we have a backlog of several hundred thousand ERC claims. It's unclear when the IRS will process them as we consider the fact that taxpayers can still submit amended returns to claim the credit.

That's only further exaggerated by the fact that as we're observing the IRS continuing to audit these claims, including those that were previously processed for which refunds have been disbursed. The outcome of these audits, inclusive of IRS decisions, those that may be appealed or brought forward in tax court will not be fully resolved until after the statute of limitations on the 2020 income tax return has lapsed.

That's for some unknown amount of taxpayers. It's just really more of a timing thing.

That's in turn lies the challenge where taxpayers who have previously amended their end of 2021, but really our timing sensitivity is around 2020, income tax returns to reduce their wage deduction as instructed by the IRS and may end up in a situation that after the statute of limitations expires, a credit that was claimed may be disallowed in whole or in part.

We've talked a little bit about protective claims and what we're hearing about that and that's protective claims for refund. Where that seems to fit and maybe where it doesn't pertain to this question is when it comes to the ERC claim, there may be a consideration to file a protective claim against the refund, which can occur when there's a contingent event. We really [mean] in this case is the resolution of an eligibility position taken perhaps, we're observing to see what happens with supply chain as those are brought forward and litigated and what that might that mean. That can provide an opportunity for the taxpayer to subsequently perfect the claim after the statute of limitation lapses provided that the basis for the claim is not materially different.

But that's for the claim for refund which is facilitated through most commonly the filing of a Form 941-X. That's different than the income tax return issue that we're facing where we're not afforded that same opportunity.

When we're amending our income tax return, we're reducing the wage deduction. We're not claiming a refund through the filing of the income tax return. What's been made available to us and what's been communicated to us through [IRS] Notice 2021-49 as it clarified, the income tax return implications, is that an amended return should be filed or administrative adjustment request.

The administrative adjustment request still would seem like the appropriate option if the taxpayer is a partnership, even as we go, perhaps beyond this 2020 income tax return statute of limitations. But it doesn't solve all other tax entity types.

That's the gap that continues to exist and where we sit today, the only reasonable answer at this point is that the IRS has to come forward and issue some further clarification. I've no doubt that the IRS is well aware of the issue and we'd expect to see some further communication. I know that doesn't fully solve the question that's being asked within the market other than wait and see, but unfortunately, that really is our current reality.

Walker: I guess, mainly, we're speaking here to tax practitioners, communicating that to your clients that this is a real possibility is important because what you don't want them to come back and say, hey, you never told me x, y, z. I feel like that's important.

Like you said, we at the AICPA have made them aware that this is an issue. I'm sure they know it's an issue. Hopefully, there will be some extension of the statute. I'm not sure how that actually is affected. But anyhow, for now, that's where we are.

Elanjian: April, I love the comment about the communications with clients.

In this market, and I know we're talking here as the comment was made about this income tax return dilemma that we may be faced with and likely will be is the just the misinformation about the ERC. Communication with clients so that they understand that you're here or they understand that you have the advice or can recommend someone who does, is clearly important in our role as trusted advisers to our clients.

Where we can see things go awry is when there is no communication and our clients go out and seek help from someone else, they may not have a preexisting relationship [with] and may or may not provide the right advice.

That client communication element to speak to, April, is critical.

Walker: We're going to continue to talk about amended tax returns, but we're going to talk about the OPR (Office of Professional Responsibility) guidance around professional responsibilities on claims. Definitely another conversation topic, question topic on this issue.

What is your perspective on this guidance and how practitioners might navigate this?

Elanjian: This is a matter we deal with regularly and that's from all sides. When it's the CPA, it may be the service provider or maybe an attorney. What's the burden? What's the responsibility rather is perhaps the better way to say it as relates to the tax preparer.

We recognize that the issuance of the OPR guidance or the IRS warnings and communications may prompt or require for that matter the CPAs to provide certain level of diligence. Some CPAs feel that they've been tasked with effectively performing some function of the IRS. At least they're acting in that particular manner as the last line of defense, if you will.

The unfortunate piece of this is that it's caused a significant strain in CPA and client relationships. As we're aware of numerous situations in which CPA may have refused to file an income tax return over an inability to agree on a position taken by their client pertaining to the employee retention credit and unfortunately sever certain relationships. That's certainly not the outcome any of us are looking for.

As we look at the OPR guidance, we look at the standards for tax professionals, we look at Circular 230. What it's speaking to is the reasonableness of the position taken by a taxpayer, the responsibilities of the tax preparer as it pertains to diligence and disclosures and how any associated penalties perhaps may come into play. That's really when it gets into this element of an unreasonable position. There's this process that a tax preparer they go through to determine is the position reasonable.

I think it's important to consider what we see in [Sec.] 6694, which notes that a tax preparer may rely on advice furnished by another adviser, another tax preparer, or another party, and that the tax preparer is not required to audit or examine or review the books and records, the business operations, the documents or other evidence to verify independently the information that was provided by the [3rd party]. That being said, the tax return preparer may not ignore the implications of the information on the income tax return, and they make reasonable inquiries if the information furnished appears to be incorrect or incomplete.

We're left with the understanding whether it's known or there's reasonable belief that the position taken is unreasonable or inaccurate. We need to figure that out to determine how far we are inquiring or evaluating the reasonableness of a position.

We're hearing some CPAs taking the position that if their client claimed the ERC, then April as you noted earlier, they should amend the income tax return. We know if it's claimed that there's an income tax implication, therefore, just do it. Amend the income tax return, no further questions asked. Now, the other side of the equation, we're seeing CPAs and some of them who have decided not to provide ERC services for one reason or another, now being faced with this consideration of being the ERC advisor, and assessing the taxpayer situation and effectively re-performing the eligibility analysis, which may very well lead to a different outcome for any number of reasons than what the taxpayer acted upon.

The appropriate position is likely somewhere in between the middle of those two bookends, and we're looking to comply with Circular 230 and certain relevant sections of the Internal Revenue Code as well as the [Statements on] Standards for Providing Tax Services. This really involves making reasonable inquiries pertaining to the taxpayer's position. Unless the facts and circumstances suggest that the position is unreasonable or inaccurate, you may stop there.

Given the subjectivity of the program, it's highly common for two different parties to evaluate the same taxpayer's position and reach two different conclusions. That might be informed by their approach, their knowledge of the program, perhaps their risk tolerance. But what it does not necessarily mean is that one position is reasonable and the other one is not.

As we discussed earlier, there's this lack of case law and applicable legislative history to actually know what a partial suspension is and what is an unreasonable position short of the known fraud and abuse.

Accordingly, making the appropriate level of inquiry to understand the taxpayer's position, assessing if it's reasonable, would seem to satisfy the compliance requirements without full re-performance of the analysis to formulate an independent conclusion that maybe predicated upon the documentation the taxpayer has pertaining to their position.

For example, if you're speaking with one of your clients and asking about their eligibility position for having claim the credit and all they can tell you is supply chain disruption with no further information, that likely is going to warrant some additional inquiry and further probing.

However, if taxpayers provide a narrative that articulates their position, its alignment with the program requirements, that would seem to achieve the level of due diligence that's required by the taxpayer as having a reasonable basis for the claim that's been filed.

Walker: I think [there are] no easy answers here, but a great way to think about it. Let's shift.

We've alluded to it a couple of different times throughout our conversation, but let's shift to as you're helping CPA firms, their clients and defense of actual examinations that are currently ongoing. [Justin, could you] share some of the themes you're seeing from those exams.

Elanjian: Sure. We recognize that CPA firms and law firms and certain ERC providers may not have the skills, knowledge, experience, or even the bandwidth to provide representation in the wake of an ERC claim exam.

That's been a great opportunity for us to collaborate with the trusted advisers to mutually serve their clients best interests and having the opportunity to do so as it pertains to the audits of these ERC claims has certainly provided some insights. Some of which from our perspective maybe a bit concerning, but nonetheless informative. As it relates to what can be expected and where to focus our efforts in working with clients and what types of documentation to really dive in deeper on.

I think it's important to start the conversation with the notion that the IRS Notices themselves or the Internal Revenue Services’ interpretation of the statute are not necessarily binding in nature. What is binding in nature is the statute itself, and that presents a much more broad definition of an eligible employer particularly as it relates to a full or partial suspension. If we look at the Cares Act, it states that an eligible employer is any employer for which the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to the coronavirus disease.

Notably, there's no mention of a more than nominal portion or more than nominal effect among the various other limiting provisions that surface in the IRS notices and most notably IRS Notice [20]21-20. That notwithstanding, we're seeing some common themes or areas of focus from the IRS exam agents that provide even a more narrow or more limited view of an eligible employer than what may be present within IRS Notice 2021-20. Again, that's to inform advisers of how they may approach situations and engage in conversations with their clients to defend their position or be prepared for defense.

In no particular order here, what we're seeing is significant emphasis on essential businesses, on government orders, the whole more than nominal concept and supporting documentation. Touch on each of these just briefly, just for some additional context.

When it comes to essential businesses, the IRS is taking a narrow approach, and particularly as it relates to essential businesses that do not operate with a non-essential component. The exam agents are hyper-focused on the fact that essential businesses, by definition, were not required to shut down.

Now, notably focused on the concept of shutdown, which is not the criteria in the statute, nor is it the criteria in the IRS guidance for being eligible. That has certainly presented some challenges for essential businesses whose trade or business operations may have been suspended by any number of factors, even though they were technically remained open for business. There's this extra level of diligence and communication that's seemingly necessary when dealing with claim exams.

As expected, the government order aspect is relevant. The IRS is requesting copies of the government orders, actual copies of the orders that were determined to be a contributing factor or the causal factor to the suspension noted by the taxpayer. In some situations, the agents are specifically requesting that they be directed to the exact section within an order. Show me the terms, show me the article, show me the subsection within the order that's being cited. We've been pulled into situations after an IDR [information document request] and a disallowance occurred, where the basis of the disallowance was because the taxpayer had provided hyperlinks to URLs where the orders existed. The agent wanted the actual orders and therefore disallowed the claim because the orders themselves and the specific sections within were not cited. That's one part of this is the substantiation of the order.

The other side of this is what is an order. We know that certain things like statements made at a press conference don't constitute an order. But what I'm talking about is the verbiage perhaps used within an order. The order uses words like recommends or encourages or something to that effect. The agent may not consider that to be a mandate, but rather a guideline. I can understand that in certain circumstances, but it certainly presents a challenge to get into that level of nuance and that level of detail for CPAs, ERC advisors, or the taxpayers themselves.

But where this further extends into some challenges is, let's take a hospital for an example, or a long-term care facility whose financially reliant on their Medicaid contracts and therefore, in turn, compliance with CMS [Center for Medicare & Medicaid Services]. The IRS is not acknowledging that the CMS is, "guidelines" were not required to be followed. They don't rise to the level of a government order and a mandate. That in and of itself can present some challenges as taxpayers who are subject to following these guidelines could lose their whole Medicaid funding, which would cripple the business if they didn't comply. There's some debate here as to whether or not that should also be considered an order.

I think the third item I mentioned was the more than nominal concept. This one is interesting for a number of reasons, despite the element of it not being present within the statute. The exam agents are very much looking for a calculation. Show me the numbers, show me the revenue, show me the employee hours. The approach is extremely formulaic. Not only that, but the application of some of the more than nominal criteria is being just simply misapplied.

When we look at the more than nominal affect language in Q&A 18 out of [IRS] Notice 2021-20, it notes that Governmental order that results in a reduction in employer's ability to provide goods or services in the normal course of the employer's business operations of not less than 10% will be deemed to have more than a nominal effect. Unlike the more than nominal portion concept, this does not suggest it needs to be a factor of revenue or employee hours. Further, it does not state that it needs to be in relation to a comparable quarter in 2019.

However, we're still seeing agents requesting a calculation for a reduction in revenue or reduction in employee hours of 10% to achieve the nominal effect criteria. That's just simply inaccurate. But nonetheless, it is something that we're continuing to see in the wake of IRS ERC claim exams.

Walker: Great. That's helpful. Helpful to you as you're walking through the steps we've talked through earlier today. What is reasonable? What is not? At least considerations here's where the IRS is coming from and then you make your own professional judgment. Justin, thank you so much. This has been super helpful for me and hopefully for our listeners. Any final thoughts as we're wrapping up today?

Elanjian: There's obviously a lot of unanswered questions and differences of opinion when it comes to the employee retention credit program and CPAs are receiving information that sends a sentiment that anyone who charges it continuous fee is bad or a substantial component of claims that have been filed that are improper. We go back to that comment made by the IRS that 95% or more of claims coming in recent months are ineligible. Probably somewhat of an overstatement. Obviously, 95% is clearly significant. Well, it's still probably not 95%, I think the intent of the message is probably not far off. It may not be that 95% or some significant percentage of claims are improper, but rather they don't contain the supporting documentation required, and in turn, therefore may be deemed as improper.

It continues to drive home this element of documentation, I think biggest takeaway of all of this is the documentation, the preparation of such, whether it's to prepare an income tax return, preparing for a claim exam, determining the withdrawal program or whether or not to file a claim. Is there a position and can it be documented and what should not occur as businesses who are rightfully entitled to the credit, second-guessing their claims, or whether or not to even submit one for fear of penalties or interest or potential financial burden that they may face or their claims be subject to exam.

At the end of the day, it's important we get back to the intent of the program, which was to provide funding to businesses who experienced challenges due to COVID and maintain their employees on payroll. We recognize that this adds more responsibilities to the CPAs as the trusted advisors to their clients, and that's where Stout is here to help and be a resource to you and providing guidance and advice to your clients to maintain the competence the clients have in you and manage your risk and their risk accordingly.

Walker: Wonderful, thank you. We will, Justin, put your information on how to best contact you in our show notes if anyone is listening and thinks I need to talk to Justin a little bit further.

In closing on these podcasts, I like to think about as Tax Section Odyssey we're taking a journey together toward a better profession. In doing so, I really like to get a glimpse of my guests, other journeys outside of when they're working on tax. Please share a page from your travel journal, Justin, either a bucket list trip or something you have on the horizon?

Elanjian: Boy, that's a tough one. I don't know that I have one on the horizon as we've had the opportunity to do some travel recently. I'll speak to the recent travel instead of the upcoming. We had the opportunity to do a two-week safari in Africa. That was absolutely outstanding. If someone hasn't gone and it's not on your bucket list, you're making a mistake. Put it on a list. It is unbelievably worth it and an experience that you will never forget.

Walker: Perfect. As we're accumulating these podcasts, I have added to my bucket list, and I think I'll have to add that as well. Thank you so much again, Justin again, this is April Walker from the AICPA Tax Section.

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October 16 is in the rearview mirror. Brandon Lagarde, CPA, JD, LLM, Partner — EisnerAmper, chats with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, to review what went well during the extension tax season and what to look forward to in 2024.

What you’ll learn in this episode

• 2023 tax extension season highlights (0:58)
• Challenges and concerns to think about for 2024 (3:05)
• What’s keeping Brandon up at night (7:30)
• Sneak peek of the National Tax & Sophisticated Tax Conference (10:13)
• Final thoughts (14:24)
• A page from Brandon’s travel journal (15:35)

Related resources

• AICPA & CIMA National Tax & Sophisticated Tax Conference 2023 — This premier conference provides tax experts with the latest updates and information on new regulations. Your team will hear from IRS executives on current challenges and opportunities. Use promo code NTA150 at checkout to save $150 (exclusions apply).
• Annual Tax Compliance Kit — Engagement letters, organizers, checklists and practice guides help you manage your tax season workflow and excel as a tax and financial planning adviser.
• Tax Season resource library — With constant changes to the tax landscape, being prepared for tax season is critical for success. Set yourself up for a smoother filing season by tapping into the wealth of AICPA and Tax Section resources.

Transcript

April Walker: On today's podcast, listen to hear more about a practitioner's extension season and learn about what you will hear about at National Tax.

Hello 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 with the Tax Section, and I'm here today with Brandon Lagarde. Brandon is a partner at EisnerAmper in Baton Rouge, Louisiana. Welcome Brandon.

Brandon Lagarde: Thanks for having me.

April Walker: We're recording this today on October the 20th and earlier this week, Monday, October 16th, was the deadline for what we think of as the end of extended tax season. Brandon I thought we could talk a little bit about some lessons learned. Let's first start with a good; I like to do that. What are some things that went well for you during this extension season?

Brandon Lagarde: This is always our busiest time of year — the extended busy season — largely because it involves more of our larger individual clients and even some of our larger pass-through clients.

September 15th is a pretty busy day for us. September 30th is also a pretty busy day with fiduciaries and states being done, and then October 15th, again, of course, being, which is October 16th this year is a huge day for us.

When we try to plan out our year, we'd certainly look at August as getting ramped back up. If I had anything good to to say about this year it is that we recently went through merger within the last few months — merged May 21st with EisnerAmper — and with that, we were able to get additional resources help.

One of the good things that happened during this extension season was, again, the ability to have more people help us get returns done and get the work out. That's probably the biggest positive we had. I wish we would've started sooner. Seems like June and July was slow for us, and we're waiting and anticipating for the wave to occur. We tried to ride the wave as best we could, but I would say that it was still a pretty stressful time even with the additional help we could get.

April Walker: I feel like when I think back to my days in public accounting, it's always hard to ramp back up, but the sooner that you can ramp back up after taking a little bit of a breath, that makes for a better September — October. That’s great that you had some additional staffing.

Maybe we'll move to the lessons learned. What are some things that didn't go as wel,l and some things you'll try as you look towards the 2024 tax season? What are some things that you're going to implement and work on?

Brandon Lagarde: One thing that we did during our regular tax season (and it never translates for us to extension tax season), and that is really trying to set some expectations with clients on when we expect them to get us information.

When we get work done internally during regular busy season, that March–April timeframe, we're much more deliberate on getting that work in the door, telling clients we need your information by this date to get the work done. We are much more deliberate on scheduling that work during busy season because we are more focused on it. Then summertime comes and I think everyone, including our clients just get lazy when it comes to their taxes and getting work done.

What we didn't do so well, and we've thought about this internally, is on the backend with the second busy season coming up in August, we really need to do a better job of pushing clients to get information and pushing ourselves to continue to work on stuff during the summertime.

Just seeing that this year specifically, I don't know if it's still coming out of the COVID-19 pandemic work issues or just coming out of first summer where people did a lot of travel. Again, there definitely was a lull that we should have prepared for a little better.

Certainly one big lesson learned is we really need to keep our foot on the gas through the extended busy season and really get started earlier because as I mentioned, one of the good things that happened to us this year was we did have additional help to get work done. Without that help, we would have been extremely backed up and not sure we would've gotten the job done.

So really pushing that deliberateness that we took during the busy season in March and April. Really pushing that to the summer and staying on top of clients, staying on top of our people and just saying, “hey, we need to make sure that we're not pushing this back further than we need to,” that's a huge lesson that we'll take from this tax season.

One of the challenges we face with our September 15th deadlines is when you have flow-through entities and we're getting K-1s on September 9th, 10th and 11th, that puts a huge strain on getting work done on the 15th.

We try [for] clients that have that multi-tier, we at least try to back that up and try to get those out before [because] we know they're going to impact other clients we're dealing with. But that's just a huge backlog that happens. Again, I don't know how you incentivize clients because sometimes it's not in their hands.

April Walker: Absolutely. But I think you can make sure you're communicating and make sure [maybe] it's getting the best draft information you can get [entered in the system] so that you're really truly just waiting on a few pieces of information and really pushing [clients]. I'm not trying to tell you what to do Brandon, but just some ideas like thrown out there and just making sure that your clients don't put you into a box where you're having to scramble.

Brandon Lagarde: That's one big lesson is never too much communication with a client, especially if you're trying to get information from the client or really trying to push the client to get you the information. To some degree, it takes some deliberateness on everyone's part to say, let's sit down first week of June and go over what financial information we need from the client, get with the client and help them to put it together and even set up meetings with the client to make sure that they understand that we're waiting on them for something.

I find that happens quite often is communication just falls apart and the client doesn’t realize we’re waiting on something or the client doesn't really understand what we're waiting on, even though we tell them waiting on something, so it certainly involves overcommunicating is going to be a huge solution for anything.

April Walker: I think that sounds good. Just a final question as we're thinking about looking forward, what's keeping you up at night as you're thinking about its the middle of October tax season. Unfortunately, we will be here again. What's keeping you up at night thinking about that?

Brandon Lagarde: We already had a meeting this morning with our partner group [and] our local group, and really starting to talk about what we need to be focused on [at] year-end and starting the process early on this communication with the clients and starting the process early on determining which clients we are going to continue to work with and which clients we may need to part ways with and getting engagement letters out and organizers.

These things need to occur now and not wait [until] January — Is just getting those things done, just getting a process down to do that, that's what we've just taken off right now. Because I think it's going to be pretty quiet legislatively in the near term, but hopefully there's no major tax things we have to deal with. Again, it's a normal year.

April Walker: But it's always thinking forward, thinking about 2024 presidential election [and] also thinking about sun- setting of TCJA — that's not until the end of 2025. But still just planning ahead, and again, you're talking about communication with clients is always a good thing.

Brandon Lagarde: Making sure we're getting in front of the clients and remind them that bonus depreciation continues to go down and things that are changing and whether there's a fix to the R&D or not and keeping people abreast of whether employee retention credit claim is currently pending because we have a lot of those that we get calls every day from clients asking, “where's our money?” We tell them that it is sitting in Washington DC — so call their congressmen.

But, as always, fun to talk to clients about and end of the year is at time and its extent that we can again have a full conversation with them, not just year-end planning, but also getting ready for the 2024 tax season, and go back to lessons learned from this year, just trying to get information earlier from clients.

If we can get in front of them towards the end of the year and even beginning of the next year and help them clean up their books or help them with organizing their stuff before it gets too late into the tax season, that's a win for everybody. Really, that's going to be our focus in the next two months is really just some of the administrative stuff done. Let's refocus our efforts on those clients that we need to be focused on and work towards making sure over communication is integral to the process.

April Walker: Brandon is a wonderful volunteer for the AICPA. He is the current chair of the Tax Practice Management Committee. He's also a first-year co-chair of the National Tax Conference, so I'd like to talk a little bit about that's upcoming really soon in the next couple of weeks. I heard yesterday, there is an additional promo code which I'll share in the show notes. Brandon, tell us, why should you come to the National Tax Conference besides getting to hang out with you and I?

Brandon Lagarde: That would be the first thing, you get to hang out with April and myself, which is always a fun time. You could visit the O museum.

This will be my sixth year attending and first year as a co-chair and I've been on the planning committee for the last couple of years. And it's always just a great conference I go to. It's in DC, you're around the IRS officials, the IRS Commissioner comes in and talks and this year we have a new Commissioner. So we get to hear from the new Commissioner and his vision for the IRS and with the $80 billion that they have to spend, what's their priorities? We hear from other IRS officials to get an idea of what their priorities are to in the coming year. It's a great place, not only just to learn from other practitioners, but also to learn from the IRS and the government officials that are there and again, you're in DC.

This is a great conference this year and we're hoping to have some good discussions and good content around AI and how it's impacting the tax practice. The committee has spent a lot of time working through that issue and just trying to provide some good information and some good commentary. I heard just this morning that we're going to have a staffer from the Senate to also be a part of the AI discussion because Congress eventually is going to get involved with putting guardrails on artificial intelligence. I know they have a committee that they're working on, talking about what should their role be. And again, what better place to learn about all that in DC.

It's a great conference and I think this year is by the [National] zoo, so we get to go to the zoo as well and go see the pandas.

April Walker: Absolutely, the pandas are leaving. That's one thing I'm doing. If you'd like to join me, give me a shout out, I'm definitely going to the zoo on Sunday.

But thank you for sharing about the [conference]. That's exciting. I always love the sessions and it's one of my favorite. It's one of my favorite times. You've talked about some of the sessions, but do you have any other specific sessions that you're looking forward to attending yourself? Or again, I like to always provide that there are some concurrent sessions happening. If there's a couple of things you would like to see at the same time, you can go back and watch them later. That's a definite benefit. But what are you looking forward to you the most?

Brandon Lagarde: With this conference being at the end of the year, certainly you get the IRS officials and you get to hobnob with them and you get to meet them and get to hear from them.

But also you get some really good year-end things to think about. Well, we're always, as I was saying earlier, the things that keep us up at night is making sure that we're talking to clients about things they need to be doing at the end of the year for tax planning. This conference gives a lot of tips, a lot of things to think about to bring back.

We try to make it very practical — practical sessions that could be applicable to everybody. In this past year, we now are integrating the sophisticated tax planning conference as well, so again, you add a little more estate planning concepts and ideas in addition to just the income tax. It's a really well-rounded tax focused, and again, given time a year is perfect.

You go to a conference, you hear a bunch of things and then two weeks later you forget about what you learned. Here, you can take what you learned and go bring it out to your clients immediately.

Again, it was a very successful tax season for us. All returns are filed that needed to be filed. Everything went as smooth as it possibly could go. Definitely can go smoother, and every year you just have to look and see what went well, what didn't go well.

One closing comment on that, we started doing this years ago was having a debriefing session for [the] tax group and for every level. Staff, managers, senior managers, partners get together and just have a debrief on what went well, what didn't go well. [We] get our admin team together, talk to them about what went well, what didn't go well, because what went well, in my mind, may have gone terribly for somebody else, but we just didn't see it at the time because people are just busy. Really sitting down with the team and just going through and [talking about] what we do here that went well, what went wrong and how can we improve and how can we fix? Because I'll say everyone can improve on something even if it's small. That's the good thing to do for the firm and good thing to do for your practice.

April Walker: Absolutely. Thank you again so much, Brandon, and I appreciate you very much. You've been on this podcast before, so you know what's coming, but on these podcasts, I like to think about us taking a journey together. Like a journey towards a better profession. In doing that, I like to get a glimpse of my guess’ other journeys outside of tax, so what is a trip you'd like to share about? Either a trip you have planned or a trip you have recently been on?

Brandon Lagarde: Yeah. I knew this was coming and I didn't have a thought until you asked this question. My wife and I are celebrating our 20th anniversary this year.

April Walker: Wow, congrats.

Brandon Lagarde: Yes. We were going to do a little bit longer of a trip, but we shortened it. We're going to Las Vegas in a couple of weeks, and been debating on this whole sphere thing and should we go to the U2 concert in it or not, but so far I think we're, we're not. But unless somebody convinces me, otherwise, we're not. But I think I'm just going to stand out in front of the sphere and take pictures of certain things, like everyone does.

April Walker: Yes. I was hoping you were going to go check it out so we could possibly, when we're together in June, next June, we could see if whether it's worth it or not, I don't know. Think about it again.

Brandon Lagarde: Yeah, we're definitely going to go check it out as don't know if we're going to go to anything inside of it. We may just go walk around outside. But Las Vegas is the fun place and we're going to hopefully have some fun, even though I don't gamble.

April Walker: Lots of good shopping and lots of good food.

Brandon Lagarde: Lots of eating.

April Walker: Yes. Happy Anniversary.

Brandon Lagarde: Thank you.

April Walker: 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 friends. You can also find our podcast at the AICPA-CIMA.com/tax and find our other episodes, as well as getting access to resources mentioned during the episode. Thanks everyone 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.

The tax profession offers a myriad of potential paths to a successful, satisfying and rewarding career. On this episode, listen in as Will Weatherford, CPA, Managing Director — Transaction Advisory Services, Forvis, and Teri Hanson, Managing Director — Alvarez & Marsal Tax, LLC, share their perspectives of what it’s like to be in the mergers and acquisitions (M&A) tax niche from both a federal and state perspective.

What you’ll learn in this episode

• A day in the life of an M&A tax professional (0:58)
• Steps when starting an engagement (4:20)
• Red flags and lessons learned (9:24)
• Saving the day (12:02)
• Reflections — past and future (16:31)
• Career drivers (17:14)
• Pages from Will and Teri’s travel journals (21:18)

AICPA resources

• Salt Roadmap and Resource Center — Browse the reference library for the latest guidance and tools to address your state and local tax needs. Navigate to the interactive U.S. map to reference taxes imposed, tax rates, due dates, tax forms and more. View the SALT resources index for additional resources by topic.
• 2022 State Tax Nexus Guide — Learn about state tax nexus including the many types of nexus (affiliate, economic, click-through, cookie, etc.), the physical presence standard and more.
• 2022 State Tax Nexus Checklist — Access a comprehensive checklist about state tax nexus considerations involving income, franchise, sales and use taxes.
• 6 reasons an S corporation wouldn’t need a PLR | Tax Section Odyssey — On this podcast episode, Tony Nitti, CPA, Partner — National Tax, EY discusses Rev. Proc. 2022-19, which provides procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a PLR.
• Wayfair Client Notification Letter — The U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. opens the door for possible economic nexus issues. Use this letter to initiate client planning.

Transcript

April Walker: On today's podcast, listen to hear more about a day in the life of M&A tax professionals.

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 today I'm excited to share our guests.

They are Will Weatherford. He is a Managing Director of Transaction Advisory Services with FORVIS, and Teri Hansen, who's also a Managing Director with Alvarez & Marsal Tax.

Just to kick us off, we hear so much about the CPA pipeline and how students and professionals entering the CPA profession don't see the excitement and don't see — all we do as tax professionals is just crank out tax returns. It might be fun to explore a day in your life, a day in the life of Will and Teri.

They're going to tell us…Will, we'll start out with you. Tell us a little bit about your background, and your role, and M&A tax due diligence in general and then once you're done, Teri, go right ahead.

Will Weatherford: Sure. Thanks, April. I'm a Managing Director with FORVIS as you said, and my job is really to lead our M&A tax engagements. I have a team that works for me, but I'm the one leading it — the one signing off at the end of the day.

From an M&A tax perspective our work really breaks down into what I call the diligence, which I think we're probably start off talking about tax diligence in that, and then the structuring which I think will also get to. But from a tax due diligence perspective, that is really about when one company is buying another part of the process of acquiring…is doing diligence. It's really no different than for people who bought a house where you hire an inspector to come in and look around and see if there's any problems. It's really a similar concept and there'll be various service providers.

I come in, the lawyers come in and do legal due diligence, and maybe other insurance advisor will come in and do an insurance diligence. We are brought in to really review the company's historical tax filings and the positions they have taken and really just understand what the company has done historically from a tax perspective and really to understand if there's any tax liabilities both from a federal-international perspective, which is what I focus on.

We're really looking at the federal income taxes and to the extent that there's any cross-border activity, the foreign taxes, and we have local teams that do that…then, what Teri focuses on, and she'll get into is, the state and local tax perspective, any state taxes — both income and non-income.

The goal is really to go in and get an understanding of the company's tax posture and again, really looking to understand if there's any historical liabilities that would be inherited by a buyer in connection with the acquisition. It's a bit of a fine line to walk because the goal is not to find 9,000 things the company did wrong. Nobody is going to be — given the nature of our tax system — no one's going to be 100% compliant all the time. Just like auditors when we operate with materiality threshold, but we really want to find those material tax exposures that would influence, or impact a person's decision-making, and then we want to understand them.

We want to ring fence what that is, and then also part of it is working to see if there's ways that we can mitigate them either. There may be something that the selling company can do pre-closing to mitigate the issue or if it's something that our client has to deal with post-acquisition. That's what my role from a federal and international perspective.

Teri, I'd love to hear about what you do from a state perspective.

Hanson: We actually do pretty similar things, it's just a slightly different focus.

As you mentioned, I focused on the state and local taxes, that's any state income tax, any non-income tax, that's sales and use, gross receipts, property tax, payroll tax, excise taxes, unclaimed property, though that really technically isn't a tax.

We're also going in, we're looking at companies to make sure we understand their business and their profile, and then we're trying to help our clients make sure they're appropriately protected in the purchase agreement to the extent we do find those material issues.

Walker: Great. Definitely, I think it's pretty obvious why due diligence is so important to a buyer. But maybe we'll start with Teri, maybe talk about the process, the steps you actually go through as you're starting an engagement, and how you actually make this happen.

Hanson: Yeah. The first thing we really do, anytime we kick off a deal, we want to understand as much as we can about the target. Whether it's understanding what kind of structured it is, I'm sure we'll get into that. There's really different tax implications.

If we're working with a C Corporation, or an S Corporation, or a partnership. We need to understand what the income tax profile looks like.

From a state and local perspective it's very important to understand exactly what the company buys and sells. We tried to get all the information that we can to make sure we're advising our clients on the best way to approach something.

Once that process gets kicked off, the next step is really a fact-gathering phase where we're requesting information to review. We're having conversations with the management team — whether it's the CEO or the CFO, the various tax advisers, and understanding exactly what they do, where we think they should be filing, and again, picking that apart to see where we might have some problems.

Walker: I would imagine, especially in the state and local area. I'm sure we'll find lots of problems too, but I feel like I hear so much about trying to figure out where you have nexus and — just from a compliance standpoint — that I would feel like in a due diligence process…I'm sure that is a very challenging adventure in trying to figure out every client is compliant or not.

Hanson: That is an understatement. Yeah.

It's especially for some of these smaller companies with very small tax departments or maybe even non-existent tax departments. It's really challenging to understand every tax and every single state.

Unfortunately, the rules are constantly changing, so we find the taxpayers just have a really difficult time keeping up.

Walker: Now Will, what would you like to add to that from a process standpoint and how might it be the same or how might it be different?

Weatherford: I will say that for us from a federal perspective, understanding the transaction structure is really critical, and there's quite a lot of misinformation out there.

People think, oh, I'm purchasing assets, no tax liabilities come over. That's not true. We spend a lot of time explaining that concept of people, but from my perspective, again, understanding what type of legal entity are we buying?

Are we buying a C corporation, or are we buying a S corporation? If you're buying a C corporation, I have to look at everything, right. All the tax liabilities will come over.

S corporations are very interesting just only because S corporations don't really pay taxes other than in very specific circumstances. But to be in that position, you have to have a valid S selection, and those S selection rules are very arcane, hyper-technical, and we have to spend most of our time really diligently seeing the validity of that election and that involves some candid, very uncomfortable conversations because there's very specific rules around the types of shareholders and things like that.

We have to get on the phone candidly and ask people, hey, what was your marital status? What's your residency status? If they have trusts, we have to ask to see this trust agreements, and a lot of times you read these trust agreements and just all the skeletons. You just follow the closet because you're reading all this stuff and people obviously get very sensitive about that. I can tell you, I've been called about every possible name you can think of. Most of it I can’t repeat on the air unless this is that kind of podcast, but I didn't think it was.

Walker: No, not today unfortunately!

Weatherford: People obviously get very sensitive about this, but that's what we have to do.

You have to definitely need a thick skin to work in M&A because you will run into people who…and candidly you're going in, you're oftentimes dealing with a tax preparer, and you're reviewing their work and they obviously don't want to look bad in front of their client.

But sometimes you just find problems and you find things they've done wrong and you have to have the very uncomfortable conversation because nobody wants to admit they were wrong, particularly if it becomes like an economic point in the deal.

Walker: And, probably professionals that did things wrong, potentially.

Weatherford: Oh yeah. It happens where there's someone who had a big miss or something and we have to raise it and there's implications for them on terms of them having to deal with that on the backend — from a diligence perspective, understanding the entity.

It's a very similar process to what Teri outlined. There was a fact-finding phase, gathering the documents, reviewing the tax returns. We're not performing an audit. Not going in and ticking and tying every single number, but we certainly do look at the material things and we do have to rely quite a bit on what management is telling us.

Obviously, if they're telling us something that's just doesn't reconcile with what we're seeing we need to investigate that. But we do try to make it a collaborative process. I always tell the management teams that were working with — that we understand they have day jobs.

Our intent is not to create a second job for them, and we try to ask for documents and things that are off the shelf, things that can be readily provided. If something is not readily available, we have different ways of working with things. I always tell them I'm like, look guys, if you're working, I'm working. If you're dealing with this 11:00 o'clock at night and you got a question, just text me or whatever because our goal is not to.

Walker: Make things harder. Yeah.

Weatherford: Exactly.

Walker: You brought it up. People loved to hear horror stories, protecting the innocent, of course. Tell us about a big miss you've seen as a business went through this process.

Weatherford: I would say a lot of the big misses, again, there's always the quotidian stuff, I'll say that, which is just very everyday things, it’s not very material.

I would say the big misses are really around prior acquisitions when a company previously went through a transaction and then was held and then our client is acquiring it. And, we generally have to go back and look at that prior acquisition and maybe they structured it to get a step up. Depending on how that waas structure if they did a 338(h)(10) election, that could potentially be invalid.

I run into anti-turning more often than I would like. Especially if some of these very old founder companies that are, maybe they're finally exiting or they're exiting to a sponsor. I've definitely seen some issues where a company thought they've taken these large amortization deductions may go in and we say, hey, this was all subject to anti-churning. It can't amortize any of it. I've dealt with that.

Walker: You are the enemy. Except you can also be the hero. It's not all about that.

Weatherford: It's hard, right. Because with what we do, the best thing that we can tell our client is, hey, the company was doing everything it was supposed to, was complying with the law and paying its taxes.

It's not often that we can come in and find…and be like, hey, look, sometimes we can find an opportunity where we can say, hey, look, the company is not taking advantage of this tax benefit. That does come up occasionally, but more often than not, we're just delivering either basically no news or delivering some bad news.

Diligence is…it's a necessary process, but we'll get into the structuring aspect, but I think the structuring is more where we I think deliver the real value. Not that diligence isn't important process, but I think the real value to a lot of our clients is really around the structuring aspect of it.

Walker: Perfect. Teri, I'II love if you have a horror story you'd like to share.

Hanson: I find on the state and local tax side, sales tax is almost an issue on every single deal. And it's after the Supreme Court, Wayfair Supreme Court back in 2018, the sales tax rules just changed so drastically and it didn't change consistently, unfortunately.

Every single state has got some different type of qualification as far as when you need to file. What you're selling is potentially taxable or not taxable. We just find that it's really difficult for taxpayers to stay on top of that with the inconsistencies.

Once you start adding on pretty significant amounts of revenue that are going into these various states, the exposures add up very quickly. As Will said, my favorite deal is when we don't find anything at all. But unfortunately, it's just not the case; sales tax seems to bear it's ugly head more often than not.

Walker: Circling back to you something you said, Will. Let's talk about when you can be the hero. Let's talk about when you can play a really important role as an adviser in M&A deals.

Weatherford: I think part of our goal is one with the diligence like we've discussed. But and again, that's just if we find issues, we have to raise them.

I think part of where we can add value is really, I think Teri said this earlier, is that helping our clients understand any exposures and how that can be mitigated. Sometimes the target can do something prior to the closing to clean up an issue and then that way it's just not dealt with.

Otherwise, it's just about framing issues and ring-fencing them and then being able to appropriately addressthat in the agreement in terms of just contractual protections. That's, I think, one way that we can add value there to our clients is just really helping them understand these issues and just making sure that they're protected and that there's not any surprises later.

Then I think the other part is the structuring element, which I've alluded to a few times.

That's really all the work we do outside of diligence. Again, I think that's more we're advising on the transaction structure and telling our clients, hey, if you structure it this way, you can get a step-up in the transaction and that's a real cash tax benefit to a lot of our clients.

Part of it is working with the attorneys to put together the transaction structure and the steps. Lot of times we're putting together PowerPoint decks and laying out each step and a lot of circles and triangles and squares and things like that, and arrows and things are moving around.

I think to a lot of non-tax people, it doesn't make a lot of sense, but it definitely makes sense to tax people and the lawyers and whatnot. I think that's one area, and we can do that and it's really all the things around that.

We'll review the purchase agreement, and provide comments on that. We work really closely with a lot of tax attorneys and very collaboratively with them in terms of helping them understand. Because they're very obviously…their main focus is getting the purchase agreement drafted correctly, but they need our input in terms of the issues that we're seeing and whatnot. We work very closely with the attorneys.

A lot of times there's a lot of modeling involved. This job is very…you need to be pretty decent with Excel, we do a lot of modeling. A lot of our clients really liked the modeling and that's I think, a big value driver for them in terms of helping them to understand what the go-forward tax rate is or what's going to be their step-up or what taxes are they going to pay in the future.

That's another area where we can add a lot of values to help our clients see the projections and what this is going to look like going forward. Then really just everything around that structuring is just the all encompassing everything other than diligence and we just get called upon to do.

Really a lot of things end up in taxes’ wheelhouse, even though it may not necessarily be tax-related, as Teri said.

There's some things that are like unclaimed property is not really a tax, but we just end up having to deal with it. There's a lot of things that we just tell pile onto our basket that we have to help address and tax for whatever reason — always just seems to go down to the wire on some of these deals. We're working right until the very end to try to get these deals closed. And, tax often becomes, once they got through some of the other business-level issues, people become very focused on the taxes.

Walker: You always hear or I feel like I always hear, “Don't let the tail wag the dog.” But it seems [tax] definitely is a huge part. You all play a really important role.

Weatherford: I think that's actually a really important point that you raise.

It's just that I know I've been told throughout my career that don't change the business deal and our job is really to take the business deal and implement it. However, what's been agreed to as commercial matter and make the tax framework work within that.

I think one of the worst things you can do as an M&A professional is to have to change the business deal because of something tax-related, unless that was contemplated beforehand. You just don't want to change that, but everyone just this is the business deal, this is what was agreed to and then people would react very negatively if a tax issue was changing the business deal in some way that affects one party or the other.

I think the difference between a very successful M&A professional and one who's maybe not so successful as one who really understands that you need to implement the business deal and needed to implement what was agreed to commercially. That needs to wag the tax tail and not the tax tail wagging the business deal, dog analogy makes any sense whatsoever?

Walker: I was struggling with it, too! Teri, do you have anything to add on that, or what role you can play helping businesses?

Tei Hanson: One of the other areas that we really add a lot of value is when our clients are selling companies. We're going to try to help them get the absolute best deal price that they can.

Whether that's identifying issues in advance and helping them clean that up before the company goes to market, or making sure that we fully appreciate the issues that we uncover and we can put a positive spin on that before potential buyers come in and ask for some pretty big concessions on the exit strategy.

Walker: I feel like 2022 was like a boom of M&A activity, not sure where we are in 2023 and what you guys are thinking going forward.

Hanson: For us, it seems like the markets, but a little bit softer in the first half of the year. Health care has been pretty consistent since COVID, which obviously makes a little bit of sense.

But we're seeing a very big uptick in our bankruptcy work right now. That said, based on conversations we've been having with our clients and what we're seeing as far as new deals pop up, it seems like the back half of the year is probably going to be pretty busy compared to the prior years.

Weatherford: I would say it's pretty consistent. 2023 has been a little choppy so far, but we're extremely busy right now, which is a high-class problem to have, obviously.

Walker: It is. In closing, both of you, I'd love for you to share what keeps you energized and motivated to stay in this business. I'm sure you have some hectic times when deals are wrapping up. Share what you love about your job. Hopefully, you're having a good day and it’s good day to share that.

Weatherford: For me, what keeps me coming back to M&A tax is just that you have to have a very broad knowledge and in working in M&A tax, you just gain a very broad knowledge of tech because you work on enough deals.

You've seen everything after awhile and it's just amazing the most obscure topic can suddenly rise to the forefront and you're called upon to be the expert on it. That to me is always very interesting and I always tell people that M&A tax, we're the tip of the spear because we're the ones who get in first for a company and we have to go through everything, we see everything and then if that company becomes a compliance client of our firm, we're having to explain it all to the compliance team later on.

We really are the first people to get in and see what's going on and particularly in deligence for me, I think it's very interesting to go in and just look at what different companies have been doing and the positions they'd been taking and you really get a sense for what's going on in the market in terms of the overall tax.

Then, like I said from the structuring perspective, to me, I think someone I used to work with said that with structuring you're making history basically, and I like that because you really are getting in there and getting to put together a transaction structure and it's really interesting just going through and seeing all the moving pieces to that.

The last piece I really like is we work with a lot of different attorneys. For me, I work with our state and local team at FORVIS. We work very closely with them. We need their input. For example, in structuring, we need the state and local input. I think it was Peter Riley, the guy who writes for Forbes, he said that a plan that doesn't include state and local tax isn't much of a plan and that really is true and frankly with the way the state taxes are going, it's important to get that kind of input.

Hanson: From my perspective, I can honestly say that I'm never bored.

I think you've alluded to this at the very beginning, but tax compliance as tax compliance, it can really only be so exciting.

With M&A, I feel challenged every single day. Target companies that just completely run the gamut as far as industries and types of businesses and it's really impossible to know everything about every kind of tax. I feel that I'm constantly learning new things. I never know exactly what my day is going to entail and for me that keeps it very interesting.

My first month doing M&A, I worked on a crime scene cleanup company and a roof manufacturer and a healthcare clinic and a restaurant tour. You just see so many different things and I really don't see many other areas in tax or accounting in general where you get that broad range.

But I think the second thing, I think that really keeps me coming back every day, it's my team. M&A really provides an opportunity to work very closely with a large number of individuals. Like we side, we work very closely with our federal colleagues and with our financial colleagues and the team of people who are doing the M&A itself and it's very collaborative and it just it makes it fun.

Weatherford: I think Teri makes a good point. The people that we work with, I've worked with some very highly intelligent, very smart people over the years. To me, I really like working for people who can teach me a lot and so that's the opportunity I get within tax.

You work with other people from different law firms and things and a lot of very smart people there. It's a very small community. I always tell the people working for you, I'm like, doesn't pay to be (unkind) in M&A tax because it's just such a small field, you're going to run into people after awhile. You got to be nice to everybody.

Walker: I say that, in general, I think the profession is small and I've told people through my whole career — people will circle back in a way that you cannot even imagine, so it does not pay to blow the doors off.

Weatherford: I'll tell you, it's even smaller in M&A tax. You'd be surprised how often you run into the same people over and over again and some of them are really fun to work with and very smart and they have great perspective on things and some of them you just got to find a way to work with them.

Walker: There you go. That is like life lessons. I have a fun question as we're wrapping up. The title of this podcast is Tax Section Odyssey, so I like to think of us as taking a journey toward a better profession. When doing so, I like to get a glimpse of my guest's other journeys outside tax.

Sometimes those journeys probably add to my bucket list. Teri, share a page from your travel journal or bucket list place you would like to go?

Hanson: That is a good question. I would really like to go back to South Africa. I was there a long time ago and I absolutely love it.

Walker: Nice. What about you, Will?

Weatherford: Well, people know me, I really like wine and I really enjoy going to the Willamette Valley right outside Portland in Oregon and they have some fantastic pinot noir there and try to get out there at least once a year or so and to me, it's just like Napa Valley, but 25 years ago. So it's not quite as touristy and commercial.

Walker: I've never been to Oregon and it's been on the list for so many years anyway. I almost always add something to my list when I'm doing these podcasts.

Thank you so much, Will and Teri. This has been fun. I hope everybody enjoyed listening.

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 our podcast at the aicpa-cima.com/tax, and check out all of our other Odyssey episodes and get access to the resources mentioned. 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.

On Sept. 14, 2023, in release IR-2023-169, the IRS suspended the processing of new ERC claims to combat the prevalent fraud occurring. These measures will help to protect small businesses and aim to stop fraud by promoters of ERC mills.

 In this episode, Kris Esposito, Director — Tax Policy & Advocacy, AICPA & CIMA, joins April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, to discuss this important news development and break down the details of the announcement.

What you’ll learn in this episode

• Highlights of the announcement (1:24)
• How to find if submitted claims have been processed (3:53)
• When will recently submitted claims be processed? (4:41)
• Number of claims currently in the audit process (5:45)
• Client talking points (6:22)
• Available resources (7:38)
• Kris’ final thoughts (9:07)

AICPA resources

• ERC guidance and resources — The rules to be eligible to take this refundable payroll tax credit are complex. This AICPA resource library will help you understand both the retroactive 2020 credit and the 2021 credit.
• Employee Retention Credit (ERC): Fact or Fiction? — Use this guide to educate yourself and others on common misconceptions surrounding the ERC.
• Employee Retention Credit Decision Tree — Download the ERC decision tree to help you with various decision points when working with clients to protect yourself/your firm from significant risk.

IRS resources

• IR-2023-169 — IRS news release on Sept. 14, 2023, ordering the immediate stop to new ERC claim processing.
• IRS ERC resource center — IRS hub for ERC information, including links to guidance, FAQs and the latest news.
• Employee Retention Credit Eligibility Checklist: Help understanding this complex credit — This IRS question-and-answer chart is used to help taxpayers figure out if they may be eligible for the credit. Use this chart if you are considering claiming the credit or have already submitted a claim to the IRS.

Transcript

April Walker: Hello everyone and welcome to this special edition collaboration between the JofA podcast and the AICPA's Tax Section Odyssey podcast. I'm April Walker, host of the Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing profession.

Today I'm here with Kris Esposito. She's a Director on the AICPA's Tax Policy & Advocacy team. And we're recording this on Thursday, September the 14th.

You have likely seen some breaking news from the IRS about the employee retention credit. We wanted to hop on here and record, tell you the information we know, and let you know what our next steps are.

We've been really closely monitoring this evolving issue of third-party ERC promoters over the past couple of years. We definitely been advocating to Treasury and the IRS. We've also been providing resources throughout the whole time of ERC since its inception with the CARES Act in March of 2020 to assist tax practitioners as well as taxpayers.

Today, the IRS announced its latest initiative to support small businesses. Kris, I thought maybe you could walk us through the highlights of that announcement.

Kris Esposito: Sure. I'm happy to.

Well, due to the big surge of ERC claims and concerns from tax professionals, including the AICPA, and the aggressive marketing tactics by third parties, the IRS announced today a multi-pronged approach to taper this ERC fraud.

They're immediately pausing the processing of additional claims. They said that will go at least through the end of the year. After September 14th, today, there will be no more processing of new claims.

They will be further scrutinizing your ERC claims that they already have received and not processed yet. Then they're also going to offer taxpayers an opportunity to withdraw claims that have not been paid out and that the taxpayer feels they may have done erroneously. So they're offering that to taxpayers.

There have been about 600,000 new claims that the IRS has received, and are awaiting processing. That 600,000, those folks, they're going to have the opportunity to withdraw their claims if they feel that they have put them in erroneously.

But for those folks who have actually willfully filed fraudulent claims or if they conspired to file a fraudulent claim, withdrawing your claim is not going to exempt you from potential criminal investigation and prosecution.

But the IRS has actually finalizing details on this withdrawal option. We don't have all the details yet, but there will be this option, it's just the IRS needs to finalize the fine print.

Then they're also going to offer taxpayers a settlement process to come forward for claims that have already been processed, but may have been erroneous, but the taxpayer has received the funds. Again, IRS is working out some details and they're going to come out with that program soon as well.

Walker: I think they said later in the fall, so we'll be monitoring that obviously.

The opportunity to withdraw should come out soon, very soon. They will provide the details there. I will share that as well as the settlement process.

You might have the question that I had when I saw this and was thinking about this — "Okay. I know I just helped my client file a claim for ERC. It's probably within that 600,000. How do I know if the claim has been processed or not?"

Probably as they have been slowing down, they've been saying that for the last couple of months that they've been slowing down processes. But our best advice is if you're in that gray area where maybe it's been processed, maybe it hasn't, the best advice we have is to call the IRS and ask [them the status] as you're walking through it with your clients on what your next steps are.

Alright Kris, what information did they provide about the timing? We’ve talked about how they're going to be slower, but what did they provided about when you can expect those claims to be processed, those 600,000?

Esposito: They did say the 600,000 that were recently received, they're going to be reviewed more intensely. They're going to be put under the microscope. They [IRS] target 90 days [to process ] new claims. I know they don't hit that target all the time. But they're now targeting 180 days.

Because they're thinking that [most of] the 600,000 don't qualify for the credit. They are really going to be looking at them, very closely and taking a longer time to do that. They may even ask taxpayers for more information so it's going to be a different ballgame now.

Walker: But that's good from a communication standpoint to your clients, if they are a part of that group that has filed a claim. In this announcement, did the IRS say anything about how many claims are in the process of audit or anything around that topic?

Esposito: Yeah, they have been auditing ERC and keep ramping up the audits of ERC because of the fraud. They did say they have thousands of claims in the audit process. They also have hundreds of criminal cases going on. They are definitely auditing the ERC and if a lot of these 600,000 are not withdrawn, a lot of them are going to go through audit as well.

Walker: As our listeners are trying to absorb this notice and thinking about [it] with their clients, about this announcement, let's talk through a few good talking points for them.

Esposito: You've wanted to throughout this process, have been in contact with your clients about the ERC. Whether it's because they qualified for the credit or they've been contacted by a third party provider, trying to influence them to apply for the credit.

As you're hearing about this announcement, you want to remind your clients of your past discussions and assure them that you're available for them, you can assist them. Whether that assistance is with support during an audit of an already processed claim, or help with the decision to withdraw their claim or to participate in a settlement agreement once those details emerge.

If they have claims that were filed erroneously, and if they filed an ERC claim that hasn't been paid out and they believe it's legitimate, you just want to let them know that, "Hey, you're processing times could be a lot slower and it may take even more time for them to get the money."

Walker: Just definitely another good opportunity to remind them that you're here to help advise them every step of the way. You are here and available. Were there any other resources that the IRS provided along with this announcement?

Esposito: Yeah. They sent out a decision tree, which gives businesses a very broad overview of when a business qualifies. Then they also have red flags associated with third party providers. If you want to go through this decision tree to figure out, "Do I really qualify or not?" —that's what that resource is there for.

Walker: I just wanted to highlight, we've talked about these on some other episodes, and we talked about them on Town Hall. We've talked about our resources the AICPA have been putting together throughout these years of ERC. We've actually opened up…it's called employee retention credit fact or fiction, which is another good companion piece to the IRS [resource]. I don't know if they call it a decision tree, but it is like a decision tree, where it's walking through the checklist of how you qualify.

But I think the [ERC] fact or fiction is another nice resource that you can help a client go, "Oh, wait a minute. This is what they told me about how I qualify and there's this resource that tells me that I need to think again."

We will definitely put links to those resources in the show notes. We have other podcasts on this topic and we'll put those in there. Take a look if that's something you're trying to find more about.

We wanted to have a quick episode today, but I'd love for you if you wanted to share anything that's on your mind, Kris, as we wrap up episode.

Esposito: Well, for years the AICPA has been warning CPAs and taxpayers, as well as the IRS and Treasury of these dishonest [ERC] credit mills, attempting to take advantage of the ERC and businesses. Because we wanted to put a stop to this or put a pause on this. We appreciate that the IRS is sending this strong message with this announcement, to these unethical credit promoters.

The announcement by the IRS today, it's made clear that meaningful relief is also going to be made available to small businesses that have been acting in good faith. I think those are important messages from the IRS. I think they did a good job with their latest announcements.

Walker: Thank you so much, Kris, for popping on here with me to record for this breaking news episode. We appreciate your expertise. This is definitely not the last you will hear of us on this issue. As we know more, we will definitely share more. Thank you for listening.

Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed specially for CPA tax practitioners like you in mind. This is a podcast from AICPA & 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. You can also find us at the aicpa-cima.com/tax and check out our other Odyssey episodes and get access to all the resources mentioned, during this episode. Thank you 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, Rudy Rudolph, Executive AICPA Risk Advisor — AON, and April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, discuss how data breaches can cause acute and lasting issues to victims.

Small businesses are often easy targets for cyber criminals because they typically have less security in place than larger companies. A customized cybersecurity insurance policy can help mitigate risks and provide coverage in an evolving market to protect your organization.

What you’ll learn in this episode

• Questions companies need to ask about cyber security insurance (0:59)
• The most common types of cyber attacks (3:56)
• Usual misconceptions about cybersecurity (6:14)
• Types of costs that cyber insurance covers (8:37)
•  Items not generally covered by cybersecurity insurance (11:12)
• Insurance consequences of not following your own cybersecurity policies (13:27)
• Rudy’s final thoughts (15:35)
• A page from Rudy’s travel journal (17:23)

AICPA resources

• Best practices for data security and cybersecurity incident mitigation — Learn about general, preventative and reactive data security tips to implement to keep data protected from identity theft.
• Cyber insurance solutions | AON — AON’s brokerage team understands the risks and how to arrange coverage in an evolving market. It’s not one-size-fits-all, so AON teams with you to create a custom cyber insurance policy fit for your organization.  
• Cybersecurity Lab — Building a nimble cybersecurity response plan | Tax Section Odyssey — In this podcast, Ashley Grover, Cybersecurity Threat Intelligence Analyst — Sylint, discusses how the cyber threat landscape continues to change rapidly. Keeping up with the latest cybersecurity trends is vital to not fall victim to attacks and data theft.
• Gramm-Leach-Bliley Act (GLBA) Written Information Security Plan Template — The GLBA Act requires financial institutions to have a written information security plan. Use this template to document your firm’s policies.
• Identity Theft Checklist | Tax Identity Theft Toolkit — Provide this checklist to clients to help them appropriately and efficiently address identity theft issues and access additional resources.

Transcript

April Walker: On today's podcast, listen to hear more about cybersecurity insurance for CPA firms.

Hi everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all the things tax facing the profession. I am April Walker, a lead manager from the Tax Section and I'm here today with Rudy Rudolph.

Rudy is an executive risk adviser with AON and his role is helping to educate CPA firms on insurance coverage available through AON's AICPA program. Since that's his role, that's what we're going to do today.

Specifically, we're going to delve into cyber insurance. What you need to know if you or your firm don't have this type of coverage or if you have it and you really want to understand what kind of coverage you have or know what questions to ask to be able to get more information about that.

Rudy, let's start off with a company or a CPA firm that doesn't have this type of insurance. What questions will they have to answer during the application process for cyber insurance?

Rudy Rudolph: One of the things I've learned is one of the great parts of the cyber application process is as much as it's filling out an application, it's also almost like a little checklist of helping the firm think of things that they want to implement or should be implementing or even just to have in mind just in general with how they deal with their own internal networks and systems. That's a great thing to look at the cyber application as is.

It's also a guide to help you consider what should be in place, almost like a little checklist. But a lot of the things that they can expect to be answering is mostly encryption and how things are protected within their network and system.

I think most people sometimes tend to overthink the encryption word and think it’s some sort of involved process when really it's just, can someone off the street walking into your office and access information without providing any type of login credentials and password, especially with thumb drives and emails and even external hard drives.

But having those protected with passwords and encryptions, and it's easy to do, that they can expect to see on a cyber application a lot of things making sure that there's backups done weekly or however many and then also if they're retaining any type of payment card information or PCI or personally identifiable information, or PII, as well as the types of transactions, estimate number of transactions in any given year are some of the big things to consider, have in mind, and that they'll see and/or be answering on those applications.

April Walker: I like the way you say it's a checklist of things that you should already be thinking about. You have probably heard me talk on this podcast before and we'll probably talk about it again about security plans and what are the requirements are for CPA firms, and it would seem like that those would go hand in hand.

There are requirements to have a written information security plan. Hopefully you know that, if you don't, that's a takeaway from listing today. But as you're going through that plan, I would think that would be important information you're going to have as you're going through that application.

This is just more of a curiosity question, but I know that until you're hurt, you think it can't happen to you. But then what you do, it's a very traumatic event. Can you talk to us a little bit about what type of cyber attacks are the most common, specifically for CPA firms as that's our topic for today.

Rudy Rudolph: Absolutely. Especially since the COVID pandemic, it seemed like computer or cyber criminals who had nothing better to do, but to sit around and think of different ways to get easy money or an access.

The biggest thing since the pandemic that's been on the rise has been ransomware attacks, which are in part more broadly categorized and they fall under the malware umbrella, I guess if you would, for cyber attacks. Basically, just hacking into or getting into accounting firms, networks and data and basically holding that information ransom until they pay a specified amount.

When I think a lot of accounting firms that are under the mindset that they're too small to be attacked or come under a cyber attack when really cybercriminals target smaller firms because they believe that they're under that mindset that [they] are too small to and maybe don't have the resources and the security measures in place to keep them out.

It's actually reported that it's 30% of all cyber attacks are focused on attacking small businesses because of that lack of cybersecurity measures. Malware and more specifically ransomware have been the number one cyberattacks especially since the COVID pandemic.

April Walker: I feel like I've heard some horror stories of those happening to firms and it always seems to happen March the 3rd or something like that, sometime that’s not very convenient for when they're very busy. It's definitely something to be concerned about.

Let's talk about misconceptions. What do you hear that people do not have right about cybersecurity, either people who have coverage or people who don't think they need coverage?

Rudy Rudolph: The two biggest things I always hear when talking to firms is either one, are not big enough, I'm just a smaller shop that wouldn't have to worry about this now and come after me. That's one of the biggest misconceptions and really they're probably one of the bigger targets, actually, because of the potential lower security measures they have in place.

They have so much data and records or their clients that they're preparing tax returns for and someone could get that information and that's easy identity theft, right there. You can get X amount of people, however many clients you have, you can get all of their names, date of birth, social security numbers, addresses. Right then and there, that's a huge risk and misconception that some of the smallest firms have.

The second is a lot of firms always come to me, we don't have anything, we don't house any data or have any storage software on-premises. Everything is done third-party by Cloud. They handle that, so I don't really need to worry about it, which is not the case.

They may be hosting your information and everything, but if that company gets hacked, now what do you do? If you can't get into anything and they're down and running, what happens then? Even if you are having a third party post your information, you should always have some sort of business continuity and disaster recovery plan in place for that type of scenario.

Keep coming back to COVID. No one saw that coming. Now, we have the hindsight of, if something like this were to happen, now what do we do? I think of it like that, having a plan in place if the unthinkable were to happen, what are you going to do? You can't just sit there like a sitting duck and wait for something. You should have or at least I think you would want to have some sort of plan in place for contingency.

April Walker: Makes a lot of sense. To find out a little bit more about cyber insurance and how it works, I know there's no way to describe every policy. Every policy is different as you're working with a firm, but let's talk generally about what types of costs that cyber insurance does cover and then almost more importantly, I think for people to hear is what costs are not covered.

Rudy Rudolph: The first and foremost, what the cyber policies and cyber insurance covers is identifying any potentially affected individuals that may be affected or impacted by the breach of your network or system, and also the notification to those affected and credit monitoring for them for the next year.

Those are all required by every state. Each state has different regulations, but those are required by all states. If you don't have an insurance policy in place, you're going to have to pay those costs out-of-pocket regardless because it's a state mandate and requirement to provide for it in the event of a breach. I think that's the biggest thing that the policies cover for most firms.

The second biggest is the forensic analysis and identifying that breach, how it occurred and identifying that and making sure that that doesn't happen again. It also provides coverage for data restoration, getting your network backup and running to the condition it was in prior to any type of breach or a hack.

Then depending on the policy, you can opt in for this, sometimes it's generally in a policy right off the bat, but business income or business interruption, so loss of revenue. I think about 200-300 days on average to identify and contain a cyber breach.

Hopefully, they don't get there, but in that time period without your network, you're not really able to operate as you normally would, as if you were able to access all those files, your internet, your emails, getting stuff out to clients and everything like that. That's costing you. The policies tend to cover the cost of that. I think most of them have some calculation to determine that number until you're back up and running.

April Walker: Got you. Then can you think of anything that is specifically not covered that you can think of?

Rudy Rudolph: The biggest thing that we've actually been dealing with for the past few years has been social engineering. More importantly, when someone, we always refer to them as bad actors, using email address that is made to look like either a bank or one of the accounting firms email, but it's really not.

The easiest way to do this is sometimes they'll use an uppercase I to replace an L just as an example in an email address. Then if they're posing as a bank, they'll email the firm. If they're posing as the firm, they'll email client saying, “Hey, you didn't send this amount of money or payment for the services”, whatever it may be, and asks you to send payment to a specified account.

A lot of the times these aren't covered by cyber policies unless you have the specific endorsement coverage that covers four types of social engineering, it not being a breach, there's no breach that took place and the bad actor was using a legitimate email address.

Now, while it wasn't the firm's, it was still a legitimate email address because they changed a letter or something in there to look like the firm or the bank's email address. There was again, no breach, no wrongdoing, so some cyber policies may not be able to provide coverage in that type of scenario.

One of the big things that has come out of this is specific endorsements to provide coverage for social engineering or having firms also consider looking into separate crime coverage policies to cover any of those gray areas where cyber policy may or may not provide coverage for.

April Walker: What about this scenario? I'm a firm, I have a security policy, I mostly abide by it, but I don't follow it to the letter. Is that a scenario where you might have trouble having your insurance claim paid?

Rudy Rudolph: It's definitely possible.

I highly recommend when you're going through either the renewal process or if you're getting a policy, a quote for a policy for the first time, definitely talking with your agent, your underwriter carrier, whoever you're dealing with, and making sure that you understand the policy requirements in terms of what are some of the standard requirements that you require your insureds to have in place.

Usually they have either guides or expected basic security measures that they can send over that they expect their firms they have in place and implement it to ensure that they can provide coverage. Sometimes if you don't meet or don't have any of those standards in place, they could potentially deny coverage saying, hey, we sent you these standards so that you needed to have in place to be insured by us, because of this, you don't have these in place. This claim can't be covered because there was a certain level of expectation where we insured you that you would have in place and by not abiding by that, you're essentially voiding the coverage. Again, it depends.

Each coverage or each policy is different. I would definitely recommend talking that through with your agent, your carrier, your underwriter to make sure that you're one, aware of any type of certain standards that you're required to have in place or should have in place, and making sure that you're meeting those requirements on a regular basis and reviewing that with them to make sure you're in compliance.

April Walker: Perfect. Rudy, can you think of anything we haven't covered that you would like to make sure our listeners are aware of as they are considering and evaluating cyber insurance?

Rudy Rudolph: This day and age, again, I feel like I'm being a dead horse and they keep coming back to the post-COVID reference, but everything has gone remote.

Everyone's being able to work remote now, businesses that we didn't think would be be able to operate remotely were forced to change the way the entire world views working and how we operate nowadays and everything to an extent is relying on computers technology, being able to access information through a computer. I think you'd be naive to, one, not consider having this coverage in places of business, and two, not going forward and having at least some cyber coverage in place.

The amount of cyber attacks have gone up exponentially since the pandemic, because everything has been forced to move to some hybrid or a digital format. I think this is one of those policies that is almost standard requirement for businesses moving forward these days, and it's definitely one thing to keep in the back of your mind is everything is still continuing to transition more and more to the cyber world as we operate, communicate everything like that.

I think it's naive to think that this coverage is unnecessary.

April Walker: Those are great thoughts and great closing. But as we close on this podcasts, I like to think about us taking a journey together towards a better profession. As we're learning more, we can do better. But in doing that, I like to get a glimpse of my guest other journeys outside of the tax world.

Really I'd love for you to share a page from your travel journal, maybe a bucket lists, trip, you have, what you got for me?

Rudy Rudolph: I'm a big golf fan and every year with the Masters Tournament and the Open Championship, there's always a ticket lottery that you can enter to potentially get an opportunity to get tickets to one of them. They don't just sell them like a normal sporting event, they're so exclusive.

Actually just got an email the other day that I won the ticket lotteries for the Open Championship in Scotland next July.

April Walker: Wow, that's cool.

Rudy Rudolph: Pretty excited, just to finalize the ticket purchase. So I'll be headed now to Scotland next year for the Open Championship, and it's to be about there.

April Walker: I love it. The US Open has been here or near here, North Carolina. It's been in Pinehurst a couple of times and I was able to get tickets somehow, not through the lottery, but Scotland sounds like an amazing place to watch golf and just to visit. I'm looking forward to hearing more about that.

Thank you so much Rudy for giving people some food for thought on this really important topic. 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 this wherever you happen to 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 feel free to share with a like-minded friends. You can also find us at aicpa-cima.com/tax, and find our other episodes and also get access to the resources mentioned during the episode. Thank you so much for listening.

This content is designed to provide institute of information, this respect to the subject matter covered and does not represent an official opinion or position of the AICPA, the Association or CIMA. It is provided with the understanding that they are not engaged in offering legal accounting or other professional services. If such advice or expert assistance is required, the services of a competent professional person should be sought. The AICPA, the Association and CIMA make no representations, warranties, or guarantees as to and assume no responsibility for the content or application of the material contained herein, and especially disclaim all liability for any damages arising out of the use of reference to or reliance on such material.

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, Mike Whitmore, CPA, Shareholder — HMA CPA, a member of the AICPA Tax Practice Management Committee, chats with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, about a checklist of items to consider when in the market for acquiring a CPA firm. He highlights red flags to look out for and green lights that signal a firm is a “go” for acquisition, and what due diligence is needed to ensure the perfect fit.

What you’ll learn in this episode

• The most crucial due diligence aspect when shopping for a CPA firm (2:08)
• Ideal time commitment you should dedicate to the due diligence stage (7:52)
• Red flags to watch out for (9:43)
• Green lights to follow (13:00)
• Lessons learned and a real-life example (16:07)
• A page from Mike’s travel journal (18:54)

AICPA resources

• Practice Management & Professional Standards — The AICPA Tax Section provides the guidance and tools you need to manage a successful tax practice and maintain the highest level of ethical standards in tax.

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 joint episode, Neil Amato, host of the Journal of Accountancy podcast and Melanie Lauridsen, VP of AICPA Tax Policy and Advocacy discuss two recent Supreme Court decisions.

The Supreme Court ruling in Loper Bright Enterprises v. Raimondo overturned a 40-year-old precedent of deference referred to as the Chevron doctrine, affecting future rulemaking by eliminating the need for judges to defer to agency interpretations of ambiguous statutes. In Corner Post, Inc. v. Board of Governors of the Federal Reserve System, the Supreme Court ruled to alter the statute of limitations for challenging regulations, starting the clock when a plaintiff is injured rather than when the regulation is enforced.

These decisions introduce significant uncertainty for the accounting profession, particularly regarding IRS regulations and long-standing rules and emphasize the need for CPAs to stay informed and adaptable as the implications of these rulings unfold.

 AICPA Resources

Melancon: Supreme Court decisions are ‘big deal’ for tax pros, The Tax Adviser, Aug. 1, 2024

Supreme Court overrules 40-year-old Chevron doctrine, The Tax Adviser, June 28, 2024

Supreme Court decision on Chevron doctrine will affect tax pros, Journal of Accountancy, June 24, 2024

For a full transcript of the episode, see  Tax Section Odyssey on the AICPA & CIMA website. 

In this episode two members of the AICPA Virtual Currency and Digital Assets Tax Task Force (VCDATTF), Nik Fahrer, CPA, Senior Manager, National Tax Professional Standards Group — FORVIS, and Robert Tobey, CPA, Partner — REID CPAs, LLP, share their expertise with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, on how to vet potential clients with digital asset activities, including questions to ask, as well as how to gain more expertise in this evolving field.

What you’ll learn in this episode

• Expertise tax practitioners need to be proficient in the digital asset field (0:55)
• Best places and ways to gain digital asset tax expertise (3:00)
• Examples of processes and procedures to set in place before accepting a client with digital asset activities (5:59)
• Record keeping responsibilities (14:05)
• Red flags (15:04)
• Highlights from Rev. Rul. 2023-14 (16:41)
• Current projects of the VCDATTF (18:36)
• Final thoughts (20:48)

Related resources

• Frequently asked questions on virtual currency transactions — IRS webpage explaining virtual currency questions and answers.

AICPA resources

• Digital assets and virtual currency tax guidance and resources — Sharpen your tax knowledge on digital assets and understand the tax complexities and strategies involved with virtual currency and cryptocurrency. This hub is your go-to library for AICPA guidance and resources as well as current legislative and IRS initiatives and projects the VCDATTF is monitoring.
• 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.
• Rev. Rul. 2023-14 — The ruling provides that cash-method taxpayers who stake cryptocurrency native to a proof-of-stake blockchain and receive additional units of cryptocurrency when validation occurs (i.e., validation rewards) must include the fair market value (FMV) of proof-of-stake validation rewards in their gross income for the tax year in which they gain dominion and control over the validation rewards.
• AICPA Comments on the IRS Draft 2023 Forms 1040, 1065, 1120, and 1120-S Digital Asset Question — The AICPA submitted comments on the digital asset question that is first appearing on the draft 2023 Forms 1065, U.S. Return of Partnership Income (version dated June 23, 2023); 1120, U.S. Corporation Income Tax Return (version dated June 2, 2023); and 1120-S, U.S. Income Tax Return for an S Corporation (version dated June 22, 2023). The AICPA also commented on the draft 2023 Form 1040, U.S. Individual Income Tax Return (version dated June 22, 2023), digital asset question.
• AICPA Comments on Non-Fungible Tokens – Notice 2023-27 — The AICPA submitted comments on Notice 2023-27 on the treatment of certain non-fungible tokens (NFTs) as collectibles. The AICPA is requesting that Treasury and the IRS provide further guidance on the issues suggested in our comments.

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 Robert Tobey and Nik Fahrer to delve into how to interact with clients and potential clients that may have digital asset activity.

Nik and Robert are on the AICPA's Virtual Currency and Digital Assets Tax Taskforce so I thought they would be perfect to share some thoughts with us today.

Digital assets, virtual currency, there's so many different terms of art here. Cryptocurrency. It is such a unique and fast-moving field. Kick us off with what kind of expertise is needed to be able to be proficient in this area. Proficient is maybe a hard word, but at least to be able to practice in this area.

Robert Tobey: First of all, you have to have a general understanding of the different types of digital assets that are out there. Right now, in particular, practitioners are probably dealing mostly with cryptocurrency, miners, traders, stakers, and non-fungible tokens which indicate a specific ownership interest (it's like a derivative of some type of underlying asset).

You need to have an understanding of what each type of these assets are. Since the tax code treats them as property from each one of these activities. If you are a miner, that's generally self-employment income. If you're an investor, that is just buying and selling, that's long or short-term capital gains.

If it's NFTs, that's treated generally as a collectible and that's taxed at 28% if it has a gain. That is ordinary income also, but the timing of recognizing that is still up for debate.

Really unless you have an understanding, my feeling is if a client comes to you or if you have these types of assets, you should seek out council, an accountant, a lawyer that understands these types of assets.

If you're a practitioner and a client comes to you and you're unsure, you should seek out help from the digital asset task force where we can answer some of your questions.

But this is one of those areas because the rules are so different and the different types of assets have different attributes to them. If you're unsure, don't practice in this area unless you really know what you're doing.

Walker: We're going to talk a little bit more about some of those questions a little bit later, but I like to think about it. It's a whole new vocabulary. It's a whole new vocabulary for understanding — what even is staking? You have to understand that stuff so that's a great way to kick us off.

Nik, as you're trying to think about learning this, where have you found to be the best place to gain expertise in this area?

Nik Fahrer: First of all, thank you April for having me on here today.

Walker: Yes. Thank you for joining me.

Fahrer: The first piece of advice that I would recommend is just dabble in this on your own. Find some insignificant amount of money, and just go out there and play around with it.

I think the best way that you can learn something and the mechanics of how these things actually work is to sign up for an account on a centralized exchange, just to name a few in the US would be Coinbase, Kraken or Gemini. Put an insignificant amount of money in there. Buy, sell, but then take it even further.

Don't just buy and sell on a decentralized exchange, send it to a non-custodial wallet and connect it to a decentralized application, like a decentralized exchange and play around with it on there. Stake some of your crypto to see how that works and just generally figure out the mechanics.

I think that's generally the best way to understand what some of these words mean. It really feels like there's a entirely new vocabulary when you get into the space.

When a client comes to you and they're like, “Hey, I just staked some Ethereum and earned X amount of dollars through staking.” You're probably wondering what the heck is staking? Doing it on your own with an insignificant amount of money is a really easy way to learn how this stuff works.

But taking it a step further, if you want to learn how these applications within this new technology actually apply within the Internal Revenue Code, the AICPA has a really good webpage.

IRS has an FAQ webpage. They also have a web page dedicated specifically to digital assets where you can go out and see all of their guidance that they've previously issued, both binding and unbinding guidance that they've issued out there. That's a really good resource as well. I would start there with those two things and then just be a critical thinker.

Try to understand as you're working with your clients in this space, where are the risks and then also, what's the cost versus benefit analysis? If a client comes to you and says, “Hey, I did all these hundreds of thousands of transactions in crypto,” and they tried to turn over an Excel document to you to go through and calculate all of their basis and proceeds. That's going to be a huge time suck.

Is that really worth the cost versus what may actually be captured on the client's tax return could end up being an overall net $1,000 gain? Use some common sense as well and just try to understand what are the risks, but also what's the cost versus benefit analysis here?

Walker: I like that and thank you for bringing up the AICPA's page. We'll put a link to that in our show notes and as well as the IRS page.

Robert, you are a partner at Reed Accountants and Advisers. Talk to us a little bit about is there any specific processes or procedures in place that you guys have before you either accept a client that has digital asset activities or how you're dealing with a client that might start dabbling in it? Also while you're at it, just talk to us a about advice you might have for those with smaller practices.

Tobey: It's interesting if someone comes to us and is just a trader. Like they have a Merrill Lynch account for cryptocurrency. There's not a lot of risk in that type of account and it's easier for us to accept and understand because they're trading — it's like they’re trading stock. If they hold it, they can be a trader in the securities which allows them to deduct their expenses differently then if they're an investor.

If they are an investor, they may be holding it for long-term gains, [but the trader is] going to have short-term capital gains and losses. That's easier to understand.

If somebody comes to me and says, I'm a miner, and I'm working with a client right now, that's a miner. I go fine. What do you mean by you are a miner? What do you do? Where do you do it? What currencies are you working with? Where is your mining rig located? Because that has some state income tax implications with respect to it.

This guy lives in Connecticut and his mining rig is in a facility that hosts it in Texas. When you mine, it's like you're self-employed and you're earning income. What do you do with that income once you earn it? You recognize it as ordinary income, you deduct your Sec. 162 ordinary necessary business expenses against this.

But now you have cryptocurrency, that once you hold it in your hands, it is an investing type of asset. What do you do with it once you have it? Are you staking with it? Are you trading it? Are you holding it for investment? Because of the complexities of the subject matter, I go through a lot of questions.

I have a checklist of questions I go through to ask people who were more than merely investors (like they hold stocks) in cryptocurrency before we choose to accept them.

You [have] to make sure that there's not any risk with respect to this. Are they doing things offshore? Are they doing them in a manner where there's some subterfuge about what they're owning because they want to potentially hide their assets offshore? There's also firm risk that we have to take into consideration.

Then once I talk to them, I determined what a fee might be because this is generally complicated stuff [more than for a] regular tax return. Our firm is really trying to get away from just doing standalone 1040, so we're talking to a lot of businesses. I'm talking to a cryptocurrency venture fund to figure out what they're doing and how I might be able to help them. That brings another level of complexity.

I lived in Charlottesville, Virginia for 25 years and there are a lot of small practitioners down there that serve the community. They're more likely to see someone who's a trader.

They really need to go to either the AICPA website or the IRS's website and become familiar with the rules regarding cryptocurrency of recognizing gains and losses and what types of gains and losses are there. Also they need to understand the fact that sometimes regular security rules don't come into play here because investing in cryptocurrency is not subject to the wash sale [rules].

There are some unique aspects to it that they really need to understand. Again if I'll go back and say what I said before. If you're unsure of it, don't put your toe in the water. If you're going to work in this area, at least get up to your knee, so you understand what's going on and you have some technical background with respect to it.

Walker: I think that's great advice. Also, it's more than just asking the very simple question that you have to ask to be able to check the box on the 1040. I like that. You need to think about and ask what those different levels of deeper engagement questions are.

Nik, what about you? You're at FORVIS, so a bigger firm. [Do you have] additional steps, or additional recommendations you have about when you're dealing with clients with digital asset activities?

Fahrer: Absolutely. I can speak to that. The best piece of advice that I would say is, let's start with the basics first. Let's not complicate things before we get too far down the road, but let's first ask those basic questions of, one, do you have the competency to serve this client, or does someone in your firm have the competency to serve this client?

Two, what is the reputation of the client and is this a client that you want to be connected with and work with? Maybe one that is not so obvious is can they pay your bill? Robert alluded to this a little bit earlier, but these are complex issues. Maybe the fees are a little bit higher than normal.

Is this something where you need to be concerned about the volatility in the market and the client may be underwater in their investments and not as liquid in their cash position. Let's ask those basic questions first and then we can start to move into the more digital asset specific questions that need to be asked in that client acceptance.

This isn't fully inclusive, but some of those could be how clean are their records? That's probably the biggest one that you want to ask is where are you keeping track of all your records, especially if the client gets off of a centralized exchange.

I alluded to this earlier whenever I was talking about how to get expertise, or some experience and doing it on your own. Don't just stick to a centralized exchange. Send your crypto to a non-custodial wallet, play around with on-chain transactions, because more than likely that's what your clients are going to be doing that need your help. Then now that you have this experience on your own, you can relate to them and know what to look for when they come to you, and know what to expect in the recordkeeping as well.

[For] on-chain transactions, there's a record of all of them on the blockchain, but there's no standard 1099 reporting, at least as of yet. We're waiting for some more guidance from the IRS here, or Treasury, one of the two, to understand what the standardized reporting is going to look like in the future.

Because of that, there are software companies out there and I'll just name a few that can help automate the on-chain transaction reporting. [For example] CoinTracker, or Ledgible, or Cryptio, or a Bitwave are several of them out there. That's not all inclusive. There is more than just those.

But they can basically connect their software to the clients wallets and exchanges and it will automate a vast majority of the transactions, and a lot of them will even raise red flags if they are unable to match cost basis, based on all of the wallets and exchanges that they've connected into that software. That's another thing that helps you as a practitioner know, hey, the client hasn't given me all their information. They say they've connected to all of their wallets, they say they connected all of their exchanges, but we're missing information for a lot of the cost basis of these transactions. It's a tool that you can have in your tool belt that'll really help you take this to the next level.

Walker: I'm glad you brought up recordkeeping. That was actually one of my questions, but that's great. Thank you for the recommendations.

I'll ask Robert if he has any also, because I feel like this could become a fire drill situation. When you got somebody coming in and they have all these crypto transactions, and then you have to go back and try to figure it out. Hopefully this is a proactive conversation. What do you recommend to your clients to help with recordkeeping, Robert?

Tobey: I'm not recordkeeping for [them].

Walker: Absolutely.

Tobey: Here's the deal. This isn't looking at a [Form] 1099-B where the column 15 [has all the information]. Most of the people that I deal with that are investing in, or dealing with crypto, have thousands of transactions. Unless they use Coinbase or some other [tracking software].

Fahrer: [Some options are] Ledgible, CoinTracker, Cryptio, Bitwave. Those are all just a few, just to name some.

Tobey: Unless they use those and they bring us the records and we can tie them out, or they have a spreadsheet that they've done themselves.

Our firm will not do that. We're running out of people just to do regular work and to sit there and to try to keep track of somebody's 10,000 crypto transactions in any one year that are not large dollar amounts in and of themselves. We just can't do that. It's a client responsibility and they wouldn't want to pay me to do it frankly.

Walker: Absolutely. That's a red flag if you've got somebody coming in and they are just like, I got crypto transactions and I haven't done [anything with] it. That's a red flag. What are some other red flags that should send a signal up that this is may be not the best client for you?

Fahrer: One question that we generally like to ask is, how did you acquire your digital assets? If they don't have a good answer to that question, that's generally a red flag.

Tobey: And where are you holding it? Are you holding it in the U.S., outside of the U.S.?

I'm really interested in the risk I'm going to have with somebody that's dealing with exchanges that are not U.S. exchanges and they should be reporting it, but they shouldn't necessarily be transacting on the exchange. I agree that if they can explain where they got it, if they can explain ins and outs of the transactions and they tell me that they're doing stuff offshore. The offshore ones have stopped me dead in the water.

Fahrer: I think one thing that you can do as a practitioner to protect yourself and your firm is to get some sort of representation from your client that says, hey, I've provided you with all of my wallets, exchanges and transactions, and that there are no other ones out there that I haven't already provided to you. That protects you that the client is saying that they've given you everything.

Tobey: We have that in general in our engagement letters. That we've told you everything, we've provided you everything you needed to prepare our tax return. Now that you say that, I actually might put an extra sentence in there about cryptocurrencies.

Walker: We're all learning. We're going switch gears just a little bit and I want to talk about guidance the IRS recently released. Revenue Ruling 2023-14, talking about cryptocurrency, staking, and rewards. Robert, you want to give us a very high-level overview of that. I know that it can get really complicated, really fast. Just tell us what we need to know about that guidance.

Tobey: This is a timing is everything revenue ruling. It was issued while a couple named the Jarretts are in the Sixth Circuit Court of Appeals, having their case heard with respect to a refund and that the IRS gave them with respect to how they reported their staking activities.

The long and the short of it is the Jarretts take the position that staking activity is nothing more than a baker putting ingredients together, baking a cake and doesn't recognize the income from baking the cake until he sells the cake. That's the simple discussion of it.

The IRS says okay if you stake, once you earn the income or have dominion and control over the rewards from staking, you need to recognize it as income. It's a very big deal. The IRS came out with this to put the stake in the sand with their position regarding the Jarretts. You got to follow it because it's a revenue ruling.

If people have a feeling that they want to take the position that the Jarretts do, you're going to have to file a disclosure form with the IRS stating that you've taken a position contrary to the law. You can do that, but it'll give you the free pass to the IRS audit auditors.

Walker: Yes, it will, okay, that's great. We'll link that in there so you can read it, and learn more and make sure that you're following that guidance. I mentioned that both of you were on the Virtual Currency Digital Asset Task Force. I want to say thank you for that. Thank you for your volunteer service.

Nik, could you give us a quick rundown on just a few of your top priorities for the group or that the group is working on?

Fahrer: Yeah, absolutely. Maybe I'll touch on a few that we just completed too.

We actually just released a resource that is basically questions to ask your clients if they invest in crypto.

We also recently released an FAQ on taxpayers taking losses. Specifically, taxpayers that may have had crypto tied up in a centralized exchange like FTX. Can they capture those losses in 2022 tax year? If not, how did they capture those in the future?

We also, recently sent a letter on the new virtual currency question that's being added to our 1120-S, 1120-C corp, and then also, 1065 partnership returns. It's very similar to the 1040 question. We sent a letter to the IRS about that.

Also sent a recent letter to the IRS about Notice 2023-27, which is guidance on NFTs as collectibles. As you can tell, we've been really busy, this year sending a lot of letters and working a lot of resources for you all.

Upcoming, we're looking at responding to the Senate Finance Committee letter, that asks basically nine or ten different questions of, how does the ambiguity in the tax law apply to digital assets?

Senators Lummis and Gillibrand also recently proposed a bill in the Senate [Lummis-Gillibrand Responsible Financial Innovation Act to create a comprehensive regulatory framework for crypto assets], and we're going to respond to that as well. Then this [ruling], 2023-[14], which talks about the timing of when to pick up staking income in gross income.

Walker: Perfect. Yes, as you said, you've been very busy, and I'm sure will continue to be as there's seems like to me, as we learn more about virtual currency and digital assets, there's more to learn, is the way I feel about it. Thanks for helping get that guidance out there.

Robert, as we're wrapping up just any final thoughts you want to share on this topic, or with our listeners about digital assets?

Tobey: The loss issue with respect to FTX and some of the other digital exchanges is really problematic. It's a timing issue. A lot of times losses can only be taken as miscellaneous itemized deductions which are no longer allowed after the Tax Cuts and Jobs Act. It could be interesting to see what the IRS comes out or whether they come out with guidance that will allow some of these losses.

There's a vibrant market today in the bankruptcy claims from FTX. How were those treated for tax purposes? Are there two different property rights there? Is there a bankruptcy claim property and there's a claim, but the underlying cryptocurrency? Even though you sell your bankruptcy claim, do you still own the underlying right to the cryptocurrency? I don't know. Neither does the IRS. We've asked for guidance from the IRS on this.

Can you take a bad debt deduction with respect to cryptocurrency and I don't believe that's allowed because bad debts are only allowed with respect to cash. That's another area that we need some guidance from. When it [comes] from bankrupt exchanges and other things, it's unclear of when you can and whether you can claim any loss at all. The IRS is going to have to deal with this because, I read that there was another exchange that was near bankruptcy this week. This isn't going away.

I will tell any practitioner that's listening to this. If you have someone who comes to you and says, here's the facts and circumstances of my losses with things. You need to stop and really look at several things. What was the underlying investment? What was the underlying cryptocurrency? When did the event occur? Claiming it currently in 2022, I think in a lot of cases would be problematic.

Walker: That's super helpful. Thanks for bringing that really important topic. What about you, Nik, what [are] some final thoughts you have as we're wrapping up.

Fahrer: One thing that I'll say is that I think this technology is really polarizing. We seem to have people on both sides of the aisle. We have people that just really love this new technology. We have people that, just haven't really bought into it and they don't see the benefit to it.

The question I would pose though is, given the IRS is issuing a lot of new guidance on this new technology, given that it is a hot topic in DC, why would they regulate it if it's something that's going to go away?

My personal opinion is, they probably wouldn't. I think it's going to be here to stay. It's probably going to be around for awhile and to just completely brush it off and ignore it completely is maybe a mistake as this continues to grow in adoption.

Tobey: I'll tell you that they'll be some upheaval in it this year.

The recent administrative law judgement decision that cryptocurrency that was bought by individuals on an exchange, is not a security where crypto assets bought by institutional investors are securities. That it'll be interesting and that's going to go, if it was by administrative law judge, I can see that going to the regular court system now because, I don't see how you can say it's a security for one type of investor and not for another.

There's another court case, that the Supreme Court is going to hear next term. Similarly, about rulemaking by the SEC in general, that will have an effect on this. Because one thing, when you're dealing with crypto and dealing with all these other assets — for the IRS, its property. For the SEC, it's a security. For the CFTC, it's a commodity and in some countries, it's a currency. We're dealing with US tax law. We know what property is, but you've got to take into consideration,what it is in other jurisdictions and what it is to other rule-making bodies within the United States.

Walker: Thank you so much, Robert and Nik. This is definitely not be the last time we talk on this podcast about virtual currency. But I think this gave our listeners, a lot of good topics to dig into and think about as you're dealing with your clients.

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 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 this wherever you listen to your podcast and please 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 other like-minded friends. You can also find this in aicpa-cima.com/tax to check out our other Odyssey episodes and also to get access to all the resources that were 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, Tim O'Neill, CPA, Senior Tax Manager — Wipfli LLP, joins April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, live from ENGAGE 2023 to discuss the current environment for recruitment and retention of employees in tax and how to build deeper connections with staff to help them feel more invested in their organizations.

What you’ll learn in this episode

• Strategies for employee retention and engagement (1:01)
• Differences between a “manager” and a “leader” (2:48)
• What it means to prioritize outcomes vs. outputs (5:04)
• The notion of no more timesheets (7:20)
• Final thoughts (8:05)
• A page from Tim’s travel journal (9:31)

Related resources

• Practice Management & Professional Standards — The AICPA Tax Section provides the guidance and tools you need to manage a successful tax practice and maintain the highest level of ethical standards in tax.
• Reimagining your tax practice — Tackle today’s top practice management issues with insights and tips from pioneers in the tax community. The Reimagining Your Tax Practice webcast series will tackle these issues and more in a Q&A roundtable series with tax pioneers from the profession.

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, Lead Manager from the Tax Section, and I'm here today with Tim O'Neill. He is a Senior Tax Manager with Wipli in St. Louis. Welcome, Tim.

Tim O’Neill: Thank you. Thank you for having me.

Walker: Yeah. We're here together today recording at the ENGAGE conference.

O’Neill: That's all right live in person.

Walker: Yeah and yesterday I attended Tim's session which was titled, “Recruit, Retain, Repeat.” Welcome Tim. I thought we could share some of your insights with our listeners from your session.

O’Neill: I'd love to.

Walker: I don't think it is a new concept for people listening today that recruitment and retention are a huge problem in tax and accounting profession, that sort of thing. I thought maybe from your perspective, you could share a few strategies that you have found that worked for you for employee retention and engagement.

O’Neill: Yeah, absolutely. Like you mentioned, this is the million or $2 million question.

Walker: Yeah, for sure.

O’Neill: What can we do as leaders to try and increase our retention increase overall employee experience? Really there's no right or wrong answers — it's all very individualized.

But what I found through my experience with AICPA committees, my experience within Wipfli, prior firms or organizations that I've worked with is being an effective leader and authentic is the best way to build these deeper connections with staff and employees that really makes them feel invested in the overall organization. I'm trying to think of some of the more important things that we've done, but it's just so individualized.

It's difficult to an extent, but if you can get across the idea that we don’t need to put together these formal programs to help retention. It really doesn't come down to that. It's just about being transparent, authentic and empathetic is a big one that we've seen.

With sessions here there is a lot of talk about being an empathetic leader. We've had tons of sessions on ideas about what can we do internally and externally to help retain employees. Obviously outside of maybe the psychology of the retention, recruiting and rewarding employees, maybe look at some of the action items, some low-cost solutions, mid cost solutions, high cost solutions, I'm happy to talk more about any of those.

Walker: You mentioned some of these characteristics, but one thing you talked about yesterday that really resonated with me was talking about differences between a manager and a leader. I think we can all agree that there is a difference.

O’Neill: There is a huge difference.

Walker: Maybe talk about some of those differences and for those people who see themselves as a leader — How do they figure out like where they land on that spectrum?

O’Neill: Yeah, and it's funny, you said — “some individuals see themselves as a leader” — we like to call those the heroes of their own stories. Is that a great leadership quality? Probably not. They might think that they're fantastic leaders, but they're not necessarily connected on that personal level with a lot of their employees or direct reports.

Honestly, to me, the difference between a manager and a leader, it's mainly…we think about a manager is very work centric. They're more about how and when are we going to get the work done? They're very much more process focused than people focused.

A leader on the other hand, they're more what and why? What are we doing? What can we do? Why are we doing this? Being transparent and showing the thought process behind all of it, and being able to communicate that to the individuals within their organization. That is, by far the largest difference between the two.

As we have been talking about pipeline challenges, the leaders within organizations — and this is not just specific to accounting, but really every industry. We've had to evolve over the last, let's say, three years with COVID and everything that was fallout from that. We've had to evolve and say we need to be much more hands-on and personalized with our approach.

Walker: You mentioned this, but I really liked when you talking about prioritizing outcome versus output. As I work with firms and members trying to help them with some of these issues and we've worked with a lot of small firms.

You're from a bigger firm, but you may have experience with or some ideas and thinking about how that can work like shifting with limited resources. How or what does it mean? What does it mean to be prioritized outcome versus output?

O’Neill: Sure. Even Wipfli, we're a top 20 CPA firm, but we do a very good job of operating as a collaborative group of smaller firms. We're in quite a few markets. But we do a very good job of still having that small firm feeling.

The firm that I was with previously, we merged in with Wipfli. We're about 100 person firm in St. Louis. I have a little bit of experience at a, we'll call it a smaller firm and culturally we aligned really well. Both firms are obviously based out of the Midwest and so on a cultural level, we had the same identity. Again, it gets into the hands-on personalized leadership approach, outcome versus output.

Billable hours — that's the driving force in public accounting. Let's get our billable hours up because this is where we make our money. But is that really where we make all of our money? Or do we have value in some of these hours that individuals are working?

We like to call them impact hours. Is there value in these hours that maybe we can't charge the client for it, but we're definitely [either the staff or the client even to an extent] getting value from it. Think of CPE, performance coaching, mentoring, client relations. Those are all impact hours.

What we've tried to do in both of my previous firm and Wipfli is we don't want to emphasize the billable hour as long as we're getting the outcome that we need and we're getting the client is first and foremost, served. At what point are we punishing efficiency? There are a lot of individuals that can get done in 20 hours while somebody else can get done in 40 hours. At what point are we punishing their efficiency and it's defeating to those individuals.

Walker: You talked about and it's so true. How they're punished as they get more work, like they can do 20 hours. Thank you so much. Sir may I have some more?

O’Neill: There was one brave lady in the audience, but that's exactly what I asked. I said what happens when you're good at your job and it was silent and she said, you get more work.

Walker: It's true. Something else you've made me think about, have you gone to any sessions that we've have talked about the no time sheets thing?

O’Neill: That's the rumbling. I've got a couple of people ask me, “Have you heard this idea of no more time sheets?” I said I haven't heard this idea.

Walker: Yeah, I've known some people that have been able to do it, but it's fascinating.

O’Neill: It's funny. We all know people that have been in public accounting and they've left, and I've got close friends that have moved into a new career paths within the CPA realm, but new career paths. I said, What do you enjoy the most? No time sheets. I don't have to keep track of every six minutes of my day.

Walker: True, you never know, we're always evolving.

O’Neill: Yeah, that's right.

Walker: As we're wrapping up, do you have any other thoughts on whether there's a magic bullet to solve this problem? You've actually already answered that question. There's not a magic bullet, but do you have some closing thoughts for us as we're thinking about this important topic about recruiting and retaining good employees.

O’Neill: Yeah, there really is no magic bullet.

One of the slides that I had in my presentation talked about the employee value proposition. As an organization, we have to be competitive in some of the basic stuff. So think benefits, compensation, some of the well-being programs that we offer and flexibility.

But really what it comes down to is there's no one-size-fits-all. There is no silver bullet because everybody is their own individual person and what I feel to be the most effective is taking this idea of being a human-centered leader and having the employee experience driven by the associate themselves. I want them to come to me and tell me what they want do. I need to be, again, genuine and saying, I'm here to help you. I want to help you.

We've heard the old saying, people don't quit jobs, they quit people. Now they're not staying for jobs. They're staying for people who have evolved into that human centered leader. That's where we're going to build the strongest relationships and where we are going to see higher retention.

Walker: Awesome. Tim, thanks for joining me. In closing, I'd like to do a little fun thing where we're taking a journey together towards a better profession. I like to get a glimpse of my guests other travel journeys. Tell us about a bucket list travel location you have on the books or something fun to share.

O’Neill: Bucket lists and travel. I tell you June has been the traveling month for me. I was in Nashville for the Craft Brewers Conference, I have a lot of craft brewery clients.

Walker: We will have to talk about that later.

O’Neill: Then Vegas and then I'm shipping off with my family here in about three days to go to Key Biscane for a week or so. Then I'm in Dallas for another conference and so all over. But bucket list — I'm a big rugby fan. I'll preference this with saying huge Ireland rugby fan. That's all in the last name O'Neill.

Walker: Got it.

O’Neill: Definitely make it out to the Six Nations tournament over in Ireland for one of the home matches. That's a bucket list trip for me for sure.

Walker: Very good. I'm actually headed to London on Sunday. Fun stuff. No rugby or anything.

O’Neill: No, that's okay. From the desert to the rain.

Walker: There you go. Thank you again. So 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.

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 Tony Nitti, CPA, Partner — National Tax, EY, joins April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, live from ENGAGE 2023 to discuss S corporations and Rev. Rul. 2008-18, delving into S corporation reorganizations.

What you’ll learn in this episode

• Overview and applicability (1:56)
• Hypothetical example (3:14)
• Review of Rev. Proc. 2022-19 and fixes to prevent invalid S elections (8:58)
• The extra step when an S Corp owns 100% of a QSub (15:33)
• Relevant articles from The Tax Adviser (24:40)
• A page from Tony’s travel journal (24:56)

Related resources

• Rev. Rul. 2008-18 — Postulates two situations in which an S corporation becomes a qualified subchapter S subsidiary (QSub) of a newly formed corporation that will qualify as an F reorganization. The ruling also provides new guidance on the proper employer identification number (EIN) to be used by the entities in each situation.
• Private equity and F reorganizations involving S corporations — The Tax Adviser, Sept. 1, 2020
• 6 reasons an S corporation wouldn’t need a PLR | Tax Section Odyssey —  Rev. Proc. 2022-19 provides procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a PLR.

April Walker: Listen today to learn more about S corps and Revenue Ruling 2008-18 F-Reorgs with Tony Nitti. Hi everyone and welcome to this collaboration between the JOA podcast, and the AICPA's Tax Section Odyssey podcast.

I'm April Walker, a Lead Manager from the Tax Section. On the AICPA's Tax Section Odyssey podcast, we offer thought leadership on all things tax facing the profession. Today I'm here with Tony Nitti. Tony is a partner at EY National Tax. He is a frequent guest of the show. I'm even more excited to be recording this today because we are recording together in person at the ENGAGE conference.

I asked Tony what he thought was important to talk about today. He brought up the topic that he is hearing a lot about, a lot of confusion about, a lot of misunderstandings about and that is an F reorg structure used in acquiring an S corporation in Revenue Ruling 2008-18.

First of all, for those who might be listening, who went like me, help, I need an overview of what you're even, talking about Tony. Talk to us about how this might apply, when it might apply if you have clients who either might be the acquirer or the target. What are we talking about here?

Tony Nitti: First things first, yes, it's good to be back together. It's become a bit of an annual tradition.

Walker: It has.

Nitti: Then, just before I came in here, I was surprised to learn that there's a trivia question where I was the first guest on an AICPA Town Hall. Is that right? I had no idea. Everything from 2020-2022 is a blur.

What we're going to talk about today, when we call it either these F reorg or 2008-18 transactions, it is the most popular way in the current climate for someone to acquire an S corporation. We know that private equity is getting involved with acquiring everything and so oftentimes it is private equity that wants to acquire an S corporation. Obviously if they were to go out and acquire shares directly, the S election is going to terminate, and then you've got a C corp on your hands, there's whole bunch of other things going on.

This has become the go-to transaction, and we'll talk through it step-by-step from both the buyer and seller perspective. But the reason I thought it was worth talking about today is just because something in the tax law has become very popular, does not mean that it's necessarily well understood. We've experienced that thing before, where the more you stop and actually think about this stuff, the more you go, why are we doing these steps that we're doing, or why is it a transaction that we use and sometimes we just follow what everyone else is doing and don't really think about what are we accomplishing, what are we not accomplishing and other things.

I just thought it would be fun to come in, talk for about 30 minutes or maybe less about what this transaction does? What it does’'t do? When we want to consider it? When we do’'t then, that whole thing?

Walker: Sounds great.

Nitti: Let's start with the hypothetical. It’s going to be the best way to explain all this. Let’s keep it simple.

We've got private equity, setup as a partnership, and they would like to acquire the business operated by a current S corp. Here at AICPA ENGAGE, anybody that's here on the tax side, they've got S corp clients. A lot of times we will be the ones representing the seller.

It's important to understand what this transaction holds for the seller, but there's also going to be plenty of times where we represent a client that wants to buy an S corporation, so we got to think about those buyer considerations as well.

Let's just say we've got this private equity partnership that wants to buy this S corporation, 99 times out of 100, and this is something I'll talk about tomorrow in my M&A class, a buyer is going to want to buy assets. They're going to want to buy assets because they're going to want to get a stepped up basis in those assets for depreciation and amortization purposes. But sometimes the buyer can't buy assets. Because maybe those assets are not transferable, maybe for a particular business reason they need to acquire the legal interests in an entity, so that the EIN stays alive.

You know how M&A works — like something's going to force your hand. From a buyer's perspective here it's how can I accomplish both of these things? How can I acquire the legal interests in this S corp target, but yet get this stepped up basis and the underlying assets?

For years, the way we tried to accomplish that is by having the buyer and the selling shareholders of S corporation jointly make an election under 338(h)(10) or more recently 336(e). That election was a magic bullet, but only for the buyer, and I'll explain that.

Like for the buyer, you make that election and for legal purposes, you're treated as buying the stock because that's what you bought. But for tax purposes, this fiction is created where the target S corporation is deemed to have sold all of its assets to a newly formed corporation owned by the buyer, and that gives them the step-up in basis and assets that they want. It's win-win for the buyer.

It's not win-win for the seller. The seller is giving something away because had they simply sold stock and not made a 338(h)(10) election, they get straight capital gains rates. But by making this election, they have to live with the deemed consequences of the S corp selling its assets, which means some of that gain may be converted to ordinary income if they have cash basis receivables or inventory or whatever it may be. This really is more of a fix from a buyer perspective than anything else.

Now, there's something in it for the seller in the sense that the buyer is going to have to pay them for that incremental tax cost. But that's where we looked for a buyer to be able to get this best of both worlds — a step-up in basis, but keep the legal entity alive. It was always 338(h)(10), always 336(e). But there are limitations to those two types of transactions.

For example, you have to acquire 80% of the stock of an S corp to make an 338(h)(10) or 336(e) and so if private equity only wants 50% of this business, that's off the table. Another thing is let's say you're not going to buy all of it, but you are going to buy more than 80%. It's not like the 10% interest that the shareholders of the target retain is going to be tax-free.

The way a 338(h)(10) or 336(e) election works is if private equity comes in and buys 90%, the other 10% is still treated as if they sold their interests as well. They still have to deal with the consequences of the asset gains. You can't have any tax-free deferrals, there are limited types of entities that can be a purchaser in a 338(h)(10), and so private equity as a partnership cannot do it. It would have to set up a corporation. You get the idea.

There's a bunch of potential limitations there. But the biggest limiting factor and really what's caused this change in this transaction type is the fact that there are a limited type of targets in a 338(h)(10). One is a subsidiary in a consolidated group. One is a subsidiary in an affiliated group that could file a consolidated but doesn't and the other is an S corporation.

What you don't hear in those three types of eligible targets is a standalone C corporation. What that means is if someone is looking to buy, an S corporation and make a 338(h)(10) election or 336(e) election, they have to be sure that [the] S election is valid.

Because if it's not valid, that's not an S corp you're buying, it's a C corp. If you buy the stock [of] a C corp, it's a standalone C Corp and the 338(h)(10)or 336(e)election isn't valid either. You just spent 30, 40, 50 million on something anticipating a step-up in basis in assets and if it turns out that S election was invalid and you just bought C corp stock, you don't have that step-up in basis.

There's this disconnect I feel some times where 90% of the tax industry thinks that if somebody says [they’re] an S corp, they're an S corp but there's not going to be any problems there. Then the other 20% works enough in due diligence or it's just been around long enough to realize that there's some real truth to this saying that permeates what I do, chairing sub S for EY, and it said in jest, but like I said, there's some truth.

You show me an S corp, I'll show you an invalid S corp. If you do enough due diligence, there's going to be things that arise that make you say, I don't think this is valid or I'm worried that it's not. The point is the second a buyer who's looking to spend significant cash on a business realizes that there could be a skeleton in the closet for that S election, you don't want to go forward with an (h)(10) or 336(e) because the risk is to you as the buyer. The risk is that you lose all of that step-up.

Walker: Does that tie back to our previous time we were together and ways to cure an S election?

Nitti: It does. You’re referencing Rev Proc 2022-19, which gives us an avenue in some respects to fix some of these problems that would cause an S election from being valid.

But practically speaking, when the numbers are big enough and a buyer is looking to acquire company, the second they get an inkling that something is wrong with that S election, even if you tell them it can be cured, they say, I want to pivot to something else to make sure I get what I came after.

What I came after is the step up. That's where this transaction came into vogue. Because how else if we're not going to do an (h)(10), if we're not going to do a 336(e), how else for example, can private equity go out and acquire some or all of the business of an S corp while one, keeping the legal entity alive and retaining the EIN.

Two, getting a step-up in basis of the assets.

Three, getting to continue to operate this business in flow through form. Because that wasn't available via an (h)(10) or something like that because, it would become a corporation because it'd be owned by another corporation.

Four, being able to offer potential tax-free rollover to some of the sellers. Like where else can you get all those things and not having to acquire 80%? It really was a wasteland of options until this Rev Ruling 2008-18, came around and said, okay, there is a path forward here now to accomplish all of these things. Most importantly, is to still get our step-up as the buyer, even if this S election is invalid.

It's not a complicated transaction at all. The reason I thought it was worth talking about today is that it's amazing- I've talked to some people who've done dozens of these but it's almost just because it's a formula they follow and they don't actually understand what each step does, or maybe more importantly doesn't accomplish.

It would work like this. You would say to the seller, hey, we've got concerns about your S selection being valid, so I’m not buying your stock because I'm the one that gets stuck holding the bag if I just bought a C corporation and not an S corporation. I paid you for the step-up and I didn't get the step-up. I want you as the seller to undergo this pre-transaction restructuring. It's all on the seller side and it's not complicated at all. Step one, the sellers, and let's just say you and I are 50/50 shareholders at this S corp. I always like using you in my example.

You and I are sellers of this S corporation. We form a brand new holding Corporation and we transfer our 50/50 interests in what I'll refer to now as the target S corporation into this new corporation. Then we immediately elect to treat that target as a qualified subchapter S subsidiary or a QSub.

When an election is made to treat a subsidiary of an S corp as a QSub, it's treated as having liquidated into its parent S corporation, and it's just disregarded from any separate existence. Now, what you didn't hear there, which you may be curious about is, I said we formed a new corporation, transferred an S corp into it, made it QSub election for it. I didn't say that new corporation was formed as an S corporation.

You can be like, how are you making a QSub election when the parent is not yet an S? But what this Rev Rule 2008-18 tells us, it builds off earlier principles from Rev Rule 64-250 and says that the combination of those steps, the formation of a new corporation, transfer of an S corp to that corporation, and then immediate QSub election for that former S corp, it all combines into what we call a tax-free reorganization under Sec. 368(a)(1)(f). What that means is it's a big fat tax zero. Nothing happens.

Because nothing happened, that newco that we set up is just considered to be a continuation of the target. The reason we didn't have to make an S election for it is because the S election of the target carried over to this newco. If you are certain that the S election of the target is valid, and if you are, we're probably not doing this whole thing.

But if you were certain, it's funny you'll find that there's no requirement to file a new S election for the parent. Instead, when you make the QSub election on the 8869, there's actually a box that was added that says this QSub election is being made in accordance with a Rev Ruling 2008-18 transaction, and that just notifies the IRS that the S election of this company now carries over to the new company.

If we stop right there, like we haven't really accomplished anything. We’ve got a new company, a newco that's an S corp that owns a disregarded entity as a QSub.

Now, if you're worried that the S election was bad and usually you are, you would probably make a protective new 2553 filing for the newco. But what this does, and I just want to point this out now, is eventually this newco S corp is going to be selling this business, selling this disregarded entity.

What this doesn't do with this transaction and this is where a lot of confusion comes in, it doesn't do anything to cure the bad S election. If we think about it, if the company had been bad and sold its assets as a C Corp, there would have been corporate level tax.

Going through these steps doesn't change that at all. Because if we form a new S and transfer the stock of what was a bad S to that new S and make it QSub election for it, effectively what we've just done is liquidate a C corp into an S. Without getting too into the weeds here, when you do that, the S corp just inherits what we call the built-in gains taint of that sub under Sec. 1374. When it turns around two or three days later, like it's going to in this transaction, sells those assets, 1374 is going to kick in anyway and make the seller pay corporate level tax. It's not doing anything to avoid a corporate level tax for these sellers and I think people should definitely understand that this doesn't fix a bad S election.

You and I talked at great length about how you could fix a bad S election. This does not accomplish that. Because a bad S being contributed to a new S and made a QSub election for it simply means you liquidated a C into an S and you inherit all that built-in gains exposure.

If we stop there for a moment, we're left with a structure where the S corp owns 100% of a QSub, which is a disregarded entity. But these transactions are almost always going to have an extra step.

That extra step is you're then going to take that QSub and convert it under state law, typically, from a corporate entity to a single-member LLC. Once again, you're just going from disregarded entity to disregarded entity. It's meaningless. It doesn't cause any tax consequences at all.

People have asked, why that? What's the point there? The point there is if you screwed up something in steps one and two, so that your QSub election is not respected, we have the same problem we would have had originally when the buyer comes in is you're going to see in the next step and purchases the interests in the disregarded entity.

If we think we're buying the stock of a QSub and it's not really a QSub, we just bought the stock of a C corp again. The only way to really purge that corporate past is to do this extra step and after we've made the QSub election, convert that QSub under state law into a single member LLC. Because now, when those steps are all complete, we have an S corporation holdco owning a single member LLC.

Just to keep things simple, if private equity wants to come in and buy 100% of that single member LLC, they get the best of both worlds. Because legally they're buying the entity, so the EIN stays alive. But from a tax perspective, when you buy the 100% interests of a single member LLC, you're treated as purchasing each underlying asset of that LLC. They're going to get that step-up in basis.

By flipping it from a QSub to a single member LLC, all you're really accomplishing is fully guaranteeing that even if everything else goes to hell, the buyer is going to get their step-up, which is what they're paying me to do, if you represent the buyer.

There's just been a lot of confusion about these steps and what they can accomplish and the order in which they have to be done. Order in this stuff matters. We have a letter ruling 200542013 that says, okay, if we contribute the stock of this S corp to the new S corp and then the next day convert it to an LLC, but then a month later, retroactively file the QSub election to be effective on the day of contribution, that QSub election is actually invalid because at the time you filed it, even though it was going to be effective earlier, at the time you filed it, it wasn't a corporate entity anymore. You'd already switched it over to an LLC.

There's just these little nuances like that that are a pain in the butt. Then one of the things we at the AICPA asked the IRS to consider is maybe we don't need the intermediate step of making the QSub election. Like why can't we just contribute the S corp to the newco and then immediately convert that Sub into an LLC.

The only reason right now we go through that intermediate step of making the QSub election is because that's what Rev Rule 2008-18 says will allow you to retain the EIN. There's enough there that worries us that we want to make sure we get the consequences the IRS says we get so we follow it to every step letter of the law. It just creates confusion. Sometimes it appears unnecessary.

What will happen is the buyer will come in, and let's just say for starters, they buy 100% of a single member LLC interest. As we said, they'll get a step up. From the newco S corp perspective we set up, they're treated as selling each underlying asset of the single-member LLC. Just like with an 338(h)(10) they will be treated as if they sold the assets. There might be a mix of ordinary income, capital gain, and they should get compensated for that.

As I mentioned to you before, if the S election truly were bad, then that corporate level tax may still be levied on the sale because you might have built-in gains issues. It's not really a magic potion for the seller, it's more for the buyer. Now the nice thing for the seller though, is let's say private equity only wants to buy 80%. If private equity buys 80% of the single member LLC interests, then we have a deemed partnership formation under [IRS Revenue Ruling] 99-5 where private equity is treated as buying 80% of the assets. They get their step-up, they're happy, and then private equity contributes their 80% up to a new partnership and the S corp contributes to the remaining 20% tax-free. There's an option here for seller to get tax-free rollover equity that doesn't exist in your typical 338(h)(10) or 336(e).

There is something in it potentially for the seller. Particularly like I said, if you're going to retain some rollover equity, but the buyer still gets their step up and everybody's happy. There's still some unanswered questions.

I think one of the most interesting unanswered questions is okay, wait a minute, you're telling me we're doing all this because we have concerns the target was a C corp for the last few years? We know we might pay C corp level tax on the sale of the assets if the IRS comes knocking and finds out the S election was invalid, but what about the three open years where it should have been a C and instead it was an S, who is on the hook for that?

There's really no wonderful answer because remember, the buyer in this situation, private equity has acquired that legal entity. That legal entity changed from an S corp to a Q sub to a single member LLC, but all along, it kept its own EIN.

If the tax liability for those previous open years attaches to that EIN, there's no guarantee the buyer is not potentially on the hook for that. That can make for some interesting negotiations, because if there's significant exposure for those open years, the buyer is going to want to build that into any type of agreement that they make in terms of an indemnity or hold back or something to make sure that they're not going to get called upon by the IRS to pay tax for the open years.

But what makes the debate fascinating as we went through this F reorg and in an F reorg we said that this new holdco S corporation is truly treated as a continuation of the oldest corporation.

From a practical perspective, if you're the IRS and you want to collect tax from prior open years, why would you necessarily go to the buyer when there's still this historical entity alive with its historical shareholders, and you can say — you're the ones who pocketed all the cash from those years so we're going to come looking for you?

But that's something that I have that conversation maybe five times a week with people that are negotiating deals. Who's on the hook here for any corporate level taxes that weren't paid? No one's certain.

I would plan as if the buyer is because you got the EIN, you've got the legal entity. That's it, that's all there really is to it. That's how it unfolds. But you can see why it's so advantageous because you can still get the step-up for the buyer even when the S selection is bad. Whereas if you try to do that being 338(h)(10) or 336(e), you're dead in the water and you just spent, who knows, it could be $200 or $300 million that you spent on a company and you paid for that step-up and then you don't get it.

But there's confusion that sticks around with all of this. You can imagine the tax return filings get pretty confusing because with an S corp going through and F reorg — when I say an F reorg is treated as a tax nothing in the continuation, it truly is.

Even though you might form your newco midway through the year, it's treated as stepping in the shoes of oldco, so you still file a full year return; one return, and that return is going to show the activity of the target for the beginning part of the year, and then it's going to have the activity for holdco for the last half of the year, which will include the sale of the target. Then if you're not selling 100% of the target, but only say 80%, then you're still going to get a K-1 from a new partnership now for the remaining 20%. People often get confused there as well, but it's just become an unbelievably powerful and popular method for selling an S corporation. For every one 338(h)(10) election, I see 49 of these. I'm just like why not talk about this?

Walker: I'm glad you brought it up.

Nitti: It's because like I said, if you dig deep enough, every S corp is going to cause you some concern. Everyone is going to make you go, hey, there's something here that makes me wonder if this is an S. It's usually not just one thing.

You reference why can't we fix it with 2022-19? Sometimes you can fix one aspect — like the bad LLC operating agreement you and I talked about. But there could be other things out there.

Half of my job April is explaining to people, I don't think this causes the S selection determinee, but I'm not the one spending $100 million to buy the company, you are, and so if you're worried about it, let's get out of this 338(h)(10) and let's pivot to this F reorg transaction that we just talked through.

Walker: There's a couple of Tax Adviser articles that also go into some of this detail. If you maybe have to listen to this a couple of times to get some of the details.

Nitti: I'm also going to be teaching that tomorrow.

Walker: You can listen to the replay. We will wrap up. I like to take us on a journey together to the profession, but I'm going to ask you a very specific question. I want to hear about new adventures with your puppy, Ms. Maggie, and specifically whether she's going to New Jersey with you this summer.

Nitti: Well, that's a big point of contention. Maggie, we adopted a new golden retriever pup about four or five weeks ago and my main responsibility is to remind her every morning and every night that she will never be what Macy was to me. That's my primary responsibilities. Tell her she'll never be the dog my previous dog was.

But I'm kidding, she's growing on me quickly. The New Jersey thing, it's really tricky because traveling 30 hours with a pup and back is a lot. I'm also not going back to New Jersey for the whole summer because my son's playing travel baseball and basketball and so if I'm only going to be back there two, three weeks, do I want to spend six days in a car? I don't know, we're hoping she'd be small enough to fly, she's not small enough to fly. You can take her if you can come live in Aspen for the summer instead of the house.

Walker: That sounds awesome. Thank you so much Tony. 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 & CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts. Please 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 to check out our other Odyssey episodes, as well as get access to the resources mentioned during the episode. Thank you 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 Jason Staats, CPA, MBA, Firm Runner and Content Creator — Realize, joins April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, live from ENGAGE 2023 to highlight the fast-paced world of transformational technology and its prominent impact on the accounting profession. He explores how emerging technologies including artificial intelligence (AI) are not only changing the way things are done but also redefining the rules of the game.

What you’ll learn in this episode

• Getting started with cutting-edge technology (1:30)
• Tips from a practice management standpoint (3:17)
• Ways firms can incorporate AI such as ChatGPT (5:26)
• Tips for memo and email enhancements (8:28)
• The optimal time to incorporate/upgrade technology (10:05)
• Jason’s parting thoughts (12:09)
• A page from Donny’s travel journal (12:56)

Related resources

• Jason.CPA YouTube channel — Jason Staats talks about how to build calm, sustainable accounting firms.
• The digital download — ChatGPT, AI and data security | Tax Section Odyssey — AI is transformational for the tax profession. In this Tax Section Odyssey episode Ashley Francis, CPA, shares her experience with ChatGPT and BingAI.
• AICPA Technology Library — Technology is evolving at an unprecedented speed and affects each of us in almost all facets of life and business. This hub provides you with access to the latest technology information, tools and resources to best serve your clients or support the organization where you work.

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.

The future of accounting continues to require more automated processes and less transactional work, and accountants will be expected to lead the charge. More and more, accountants rely on  cloud software and artificial intelligence and boost their soft skills and leadership prowess to excel in the profession. 

Additionally, with cybersecurity threats on the rise, being proactive before a cyber incident happens is key — understanding potential threats, identifying vulnerabilities and planning around security optimization.  Adherence to cybersecurity frameworks will continue to be important, and financial institutions must comply with the Safeguards Rule as set forth by the Federal Trade Commission (FTC). Although updates to the Safeguards Rule are set to take effect on June 9, 2023, the requirement for each financial institution to implement an information security program has been in effect since May 23, 2003.

 Listen in as Donny C. Shimamoto, CPA/CITP, CGMA, Owner — IntrapriseTechKnowlogies LLC, chats with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, on these topics and highlights the latest with regards to written information security plans as well as learning, networking and research opportunities available to practitioners.

What you’ll learn in this episode

• Takeaways from the recent webcast: Tax Practice Quarterly: Cutting-Edge Cybersecurity in 2023 (1:20)
• Q&A available with the webcast archive (3:53)
• Preview of Donny’s session at the upcoming ENGAGE 2023 conference (4:41)
• Center for Accounting Transformation research surveys (8:03)
• A page from Donny’s travel journal (13:00)

Related resources

• ENGAGE 2023 conference — ENGAGE 23 will help you evolve by turning the pace of change from a challenge to an opportunity. With nine tracks of expert content, you’ll gain exclusive insights, develop practical skills and walk away with tangible guidance to evolve at your own pace. Join us in June at the ARIA in Las Vegas or live online.
• Gramm-Leach-Bliley Act Information Security Plan Template — The Gramm-Leach-Bliley Act requires financial institutions to have a written information security plan. Use this template to document your firm’s policies.
• Webcast archive: Tax Practice Quarterly: Cutting-Edge Cybersecurity in 2023 — Jeffrey Birnbach, Senior Partner & Managing Director — Sylint, and Donny C. Shimamoto, CPA/CITP, CGMA, Founder & Managing Director — IntrapriseTechKnowlogies LLC, provided practical advice on mitigating cybersecurity incidents and protecting data privacy in this recent webcast from May 2023. Center for Accounting Transformation is conducting research on two important topics. Voice your opinions in the Advisory Services Research Survey and Staffing Strategies Research Survey.

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.

Starting Jan. 1, 2024, most companies created in or registered to do business in the U.S. will need to report information on their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) under the Corporate Transparency Act (CTA). In 2024, 32.6 million entities should submit their initial BOI reports with approximately 5 million initial BOI reports filed each year thereafter. The AICPA, as part of a coalition, calls attention to the new BOI reporting requirements to taxpayers and practitioners. 

Listen in as Art Auerbach, CPA and Andy Mattson, CPA, Tax Partner — Moss Adams LLP, delve into the 5 Ws (who, what, where, when and why) of BOI reporting with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA to help raise awareness that is critically needed.

What you’ll learn in this episode

• Why is BOI important? (0:54)
• Who must file and who is exempt? (2:55)
• When must entities file? (8:01)
• What are the reporting obligations? (11:04)
• Where to file (what agency) and other concerns, including the potential for unauthorized practice of law? (15:00)
• Resources to help (21:59)
• Final thoughts (22:32)
• A page from Art and Andy’s travel journals (24:56)

Related resources

• AICPA BOI reporting resources — Access resources (FAQs, summary of data fields, advocacy efforts, etc.) to learn about the BOI reporting requirement under FinCEN’s CTA.
• FinCEN BOI reporting resources — FinCEN resources on reporting requirements, fact sheets and FAQ.

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.

Artificial intelligence (AI) is the simulation of human intelligence by machines, and the applications for use are rapidly increasing each day. Chatbots such as ChatGPT and BingAI are at the forefront of this movement, but Ashley Francis, CPA, Owner — The Francis Group, PLLC, notes that more than 1,500 similar AI were released in the past week.

Listen in as Ashley shares more insights with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, including how AI is positioned to transform the future of tax compliance.

What you’ll learn in this episode

• Why the time is ripe for AI and why it creates both excitement and anxiety (0:48)
• Other players on the scene besides ChatGPT (5:03)
• The more exciting implications of AI for tax practitioners (9:07)
• Is this just a fad? (13:52)
• Tips for getting started (16:29)
• How to create a helpful prompt (19:48)
• Data security concerns, legal and ethical concerns and tips for risk mitigation (26:18)
• A page from Ashley’s travel journal (30:05)

Related resources

• The Francis Group, PLLC — At The Francis Group, Ashley offers expert technical services and personalized service to sophisticated taxpayers and family entities with high net worth. Ashley can also be found on Twitter.
• AICPA & CIMA ENGAGE 2023 — June 5–8, 2023 (live onsite at Aria Resort & Casino, Las Vegas, NV, or online), will help you evolve by turning the pace of change from a challenge to an opportunity. With nine tracks of expert content, you’ll gain exclusive insights, develop practical skills and walk away with tangible guidance to evolve at your own pace.
• Technology resource center — Technology is evolving at an unprecedented speed and affects each of us in almost all facets of life and business. This hub provides you with access to the latest technology information, tools and resources to best serve your clients or support the organization where you work.

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.

April 18 marks the close of tax season 2023. This is a time for many practitioners to reflect on the past few months and decide what went well and what could be improved for future tax seasons ahead.

Nicole Davis, CPA, has one word to encapsulate this tax season. She also shares her wins and challenges along with solutions she implemented including the pizza tracker protocol and videos.

What you’ll learn in this episode

• Tax season 2023 defined in one word (1.24)
• Changes/improvements that made a difference (2.35)
• Advantages of using a tax process explainer video (5.25)
• The pizza tracker tool (8.05)
• Tax practice management software Nicole uses (10.55)
• Challenges and lessons learned (12.09)
• Nicole’s take on IRS service level (16.21)
• Final thoughts (18.01)
• A page from Nicole’s travel journal (20.15)

Related resources

• Tax season resources – With constant changes to the tax landscape, being prepared for tax season is critical for success. Set yourself up for a smoother filing season by tapping into the wealth of AICPA and Tax Section resources.

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.

The employee retention credit (ERC), established in 2020 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, a refundable tax credit for businesses that paid employees while they were shut down due to the COVID-19 pandemic or had significant declines in gross receipts for the period between March 13, 2020, and Dec. 31, 2021, continues to be front and center on the minds of taxpayers and CPA practitioners. In response to requests from practitioners given the slew of ERC “mills,” the Office of Professional Responsibility (OPR) provided guidance on clients' claims for the ERC on returns prepared by others.

The OPR said in a bulletin that practitioners want to be sure that "they are meeting their Circular 230 professional responsibilities and the standards required to prepare and sign original tax returns, amended returns, or claims for refund" related to the ERC. The OPR administers and enforces Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10).

On this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, discusses the latest in the world of ERC with Chris Wittich, MBT, CPA, Partner — Boyum Barenscheer, and Dan Chodan, CPA, Partner — Trout CPA.

What you’ll learn in this episode

• Where things can go wrong in considering ERC eligibility (1.45)
• Red flags to watch out for when considering third-party ERC providers (5.00)
• IRS audit procedures and examinations of the ERC, including real-time information document request (IDR) examples (7.33)
• The OPR bulletin, Circular 230 and Statements on Standards for Tax Services (SSTSs) (12.44)
• Level of “auditing” a tax practitioner needs to do to examine third-party ERC calculations (17.56)
• The importance of ERC documentation and how to put numbers behind examples to hit home with clients (23.07)
• Final thoughts (29.57)

Related resources

• Employee retention credit guidance and resources — The rules to be eligible to take this refundable payroll tax credit are complex. This resource library will help you understand both the retroactive 2020 credit and the 2021 credit.
• Professional Responsibility and the Employee Retention Credit — Alert wherein ORP advised that to fulfill their professional obligations to clients and to tax administration, practitioners — attorneys, CPAs, and enrolled agents — must meet the applicable provisions of Circular 230.
• Statements on Standards for Tax Services (SSTSs) — Tax standards are the foundation for validating reputational integrity in the tax profession. These SSTSs are the enforceable tax practice standards for members of the AICPA.
• Treasury Department Circular No. 230 — Guidance, information, practice aids and other resources related to Circular 230, which govern a CPA’s practice before the IRS.

 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

Natural disasters create a great deal of anxiety for all involved. Disaster tax relief in the form of tax return delays and casualty loss provisions are meant to ease some of that anxiety, but uncertainty surrounding some of the relief can cause confusion.

On this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, goes behind the scenes with Jerry Schreiber, CPA, partner at Schreiber & Schreiber in Louisiana, dubbed the “Master of Disaster,” and Adam Silva, senior manager at Crowe LLP.

What you’ll learn in this episode

• Distinction between a “qualified disaster loss” and a disaster loss (1:02)
• Refund claims when they occur during  a postponement of filing due dates (5:00)
• How to indicate to the IRS that a return is being filed under disaster relief (9:47)
• AICPA advocacy efforts related to disaster relief (13:41)

Related resources

• Lookback period extended for refunds related to pandemic postponements, The Tax Adviser, March 1, 2023
• Disaster tax relief guidance and resources — Provides resources and guidance regarding the disaster relief process as well as answers to frequently asked questions (FAQs) concerning disaster, casualty or theft losses and how these events may impact a client’s tax returns and business affairs.
• Automatic postponement date lookback period for allowing tax credits or refunds for all disasters — AICPA submitted comments to Treasury and IRS requesting that the IRS apply the relief given in Notice 2023-21 regarding the lookback period for allowing tax credits or refunds to all federally declared disasters.
• Road to recovery — Primer on disaster tax relief | Tax Section Odyssey — The “Master of Disaster,” Jerry Schreiber, CPA and Amy Miller, JD, CPA from the AICPA discuss tax-related disaster relief and resources to aid in recovery in this podcast episode.
• AICPA tax season library — With constant changes to the tax landscape, being prepared for tax season is critical for success. Set yourself up for a smoother filing season by tapping into the wealth of AICPA and Tax Section resources.

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.

On this episode of the Tax Section Odyssey podcast episode, Dave Kirk, National Tax Partner — EY, and Chair of the AICPA’s Pass-through Entity Tax Task Force, discusses the complexities surrounding state tax refunds related to the pass-through entity tax (PTET) and delves into the challenges posed by the lack of IRS guidance, the application of the tax benefit rule and varying state regulations. Dave emphasizes the importance of consistency in handling these refunds and advises practitioners to involve taxpayers in decision-making due to the inherent uncertainties and risks.

AICPA resources

FAQ on the Federal Taxation of State Income Tax Refunds for PTET Payments — FAQ guidance on the federal taxation of state income tax refunds for PTET payments.

AICPA list of taxpayer and practitioner considerations for whether to elect into a state pass-through entity (PTE) tax — Various issues should be considered when deciding whether a taxpayer can, and should, elect into a state PTE tax.

Pass-through Entity (PTE) Taxes States’ Legislation and Tax Authorities’ Information and Guidance — A state-by-state PTE matrix tracking and linking to legislative updates, guidance, as well as other relevant information.

State and Local Tax (SALT) Roadmap and Resource Center — Browse the reference library for the latest guidance and tools to address your state and local tax needs including tax rates, due dates, nexus, PTE tax and more.

Transcript

April Walker: On today's podcast, listen to learn more about how to handle refunds related to the pass-through entity tax.

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 a repeat guest, Dave Kirk. Dave's with National Tax at EY. He is the knower of a lot of things, but specifically today we're going to talk about PTET.

Dave, let's start off with, I think when we chatted before, we talked about pass-through entity tax fun with that, we're delving into a very specific issue related to it. Let's first talk about the challenges. There are so many challenges around this, the lack of guidance around PTET, but today we're going to talk about refunds and there isn't guidance really. How has that impacted our practitioners?

Dave Kirk: First of all, thanks for having me again. Being the leader of the PTET Task Force for the AICPA and having to deal with this for E&Y nationally, I've probably spent 500 hours of my life on this that I'm not getting back. It's just that each state is different. You could probably group states together. It usually requires a case-by-case analysis on how the deduction was taken, when the deduction was taken, and how much money the taxpayer is getting back.

The [IRS] Notice 2020-75 only talked about taking the deduction. There was not one word in that notice talking about refunds. You're right, April, there is no formal guidance from the IRS on PTET refunds. But this is also not the first time in US history where a state government has given money back to a taxpayer. Our federal tax system, as we currently know, it has only been around for 110 years or so. We do have guidance scattered throughout that last century of payments of taxes, deductions for taxes and recoveries. You might call it the common law of refunds that we would use in the absence of anything specific coming out of the government on how to deal with this.

Walker: Tax benefit rule, right? It's been around for a little bit.

Kirk: Yeah. There's two aspects of the tax benefit rule. There's the exclusionary aspect of it, and that's been codified about 40 years ago into Sec. 111 of the code. Then there's also the inclusionary aspect which kind of says, hey, you got a benefit for a payment back in a prior year and you have got that payment returned. That should be something, that should be Sec. 61, gross income. But where the complexity arises is, first of all, you can tell whether something is taxable or not taxable based on whether you got a benefit for it in a prior year.

Okay, great. That's relatively straightforward, and I say relative with some emphasis there. But then you'd go down a very slippery slope really quick once you do determine that a PTET refund is taxable, because then you have to ask yourself, what characteristics does that taxable refund have? That is a morass that I don't think that the government ever really envisioned. I'm not envisioning any sort of guidance coming out of the government within the next 12 months on this.

Walker: The last count, we have 50 states. Like you said, you can group them maybe, but each state was allowed with the IRS notice to develop their own regime which causes all kinds of fun. Which again, we won't get into specifically today.

But like you said, it seems like we could the tax benefit rule and thoughts around that, or how we are going to try to provide some assistance to you with a resource that's been developed. You mentioned that you are the Chair of the AICPA Task Force for PTET. We thank you so much for all the things you do for the AICPA. In doing that, you guys have developed some really helpful FAQs around different nuances, some examples or some summary activities that can happen. Let's provide our listeners with some of the key takeaways from those FAQs.

Kirk: First, states matter, and who's getting the refund matters. If you're an S corp and let's just keep this simple that you have at dentist that owns an S corp. That S corp makes $1 million and it owes PTET at the S corp level of say, $80,000. What you do assuming cash basis and assuming you pay the exact amount of PTET on December 31st, that you can deduct it. Your K-1 line 1 should be $920,000. You are going to get a credit on your local state return of $80,000. In a vacuum, you should not have a state liability equal to or greater than or less than the $80,000. In a perfect world, that's how the system works, and that's probably about as complicated as the system was ever supposed to be in the eyes of the IRS.

But you know that no one ever hits their tax liability at 100 percent. You might hit by 99, 98% or 101 or 102%, but you're never exactly on the dollar. First is the S-corp. If you thought that you owed $80,000 and you made that payment in December of 2023. Cash basis taxpayer, you reduced your K1 income by the $80,000. But when you get around to filing your return and you only owe $79,000, when the S-corp files the PTET return, the S-corp is overpaid $1,000. That should be income back to the S-corp because in 2023 they deducted 80,000.

They only should have deducted 79k and so they get it back. In a vacuum, next year, I'm going to have $1,000 of income on my K1 that I wouldn't have otherwise had if I wasn't in this PTE regime. Simple. Now if I deducted it on the front page of the return because I'm just offsetting my dental practice income or whatever it is, that PTET payment is no different than rents or salaries or insurance or whatever it is. Ok fine. So when I pick it up, that $1,000 refund in the next year, that should also be similar to my dental practice income, it's simply reversing a deduction.

If that amount is, if I say for example, reduced passive income, maybe I'm a part owner of a dental practice that I don't practice anymore and I'm passive. Then that should come through as passive income to me because last year the deduction was probably a passive deduction. Or if I was in a business that generates QBI, qualified business income, under 199A and I deducted PTET against it last year. If it reverses, then it feels like the right answer should be it's 199A income, good QBI when I pick up my refund.

But that is where the inclusionary aspect of the common law tax benefit rule would come into play. You think about it in the same way of self-employment income. Is if a partnership that you were in your subject to self-employment income on the Line 1 and your PTET deduction reduced Line 1, and that amount is refunded to the partnership, or some portion of that was refunded back to the partnership in year 2, that should probably be self-employment income. Just because the deduction reduces self-employment, you'd think that the income should increase self-employment. That's at the entity level.

But then you have to think, going back to my original example, my dental practice made a million dollars and paid $80,000 of PTET. I turn around and I file my personal return and because of credits or dependent exemptions or whatever it is, I owe only $76,000 on my 1040, on state version of my 1040. I'm going to get $4,000 back from the state. Then the question is, what is that? I first start with the concept of I have $4,000 and so Section 61 says that's income, I'll live with that.

Then I go to Sec. 111 and said, do I have a benefit from a prior year or do I not? If I don't have a benefit in a prior year, then this income shouldn't be income so it would probably be excluded by [Sec.] 111. But because they took the $4,000 of a deduction on the front page of the 1120-S, it reduced my K1 number. I did get a benefit even if I had an NOL that I could use and I didn't pay any tax on a prior year. It just means I used less NOL. Or that if it was passive income and I had passive losses that would be able to offset, but it would still be income to me.I still got a benefit even though I had other personal attributes that minimized that income, it would still be income.

It's much harder though, to think about, look, I am getting this refund and should a state refund be QBI? Because it came from the state, it didn't come from the entity like in the first part of our discussion, should it be self-employment income? That's never been the case before that a state tax refund is self-employment income. That's just weird because itemized deductions for state taxes were never self-employment because you'd never got to deduct them from self-employment. You have all of these character questions.

But that is simple when you're looking at the individual and the entity in a vacuum, and that's where we started that I'm a dentist, I own 100 percent of an S-corp and that's all I have. But as soon as I start injecting other things such as a spouse with W2 withholding or estimated payments that are made at my 1040 level or composite returns that I'm filing in other states and getting out-of-state tax credits on my local return. That gives rise to the question of if I get money back from the state, is it really the PTE credit that I am getting back or am I getting back my estimated payments? Or am I getting back my W-2 withholding or my spouse's W-2 withholding? That part, what is it, is a question that we've never really had to wrestle with in the last 100 years because taxes were always deductible in prior years, prior to TCJA.

Yes, we had the AMT system and everyone knew how to do that calculation of how much of the taxes puts you in an AMT and did you even get a benefit at all? But the composite taxes, the withholding taxes, estimated payments, they were all treated the same. But now you have this special class of tax credit, deemed tax payment, whatever you want to call it, that, is almost like a hydra with multiple heads of, what is it?

In the FAQs, basically say, "Look, we think that absent any guidance specifying that certain items come first, that you pick a method and you stick with it year over year." A duty of consistency. If you want to take the position that every dollar of refund first comes from estimates and withholdings. Basically your Schedule A, taxes that are capped at 10K. Then chances are those coming back to you will not be taxable because you capped out at the 10K and you never got a benefit under the tax benefit rule. Another alternative is to say that the PTE credit comes back first, but that would almost certainly be taxable if it was deducted on Schedule E or are embedded in Line 1 of a K-1. That's probably not very common for people to take that position.

But the other one would be, look, if you have $80,000 of PTET credit and you have 20,000 of withholding than $0.80 of every dollar coming back could be taxable and 20% would be associated with the withholdings or whatnot. Maybe that would not be taxable. That would be like a pro rata method. But absent guidance, it's Choose Your Own Adventure. Just don't get eaten by the dragon at the end.

But that's what we're instructing our folks inside of E&Y is to just be consistent and let the taxpayer in on the discussion. Don't make unilateral decisions on their behalf. And let them know that there is uncertainty, there is risk, and that the IRS may disagree on taking estimates first and whatnot. That they should to the extent that they are running into this problem. That if I know that my PTET is being overpaid at my partnership or S corporation level, then I should take corrective measure at my personal level either, by reducing estimates or trying to ratchet down withholding of my spouse on her W2 or his W2 to try to make sure that you're not overpaying too much because you're still giving interest-free loans to your state and local governments and that still doesn't make any sense.

Walker: That's a great summary of what's included and the different situations that we go through [in the FAQs]. But consistency, I think, is a good rule. Also, if we note the fact that the IRS hasn't and likely will not put out any guidance on this. I think it's really interesting that here we are in the middle of 2024 and TCJA is scheduled to sunset at the end of 2025 and we're dealing with this. It may become a moot point, but it's still very important that people are just really wrestling with this very complex issue and without guidance, it's hard to make a plan.

Kirk: I think the IRS is keeping their fingers crossed, that the SALT cap expires and the TCJA and PTE regimes will just expire and everyone will go back to itemized deductions. I'm not sure that's in the cards, because even if the SALT cap goes away and that itemized deductions are fully allowed for taxes, just like was in pre-TCJA land. The PTET regime is still beneficial from an AMT perspective. I wouldn't be the least bit surprised that you're going to have maybe state societies and taxpayers and the likes start lobbying their state governments in the next year to extend the PTE regime past 2025, make it permanent.

Because of the AMT benefit, regardless of what happens in Congress on the cap. Whether cap goes away, cap goes up, cap stays where it is, whatever. Because the people on the coasts, the high-net-worth individuals on the coast and in the highest tax states, California, Oregon, New York, New Jersey, Connecticut, Massachusetts. You all know where you are, Illinois, whatever, that taxes and 2% miscellaneous were the ones that put you in AMT to start with. The fact that you could get their local governments to go along with this, I don't think that this topic is going away for taxpayers or the IRS. I think that both sides, both taxpayers and the IRS need to I would say wake up to this. This is something that's in my mind here to stay for the long term.

Walker: I don't know if that's good news or bad news. I'm not sure how I feel about that. It is news. That's what we're here, is to let people know. Here's something you need to not bury your head in the sand about. Any other final thoughts as we're wrapping up? Dave, any advice?

Kirk: Advice is that it is a lot more complicated than people appreciate. That I know I've heard certain preparers, usually it's smaller firms, really small. Just say that this stuff it's not taxable if the state doesn't give you a 1099-G. The 1099-G has nothing to do with whether something is taxable or not. The taxability of something landing in a checking account, direct deposit, or via check. The default position is it's taxable unless you can tell me why it's not. That's always been the case in the code. I think that's the way people need to approach it. Start with taxable and let's figure out a way for it not to be.

Walker: Great. That's good final advice for everyone. Dave, in closing on these podcasts you've been with me before, but I like to think about us taking a journey. We're the Tax Section Odyssey, we're taking a journey toward a better profession. But I also like to hear about my guest other journeys outside of the world of tax. I do have some insider information — I know you were just on a trip, do you want to share something about that. How did that go?

Kirk: We just got back a couple of days back from 16 days in Alaska. We flew into Fairbanks, took the train down to Denali and then carried on down to Anchorage, and then got on a ship and made it all the way down to Vancouver.

Walker: Nice.

Kirk: I expected a lot of strange things to happen, maybe be chased by a moose or something like that. But what I didn't anticipate is when I took the train from Fairbanks down to Denali, that a spark shot off the train and started a forest fire at the entrance of Denali. Within two hours of us getting to the entrance to the park, the forest fire had spread to such a point where it burned all the power lines and the park had been is now I think just opening up after being closed for about two weeks. Ironically, I've been to the entrance point of Denali twice in my life and I've never actually been able to make it into the park. That gives me a reason for a third time to return to the interior of Alaska.

Walker: Yes. I like your positivity there, rather than taking it as maybe you don't need to go back to Alaska. I don't know. I hope you were able to experience some of the loveliness of Alaska even though you weren't able to get into Denali.

Kirk: Oh, it's beautiful. For those that like the outdoors. It truly is a magical place.

Walker: Wonderful. Thank you again so much, Dave. I hope this was helpful and good information for our listeners. It certainly was for me.

Kirk: Thank you for having me again, do it anytime.

Walker: Thanks. 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 wherever you find your podcasts and please 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 Odyssey episodes, as well as getting access to the resources mentioned during this episode, specifically the FAQs that were the focus of our conversation today. Thank you 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.

Another busy season is upon the profession. With several tumultuous tax seasons in the recent past, the 2023 tax filing season is shaping up to be relatively normal, a welcomed changed for taxpayers, tax practitioners and the IRS. Normalcy doesn’t exactly equate to status quo, however. There are new rules, new guidance releases as well as established items with newfound scrutiny that practitioners and taxpayers need to be aware of.

On this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, conducts a tax season pulse check with Annette Nellen, CPA, CGMA, Esq., Tax Professor — MST Program at San Jose State University, and a past Chair of the AICPA Tax Executive Committee, touching on some key topics in the tax arena that are currently noteworthy.

What you’ll learn in this episode

• Latest in virtual currency/digital assets and the most recent AICPA comment letter (1.02)
• Confusion around “worthless” virtual currency (4.17)
• Practical discussion on the Form 1099-K and the transition year (13.14)
• Change in the bonus depreciation percentage for 2023 (23.31)
• Reminders about the accumulated earnings tax and personal holding company tax (25.18)
• ChatGPT (29.32)
• A page from Annette’s travel journal (34.02)

Related resources

• AICPA comments for IRS consideration on AICPA proposed FAQs on the new digital assets question on the 2022 Form 1040 — AICPA suggested for IRS consideration proposed frequently asked questions (FAQs) to assist taxpayers in responding to the new digital asset question on the 2022 Form 1040, U.S. Individual Income Tax Return and discussed in the instructions. Also see AICPA press release on these comments.
• AICPA tax season library — With constant changes to the tax landscape, being prepared for tax season is critical for success. Set yourself up for a smoother filing season by tapping into the wealth of AICPA and Tax Section resources.
• ChatGPT and the tax law — Official blog post by Professor Nellen on the 21st Century Taxation website.
• Chief Counsel Advice (CCA) 202302011 — Addresses the applicability of Sec. 165 to cryptocurrency that has declined in value.
• Frequently asked questions about Form 1099-K – Links to frequently asked questions about the Form 1099-K including general information, reporting requirements and filing the form.
• Internal Revenue Manual (IRM) 4.10.13.2 – IRM on accumulated earnings Tax (IRC 531)
• IRS Practice & Procedure — Browse the latest resources to help with IRS tax matters including news, guidance and tools.
• Reminder to answer the digital asset question on the 2022 tax return — In IR-2023-12, Jan. 24, 2023, the IRS reminded taxpayers that they must again answer a digital asset question and report all digital asset-related income when they file their 2022 federal income tax return, as they did for fiscal year 2021. The term "digital assets" has replaced "virtual currencies," a term used in previous years.
• U.S. Federal Tax law Hierarchy — Understand the weight of taxing authorities from highest to lowest for use in determining whether a source can be relied upon for a tax position.

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.

Rev. Proc. 2022-19 appears in the Internal Revenue Bulletin 2022-41 for Oct. 11, 2022, and provides taxpayer assistance procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a private letter ruling (PLR) issued by the Internal Revenue Service (IRS).

 On this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, discusses the revenue procedure in detail with Tony Nitti, CPA, Partner — National Tax, EY. Tony combs through the circumstances in which a PLR will not be available or will not ordinarily be issued. In these cases, the IRS does not have a concern with the validity of the entity’s S corporation election or there are other avenues to address the matter outside of the PLR process.

What you’ll learn in this episode

• Setting the stage for Rev. Proc. 2022-19 (0.49)
• Generalization of the frequently encountered issues provided in Rev. Proc. 2022-19 (15.52)
• Principal purpose motivation (16.55)
• Disproportionate distributions (22.14)
• Missing shareholder consent (27.53)
• Missing an administrative letter relating to the IRS’s acceptance of an election (33.28
• Federal income tax return filing that is inconsistent with the entity’s S corporation status (34.20)
• Non-identical governing provisions (35.24)
• A word of caution (39.25)
• Tony’s final thoughts (43.57)

Related resources

• Rev. Proc. 2022-19 — Published in Internal Revenue Bulletin No. 2022-41 on Oct. 11, 2022.
• IRS Practice & Procedure — Browse the latest resources to help with IRS tax matters including news, guidance and tools.
• AICPA tax season library — With constant changes to the tax landscape, being prepared for tax season is critical for success. Set yourself up for a smoother filing season by tapping into the wealth of AICPA and Tax Section resources.

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.

ESG is becoming an increasingly familiar acronym, standing for environmental, social and governance. Similarly, ESG analysis has become an increasingly important part of the tax compliance process and, for CPAs, it’s a key area to understand as part of a taxpayer’s overall financial snapshot.

On this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, chats with April Little, CPA, Partner, Tax Risk & Advisory Services — Grant Thornton, about the importance of ESG matters and why tax practitioners need to be part of the conversation.

What you’ll learn in this episode:

• High level introduction to ESG and sustainability topics (0.54)
• Why accountants are (and should be) interested in the ESG area (6.35)
• Why all-sized firms, including smaller firms, need to get up to speed and focus on ESG (9.02)
• Where tax specifically fits in with ESG (11.05)
• A deeper dive into the “g” of ESG — governance (13.47)
• What companies are currently doing around ESG and tax risk management (14.59)
• A page from April Little’s travel journal (18.06)

Related resources:

• ESG and taxation: A necessary part of a company’s strategic objectives, The Tax Adviser, Oct. 6, 2022
• Key tax provisions in the Senate reconciliation bill, The Tax Adviser, Oct. Aug. 8, 2022
• Energy Tax Credits And ESG Client Letter — Inform your clients about ESG investing and energy tax credits for electric vehicles and residential energy efficiency
• Inflation Reduction Act Energy Credits Chart — Learn more about the energy credits related to home improvements and electric vehicles from the Inflation Reduction Act.
• Tax Policy & Regulatory Change — Stay informed on the latest in tax legislation and tax policy developments. To support members and the profession, we have collated relevant guidance, resources and learning opportunities — and will continue to add new materials as tax law changes unfold.

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.

The Tax Cuts and Jobs Act (TCJA), P.L. 115-97, imposed a $10,000 limitation on individual taxpayers for the deduction of state and local taxes (SALT) for tax years 2018 through 2025. In response, many states enacted laws allowing (or mandating) passthrough entities (PTEs) to pay the taxes at the entity level instead.

In November of 2020, the IRS issued Notice 2020-75, which clarified that partnerships and S corporations may deduct their SALT payments at the entity level in computing nonseparately stated taxable income or loss. The notice also indicated that the IRS intends to issue proposed regulations to this effect.

While electing a PTE tax election can be very beneficial overall, certain aftereffects — while small alone — when stacked together, may reach a materiality level where it should be second-guessed.

On this Tax Section Odyssey episode, David Kirk, CPA, CFP, LLM, Private Tax Leader, National Tax — EY, discusses with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, several concerns that could lead to reconsideration of making a PTE election.

What you’ll learn in this episode

• S corporation issues (3.08)
• State crediting complications (11.54)
• State governments sharing in a “piece of the pie” (14.24)
• Alternative minimum tax (AMT) matters (16.11)
• Grantor trusts considerations (20.10)
• Non-grantor trusts concerns (22.48)
• Thoughts on refunds (25.00)
• Final thoughts (28.29)

Related resources

• SALT Roadmap — State and Local Tax Guide — Navigate the complex world of state and local taxes with a compilation of information and quick links to additional guidance and references. Use the map to access information on the types of state and local taxes imposed, tax rates, nexus, passthrough entity (PTE) tax elections and mandates, due dates, government websites and CPA society information. Also quickly determine commonly used state and local tax forms and easily locate versions and their instructions.
• State and Local Tax Advocacy Resources — This page provides information and documents created by the AICPA State and Local Tax Technical Resource Panel (SALT TRP) on state-level tax advocacy issues affecting tax professionals.
• State implications with the PTE tax | Tax Section Odyssey — States continue to look at the PTE tax to sidestep the federal $10,000 SALT cap deduction limitation following the IRS’s Notice 2020-75.
• Questions to consider before electing into a PTE tax, The Tax Adviser, Sept. 1, 2022.
• Map of states with adopted or proposed PTE level tax — AICPA downloadable map open to everyone.
• Links to PTE taxes states' legislation and tax authorities' information and guidance — AICPA downloadable document open to everyone.
• Taxpayer and practitioner considerations for whether to elect into a state PTE tax — AICPA downloadable document open to everyone.

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 December 2022, the IRS posted a revised draft version of the 2022 Partnership Instructions for Schedule K-2 and K-3 (Form 1065) and a similar revised version of the 2022 S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S). They were subsequently finalized.

On this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA along with Tim Chan, Managing Director, Washington National Tax — Passthroughs — KPMG LLP and David Sites, National Managing Partner, International Tax Services — Grant Thornton LLP, sift through the changes between the draft instructions and dive into the particulars taxpayers need to know.

What you’ll learn in this episode

• Who needs to file the Schedules K-2 and K-3 (2.41)
• Domestic filing exception in the December 2022 draft instructions (5.06)
• The two-prong test (5.47)
• What no or limited foreign activity means (6.46)
• How to report foreign-source income (8.33)
• Requirement that all direct partners are US citizens/resident aliens (9.26)
• Partner or shareholder notification (11.20)
• Requirements for the schedules and the 1-month date (13.14)
• Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), exception (18.21)
• Risks and penalties associated with not completing or filing required schedules (22.55)
• Final thoughts (25.05)

 Related resources

• IRS Schedules K-2 and K-3 guidance and resources — Access resources to advise clients on IRS Schedules K-2 and K-3, which are used to report items of international tax relevance from the operations of passthrough entities.
• Tax potpourri — Form 1099-K, Schedules K-2/K-3 and tax legislation | Tax Section Odyssey — Schedules K-2 and K-3 aim to standardize international tax information reporting to flow-through investors, yet challenges in practical implementation exist.
• K-2/K-3 — Making sense of new international passthrough reporting | Tax Section Odyssey — Listen to this podcast covering the new schedules and related past and future AICPA efforts.

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.

The end of the year is upon us. While the hustle and bustle of the holidays and winter hibernation sets in, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, fills you in on some quick updates about a few trending tax topics to keep you in the know, including Schedules K-2 and K-3, Form 1099-K, Payment Card and Third-Party Network Transactions and tax legislation developments

What you’ll learn in this episode

• Second draft of Form 1065 Schedules K-2 and K-3 instructions revise domestic filing exception (0.34)
• Continued concerns regarding the revised reporting threshold for Form 1099-K (6.13)
• Year-end legislation, including the potential for tax extenders (8.31)

 Related resources

• AICPA Comments on Form 1099-K Reporting Threshold — The AICPA has deep concerns regarding the Form 1099-K reporting threshold that was lowered to $600 for 2022 and will lead to significant confusion in the tax system in the next several months.
• Form 1099-K — New lowered threshold for 2022 — New reporting requirements for Form 1099-K are effective for tax years beginning in 2022. Access information and tools to help you with the changes.
• IRS Schedules K-2 and K-3 guidance and resources — Access resources to advise clients on IRS Schedules K-2 and K-3, which are used to report items of international tax relevance from the operations of passthrough entities.
• JCX-1-22 (January 13, 2022) — The staff of the Joint Committee on Taxation has prepared a list of Federal tax provisions that expired in 2021 or are scheduled to expire in the future.

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.

An engagement letter is an important written agreement that describes the business relationship and the types of services agreed upon by a client and a professional firm. The letter details the scope of the agreement, terms and costs and sets expectations for both sides of the arrangement.

In this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, Association of International Certified Professional Accountants, representing AICPA & CIMA, chats with Deb Rood, CPA, MST, Risk Control Consulting Director — CNA, about the importance of engagement letters and determines why a well-drafted engagement letter can help prevent a misunderstanding with a client from turning into an expensive liability claim.

What you’ll learn in this episode

• The necessity of engagement letters (0.57)
• Liability claims and engagement letters — the statistics (2.24)
• Specific understandings and agreements that should be included in an engagement letter (5.35)
• Timing and fee topics in engagement letters (7.32)
• Electronic engagement letters (10.44)
• Tips for those getting started on using engagement letters or for those that want to improve their processes (11.30)
• Resources, including those related to client terminations (13.44)
• A page from Deb’s travel journal (16.45)

 AICPA resources

• 2022 engagement letters — The 2022 engagement letters are available for Tax Section members to download. These resources are part of the Annual Tax Compliance Kit — a library of engagement letters, client organizers, tax return checklists and practice guides to help you get ready for the next tax season.
• AICPA Member Insurance Program education and resources — Brought to you by AON, on this hub you can find articles, tips, calculators, checklists, webinars, letter samples and downloadable materials.
• Advice for when it's time to say goodbye (to clients) — On this Tax Section Odyssey episode, professionals discuss how ending a client relationship is a weighty decision for any CPA. Whatever the reasons are for the termination, disengage cleanly and timely.
• Rogue behavior: Risks your CPA firm should avoid — Deb Rood shares claim experience of the AICPA Professional Liability Insurance Program that demonstrates that rogue behavior, especially at the partner level, can lead to professional liability claims.
• Use of e-signatures for engagement documentation — The question of whether a client's electronic signature on engagement letters, management representation letters and other documents is acceptable is examined. 
• Surviving tax season: Checklists to manage your risk — Access these interactive checklists to help you navigate tax season and manage your professional liability risk.
• Client Evaluation Tool — Use this tool to identify your firm’s better clients who deserve more of your time and attention.
• Client Termination Practitioner Checklist and Notification Letter — Terminate a client relationship by following these helpful practice management reminders and then formally communicate the termination to your client.
• Practice Management & Professional Standards — Browse tax practice management resources and guidance to help keep your firm performing at the optimal level.

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.

Knowing the right time to end a client relationship can be tricky. No matter the reason for termination, managing the practical components plus the human emotions can be difficult.

In this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, Association of International Certified Professional Accountants, representing AICPA & CIMA, chats with Daniel Moore, CPA, Owner — D.T. Moore & Company, LLC, and Brandon LaGarde, CPA, JD, LLM, Director — Postlethwaite & Nettervile, about their perspectives on when and how to terminate a client relationship for a successful outcome for both parties.

What you’ll learn in this episode

• The first steps in this process (1.22)
• Tips and tools for ranking client relationships (3.40)
• Client Evaluation Tool from the Private Company Practice Section (PCPS) (5.46)
• Example of “buckets” of client relationship types (7.00)
• The next steps after the client evaluation process (13.16)
• Client termination letters (15.09)
• Should you explain the why to your clients? (18.23)
• Thoughts on referrals (20.45)
• Considerations from a firm administration standpoint (23.53)
• Final thoughts (27.22)
• A page from the guests’ travel journals (29.33)

 AICPA resources

• Client Evaluation Tool — Use this tool to identify your firm’s better clients who deserve more of your time and attention.
• Client Termination Practitioner Checklist and Notification Letter — Terminate a client relationship by following these helpful practice management reminders and then formally communicate the termination to your client.
• Practice Management & Professional Standards — Browse tax practice management resources and guidance to help keep your firm performing at the optimal level.
• Reimagining Your Tax Practice Q&A roundtable sessions — Tackle today’s top practice management issues with a free interactive virtual Q&A roundtable series. Get innovative advice from our panel of experts on running an efficient, agile and profitable practice.

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.

Managing a future-forward tax practice that is efficient, profitable and agile can be overwhelming. Meeting client expectations, streamlining workflows and handling staffing challenges are just some top-of-mind concerns. One resonating topic throughout this year, is also the debate regarding shifting the tax filing deadlines. Will they remain what they currently are or is there an appetite for change?

The AICPA Tax Practice Resilience Task Force, composed of a diverse group of tax professionals, are tackling these issues.

In this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, Association of International Certified Professional Accountants, representing AICPA & CIMA, chats with three members of the task force: Chris Wittich, MBT, CPA, Partner — Boyum Barenscheer, Kelly Rohrs, CPA, P.C., Owner — Kelly A. Rohrs, CPA, and Chet Buchman CPA, CVA, CEPA, CGMA, CNC, Managing Partner — Swindoll, Janzen, Hawk & Lloyd, LLC, to discuss the genesis of the group, topics of discussion amongst the members and future endeavors.

What you’ll learn in this episode

• Mission of the task force (1.00)
• Top practice management pain points (2.20)
• Tax filing deadlines (5.37)
• Task force members’ viewpoint on changing tax filing deadlines (9.33)
• What changing tax filing deadlines entails (12.06)
• Conclusion regarding advocating for tax filing deadline changes (16.24)
• Potential alternative fixes that could make a difference (18.57)
• Future ventures of the task force (24.41)
• Upcoming Zoom roundtable sessions (31.12)
• Closing thoughts (32.12)

 AICPA resources

• Practice Management & Professional Standards — Browse tax practice management resources and guidance to help keep your firm performing at the optimal level.
• Reimagining Your Tax Practice Q&A roundtable sessions — Tackle today’s top practice management issues with a free interactive virtual Q&A roundtable series. Get innovative advice from our panel of experts on running an efficient, agile and profitable practice.

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.

Statements on Standards for Tax Services (SSTSs) are the foundation for validating reputational integrity in the tax profession. The SSTSs are the enforceable tax practice standards for members of the AICPA.

To keep pace with the evolving tax profession, the updates to the AICPA’s SSTSs will guide tax practitioners into the future, help them enhance their services and maintain their professional edge.

On this Global Ethics Day, in collaboration with the Journal of Accountancy podcast, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, Association of International Certified Professional Accountants, representing AICPA & CIMA, is joined by David Holets, CPA, Partner – Crowe LLP, and Henry Grzes, CPA, Lead Manager — Tax Practice & Ethics, Association of International Certified Professional Accountants, representing AICPA & CIMA, to discuss the proposed revisions to the standards. Tune in to this special episode to learn more about the goals and timeline for these revisions and how you can provide your input.

What you’ll learn in this episode

• What are the SSTSs are and why are they being revised now? (0.54)
• What are the proposed changes? (2.36)
• Other subjects considered but not included in the revisions (6.13)
• SSTSs resources available (8.05)
• How to submit comments to the proposed revisions by the due date (9.35)
• Invitation to comment (ITC) (10.50)
• Discussion about quality management (13.19)
• Project timeline (15.25)
• Closing thoughts (17.37)

 AICPA resources

• Statement on Standards for Tax Services (SSTSs)— Examine the toolkit for the enforceable tax practice standards for members of the AICPA.
• Proposed revisions to the AICPA tax standards (SSTS)— Access a resource hub that provides the objective of the SSTS updates, project timeline and answers to frequently asked questions (FAQs). Please complete the Comments Form or email feedback to SSTScomments@aicpa-cima.com by Dec. 31, 2022. Comments will be available for viewing on the AICPA’s website at the conclusion of the comment period.
• Circular No. 230 guidance — Title 31 United State Code section 330 was first published as the Horse Act of 1884 which granted the Secretary of the Treasury the authority to regulate agents representing claimants before the Treasury Department. Guidance was provided to these agents by the Treasury in the form of circulars.
• Professional responsibilities in data security for tax professionals — Safeguarding your client’s data is paramount. Use these laws and guidelines to help you help your clients.

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.

If you're advising businesses on their pending ERC claims, this is a must-listen for practical guidance on navigating the process and setting the right expectations.

Tune in to hear Chris Wittich and Dan Chodan, two experts immersed in Employee Retention Credit (ERC) matters for four years, discuss the IRS's upcoming actions for sorting and processing pending ERC claims by risk level. High-risk claims are likely to be denied, medium-risk claims require more detailed review, and low-risk claims will be processed starting soon. The IRS moratorium on processing claims filed after September 14, 2023, is still in place.

Businesses with pending ERC claims are facing critical choices about amending income tax returns due to statute limitations. The speakers advise open communication with clients about the limited options available and the importance of understanding the ethical responsibilities as tax preparers. Based on the current backlog at the IRS for ERC claims, it is important to manage client’s expectations around the processing time as the impact of potential changes in legislation.

Related resources 

Previous Tax Section Odyssey episodes discussing the Employee Retention Credit (ERC):

·       Sifting through ERC questions | Tax Section Odyssey

·       ERC suspended: What happens next | Tax Section Odyssey

·       Employee retention credit and professional responsibilities | Tax Section Odyssey

ERC guidance and resources — The rules to be eligible to take this refundable payroll tax credit are complex. This AICPA resource library will help you understand both the retroactive 2020 credit and the 2021 credit.

Employee Retention Credit (ERC): Fact or Fiction? — Use this guide to educate yourself and others on common misconceptions surrounding the ERC.

Employee Retention Credit Decision Tree — Download the ERC decision tree to help you with various decision points when working with clients to protect yourself/your firm from significant risk.

IRS resources

·       IR-2024-169 — IRS news release on June 20, 2024, discussing the next stage of ERC work

·       IR-2023-169 — IRS news release on Sept. 14, 2023, ordering the immediate stop to new ERC claim processing.

·       IRS ERC resource center — IRS hub for ERC information, including links to guidance, FAQs and the latest news.

Transcript

April Walker: On today's podcast, we're going to talk about the IRS's next steps for ERC and what that means for you.

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 two repeat guests. I'm happy to have with me, Chris Wittich. He is also known as @ravenoustiger. He is a partner at Boyum Barenscheer in Minnesota. I'm also delighted to have Dan Chodan. Dan is a tax partner at Trout CPA in Pennsylvania. Welcome to the both of you.

Dan Chodan: Thanks for having us.

April Walker: Chris, let's set the stage for what we know now. We're recording on July 2. [Let’s talk about] what we recently heard from the IRS late last week and what we know now about the IRS processing of claims or what they're telling us.

Chris Wittich: On June 20th, IRS had a press release, and there was a lot of good information in there, the first time in quite awhile. I think we've gotten some insight as to what they're doing with these ERC claims. Right off the bat, they differentiate, and they say they're putting claims in three different buckets, and it certainly falls in the red, yellow and green.

In my mind, the red category, the IRS is saying between 10-20% of the claims fall into what they describe as the highest risk group. They've said that a lot of these are going to be just straight-up denied in the coming weeks, so that red they're just seeing these claims. They're looking at them. They're saying these are not good claims at all. I would suspect those are like the employees don't exist, the businesses don't exist. They're claiming more in credits than they paid in wages, stuff like that. The IRS is saying 10-20% of all the claims they have, I would expect to get adjusted or denied entirely, and they're going to start working on that soon.

The next category is the biggest category, and that's the yellow, as I would describe it. So they're saying between 60 and 70% of claims show an unacceptable level of risk. That's their term, not mine. That's two-thirds of the claims. They think the risk is so high that it's unacceptable and we're not exactly sure what factors they're using to determine that, but in their own words, they're going to be doing more thorough reviews, compliance reviews of those claims. Which again, that's the vast majority of the claims.

The third category is a green zone. They're saying between 10 and 20% of the claims show a low-risk, and they don't say how they determined it, but you can reasonably assume that the claims are well within the payroll metrics. They might be particularly at-risk industries. A restaurant is likely to be a lower risk claim than a law firm. Based on industry or the size of the claim, or the number of quarters, they're saying, well, 10-20% of these look like they're going to be good claims, and so they intend to start processing them. It remains to be seen how quickly they really process the claims, but at least they're acknowledging that a portion of these are good claims and we're going to start getting them out.

For those three buckets, the other caveat here is those are the claims filed prior to the moratorium. They haven't looked at the claims filed after the moratorium. So, those three buckets, those are just the claims they had prior to September 2023.

April Walker: It's important to note, because we get this question quite a bit, the moratorium means they are not processing those claims. It does not mean that they're not accepting them. If you feel you have a good claim. We're going to get more into the statute discussion a little bit later. [I’m really not talking specifially] about statute on income tax return, but there's also a statute issue with the ERC claim itself. Again, we'll talk about how you're talking to your client about the [statutes], but the moratorium does not mean you cannot file, it just means they are not processing.

Chris Wittich: The moratorium. I always explain it to clients, like you can send in your claim. The IRS will take your claim and put it on a shelf, and they promise that someday in the future they will start looking at the stuff on the shelf, and they haven't done that yet. If you have a good claim submit it, it goes on the shelf, the IRS will get to it down the road.

April Walker: That's what the IRS told us, which is important to set the stage. Chris, based on this information from the IRS, what advice are you giving to businesses who are waiting? I guess there are the buckets – from what the IRS said. There's also buckets of where people are in this claim process. Walk us through a little bit about how you're sharing with your clients about expectations, I think is an important word.

Chris Wittich: So for the people who filed prior to the moratorium, and we have lots of people we helped in the summer of 2023, very few, if any, of them have seen actual checks or credits getting processed. I think now what we can tell people is the IRS is going to start processing those. If you filed in the summer of 2023 and you're a low-risk claim, I would expect or hope to get processing in the next six months.

For those people, I am saying, hey, it's been slow. It's been maybe 12 months and you haven't seen anything, but we're very hopeful that you will get processed before the end of the year. For the people who filed during the moratorium, and certainly we've had a bunch of those. Originally we didn't know how long the moratorium would last. Maybe it was only going to be a couple of months.

My advice to them now is that I fully expect the moratorium to last until April of 2025. I think if you read in-between the lines of what the IRS is saying, this moratorium is going nowhere anytime soon. If you filed in October 2023, just after the moratorium, I'm telling them, hey, that claim is likely to sit on the shelf at the IRS until April 2025, then they're going to process them in the order they were received.

Late 2025 or sometime in 2026 is my realistic expectation for when those claims will get processed. For the people who are questioning their claims, I would remind them that the withdrawal process is still available, it's still open. You can also just file a regular amended payroll tax return to undo or modify or payback your portion of a claim, if you think it is no longer a claim you want to make.

Then for people who have potentially made bad claims, I would say the IRS has hinted at a second voluntary disclosure program (VDP). It's not out yet. When it comes out, the terms won't be as generous as the first time around, but there's a decent chance that a second voluntary disclosure is coming down the road so that's how I look at it. You got the good claims from before the moratorium, the good claims during the moratorium and then you've got withdrawal, regular amendment and voluntary disclosure as the options to deal with bad claims.

Dan Chodan: If I can jump in there about the VDP. I think the comment has been that they were going to make that decision pretty soon. I think this month so that we should hear something on that. Anybody that might be thinking about doing it, I'd say at least hold off through the summer before making those decisions because it sounds very likely that they're going to come at least come out with something or say that they're not.

One way or another, I think the IRS already hinted at that, but you bring up a really good point there Chris, and the IRS said it in this release. They are really concerned about lifting the moratorium and what that would do for the next wave of promoters, pushing for another gold rush, I think is the term that's used there.

That's really the big push of the moratorium itself. To shock the system of the outfits that were doing heavy promotion. I think it's been largely successful. You got to give the IRS credit. They can't necessarily deal with a significant volume that was out there. It went from 50-60,000 claims a week. You're recently looking like closer to 12k a week that they are receiving. And that's because of this moratorium and then because you can't file 2020 claims anymore.

Because after the bill with the January 31st cutoff potentially was out there, that really caused a push, for a lot of reasons, but the moratorium being the primary one. And just to reiterate what you said with that in mind, the IRS saying they want to responsibly lift the moratorium, and that absolutely means it's not going to be before there'll be any chance that funds would go out and be used for further promotion. They've said that explicitly in this. Those hoping that it would have been through the end of '23, what the first timeline could have been and it'd be lifted soon.

It's certainly dragged on of course, till now and I expect that it's going to at least double in time here through next year, if not more. While they try to get Congress to act, they want Congress to pass that ERC provision that was in that bill, that didn't make it to law yet. But they want that passed in standalone or tucked into something else.

That's what IRS is lobbying for. It's certainly interesting, but I am maybe a little more pessimistic on the timeline. Six months, I'd love to see something happening. But I've been telling people we're in uncharted waters and we have seen some processing. It's been a trickle during the moratorium of the pre moratorium claims getting paid. I think there's a lot in this release, but that's basically going to continue. What we've seen is the same as what it's going to be going forward. It's going to be a very slow rate and it's a very small amount.

But we are saying that most all of these claims have a very high risk of being improper and the low-risk claisorryms are so small. How do you know which bucket they've put you into? You just can't expect anything. What I'm telling clients is do what the IRS is telling you to do here. You've got to wait and don't expect anything, don't spend this money in advance. If you do have a hardship case, it's been over a year. Those are the taxpayer advocate cases that can be filed and there's been success there. We've seen that for those funds that have sat around for a long time, but if it's a true hardship case that can be made, still don't consider that a guarantee, but at least you can make those cases through taxpayer advocate.

That's an action that can be taken, but for those that can't make the hardship cases, it's a sit around, waiting game for very large claims that are solid. Refund litigation is part of the conversation too through the court proceedings there, but not something that the average taxpayer would be considering. Just due to the costs and the timeline and there is scrutiny to that. It isn't going to be all claims, it's just going to be the best ones and the biggest ones and those willing to fight that process. No guarantee that it will mean it's a faster process than if you had left yourself from the traditional route. Those are just the conversations around what are we doing at this point. Just to add some more color to that plan.

April Walker: That's great. Dan, Thanks. I was just thinking as you were talking. Again, we do not know anything about whether this is true or not, but truly, if they push the moratorium until next spring of 2025, maybe I just had a light bulb moment, That will be the end of when 2021 claims can be filed. But I guess even more important, if there is a legitimate claim, back to our original point, can still be filed. They're put on that proverbial shelf that Chris is talking about, but it sounds and they certainly alluded to that opening up the moratorium seems like an opportunity.

Dan Chodan: We should mention April [15 deadline] there. I always have to layer that with a lot of caution at this stage because that January 31st date could stick at some point. While I would say you can file them today, there's no guarantee. If the messaging continues the way that it's going, it could be another date. It could be any date. It could stick with January 31st. All these claims on the moratorium, have been sitting on the shelf. It could go all the way back to the beginning of the moratorium. that's more revenue for them in Congress to go spend somewhere else. It's not to say that you don't file if you have a legitimate claim, but you just have to be aware that there's absolutely a risk at play that this could be changed and could be changed retroactively to make sure we highlight that.

April Walker: Great point and things you need to be talking about with your clients as you're thinking about it as a business yourself filing this claim.

I want to talk about any experiences you've had, just in general, with not necessarily the processes and the claims, but thinking about have you had a lot of [IRS] examination communication. What's your experience been with your current claims that you have in the hopper?

Chris Wittich: I've seen just a wide variety, I would say, of issues or notices related to these. Certainly, had a couple of audits, but still that's a small number. We have other issues where four of the quarters got processed, but not the other two. You call the IRS, try figure out what happened, and you get the runaround, you just can't get a straight answer.

We've had notices where the IRS denies the claim because they say you didn't pay any wages, only to discover that, yes, of course, they paid wages, but the IRS lost all the payroll tax documentation; they don't have the W-2s, a lot of little one-off issues, I would say that are all over the place and it has to do with these things. A lot of these things were filed on paper, the records aren't necessarily that great.

I'm sure that I have clients in what they think is the highest risk category, and they're there because they lost the W-2s, and so they think a client made a claim of $100,000, but don't have a single person on payroll. But yes, they do have people on payroll, we have all the payroll tax reports, we have all the proofs that W-2s were issued. IRS just isn't matching that up, necessarily. Just lots of issues, but they're all over the place. I haven't seen anything, at least recently that's been very systemic or consistent.

My advice is always trying to confirm that the IRS has your claims. Certainly, certified mail was a good way to do that, but some clients didn't do that, so you can call the IRS and at least confirm that they received it and then deal with those one-off issues as they come.

April Walker: Are you doing that on the PPS line?

Chris Wittich: Yeah. We've used the PPS line for the most part, you certainly need a power of attorney to do that. Some clients just call themselves and they're calling the regular IRS line, that's so hit or miss, as to what kind of service you're going to get, but it's available just to call and confirm that they have it.

April Walker: We do get that question a decent amount. Dan, do you have any thoughts to share?

Dan Chodan: Sure. Yeah, I'd add to that. Once you have that power of attorney, you can get the 941 transcripts. It's going to give you the same information as a phone call, they'll tell you the date received, and once it's paid, otherwise, no updates in the process, which is just mind-boggling, of course, when he tried to explain that to a taxpayer that wow, how do I not know the status?

Unfortunately, everybody's in the same boat, all we can do is prove receipt and then show when the payments are made, and those transcripts are great. As far as what I've been seeing, I've seen it all across the board just as Chris has mentioned here, there's inconsistency as I talk to other professionals, the enforcement of this is all over the map, some have moved very quickly, some really drag on, some agents are very well-versed in the process, some are missing things that are needing to be explained the rules, may be and helped through the process is a wide breath in that and what's going on, but it doesn't seem to be in a large volume.

There's a team that's doing these in examinations and the processing is at a trickle, it's not a large group, and neither of those areas. Something's going to have to change going forward while the IRS puts more resources behind enforcement. Will there be a larger enforcement window authorized by Congress that's being asked for in these bills? Now at some point, the rate of processing has to pick up or it's just going to take years and years for the backlog to be cleared on all these things.

There's more to come on what's going to happen, but again, is it to expect some seismic the change in the next six months or even to a year, it's probably not it, but there'll be some change on that front. There has to be given the IRS rhetoric around enforcement and then also just there will be more of a ground swell eventually that we have to do something with all these claims sitting on a shelf.

April Walker: I'd like to pivot a little bit to another big question we get all the time, and this is the segment I'd like to call There are no good answers to these questions". I want to talk about them [though] and let's walk through where you guys stand with them.

So statute of limitations and income tax returns. Lots of concerns here, especially as we talked about with all the delays. With delays of running out of statute for these income tax returns where either amended returns have already happened or need to happen.

Let's break it down a little bit. There are businesses who haven't received their refunds, their claim has not been processed. You have told them. I know the two of you have told them, no question, they need to amend their income tax return for the period of the ERC claim, and statutes either have already run or getting ready to run. Chris, talk a little bit about talking points here. What you're talking with your clients about, trying to help them understand where they are with this.

Chris Wittich: Yeah, there's definitely no good answers, and I think just being honest with the clients and telling them that upfront. The biggest thing is to discuss it with them, make sure they're aware, and then let them choose which bad choice they want to make.

But the timing of the income tax statutes, they are going to close, and especially with this recent announcement, we basically know that these moratorium claims are not going to get processed before the statute closes, lots of claims or high risk, so they're not as likely to get processed before these statutes close.

A lot of the 2020 statutes are probably already closed, 2021 will go next year. A lot of the time you're left with a choice which is pay tax, which you simply cannot afford to pay because you have not received the money, or let the statute run and potentially do it after the statute, which is not a good feeling, and neither of those is attractive.

The third common scenario is I paid my tax already, but now my claim has been sitting for 18 months and I'm worried I'm not going to get all of it. So do I push back to those same two options again, do I amend now to take the income back out? And I'm left with the same two choices of when to pay the tax or to do it late, or do I look at some protective claim to hopefully protect me if the IRS adjusts my claim down, then I want to be able to get a refund of the income taxes, which I've already paid.

I think all of those scenarios are lousy choices for a taxpayer to make. I see my role is just making sure they know all of the lousy choices available to them, and it's going to depend on their financial situation. Sometimes you simply cannot afford to pay the tax, that's just not a choice, if I'm going go bankrupt by paying the tax, I guess we're not choosing that option. So making them aware.

I think it would certainly be a consideration as to how high a risk a claim do you think they have. Some claims are based on gross receipts decline that's very obvious, and all the calculations are done correctly. Other claims are based on government orders and trying to figure out what a more than nominal impact is, and there's some question as to maybe a grouping or something like that.

Some claims are inherently going to seem like they're higher risk and making sure the clients are aware of that, and then just letting them go with one of these lousy options. I wish I had something better to tell them. It's kind of a depressing conversation to have with people, but it's one that you don't want to avoid because that is the worst outcome. Because if you don't talk to them about it.

Dan Chodan: We can't avoid it, we need to make the recommendation to the client. Here's what the rules are, you've made the claim, here's what it is. We have to advise the rules, but we can't force someone to amend either, we have to meet our duty in that and there's the reality of their situations that will come into play and their decision. But we have to do our end of things.

What will be interesting is the proposed bill that was out there to change some things on the ERC would align the income tax statute with the enforcement. There could be relief on some of this for the ones that get thrown out later, may at least not have that double whammy of inability to get the income tax back, so there may be some relief for those bad cases at some point.

But right now, before these statutes run, 2020, maybe closed, 21 is still open for sure. Those ones that could be risky, I'd have those conversations. Also on our end, if we know clients that have a shaky one, they may be in a position where they don't want to wonder what Congress will do in the future, will they give us this relief or not? They may look to get that cash back on the income tax side now and then redo this in the future as needed. But at least you can lock in if you know that you're in a really sticky spot, so that's something to consider.

April Walker: I told you that this was the section of no-good news and that's not generally how I roll. I generally like to provide bright light and positivity, but this is a tough one.

But I think this is where you need to show that you're an advisor and show your value even if you're coming with not a lot of great news. All right, as we're wrapping up, let's see, I'll start with you, Dan. Is there any final thoughts or takeaways that you'd like to leave our listeners with today?

Dan Chodan: Sure. This is a very interesting release that pushed us to have this conversation today. I think it's very telling, but also at the end of the day, we're in the same spot. The IRS has the situation where it wants it. The advertisements have disappeared. The deluge of claims is way less. It's not that they're without problems, but the IRS has been immensely successful on this already, so you got to give them some credit.

This release gives us a lot of information, but when you look at it, it means what we've been experiencing is probably going to continue. We're probably going to get another doubling of the experience we've had to this point. The fact that they say the vast majority of these show risk of being inproper just really supports what has been seen, what they've been worried about all along, and is also just echoed in the compliance efforts.

They said two billion dollars to date in compliance through the VDP, through withdrawal and enforcement efforts. That's a huge number. Not a huge number to the total of the program. But when you think about, that means that's what's been accomplished so far, so how much more is out there if that's what has been withdrawn, if that's what has been enforced to date, even with limited resources and small amount of audits there's a much bigger pool and it speaks to the fear and the risks that's out there.

A lot more to come. If there's no congressional action at all related to this program and everything just stays as is going forward, I'd be surprised. Something's going to happen in some form, even if it's not exactly what was out there in the last proposed bill. I feel like this is going to come in some way, shape, or form in the next couple of years, and the IRS will have more releases. There'll be more twists and turns on this.

More to come, unfortunately though, for those that aren't in a spot to get a taxpayer advocate referral and have a hardship claim to push this. I think you're just along for the ride until you're in that real need, unless you're going to go that refund litigation route, you're just going to have to be along for the ride here, unfortunately. A lot of other tough conversations we've been having for a while now are just going to be continuing, that we're going to have to wait and see.

April Walker: Thanks, Dan. All right. Chris, what's your send-off thoughts for us?

Chris Wittich: I would agree with everything Dan said. I guess I would just wrap it all the way back to the discussion that we had in April of 2023. I'd encourage you to circle back. In April 2023, we talked about the IRS OPR announcement. We talked through the Circular 230 issues, the SSTS issues, what are the ethical responsibilities of a tax preparer of a CPA. I would cross-reference those conversations with where we're at today.

You want to advise your client of the rules. You want to be sure you know what the IRS is saying currently. But I would cross-reference, we got this new press release, there's some new information in there. They're clearly targeting these bad claims, so what do we do about the bad claims? There's a few solutions available now, but I also need to understand my ethical responsibility. I'm sure it'll be linked, but I would go back and take a listen to that with this new press release in top of mind.

April Walker: Yes. That is exactly right. That's when we were together last to record talking about that, and none of that conversation is out of date. We're in a different place with claims, but all of that conversation is very relevant.

Now, you're not going to get out of my fun question. Even though you've been with me before, you still have to answer these questions. I like to think about us taking a journey together towards a better profession. Always journeying toward that. Chris, what journeys are you taking outside of tax? I think you're getting ready a month or so to have baby number 2. I don't want to put words in your mouth. Where are you headed this summer?

Chris Wittich: With a baby on the way, travel plans are limited. These days our travel plans consist of going to grandma's house or going to the other grandma's house. About 20 minutes in either direction is our maximum travel distance, but excited too. I'll be at National Tax in November. I'll be in DC.

April Walker: That's fun travel, and there'll be some good hotel sleeping for the tiger. Dan, you don't have the tiny little ones running around, so hopefully you got some fun travel on the agenda.

Dan Chodan: We're going to get them back to the beach this summer. They'll be really excited for that. But my favorite travel this year was a bucket list item for my wife. It was our 10-year anniversary. She always wanted to go to Nashville. Big country music fan. That was a great time. We did that. Just got back. I'll admit country music isn't all that bad after being steeped in a little more of it, so I'm coming along to it.

April Walker: Okay. It's not it's not my favorite either, but Nashville is quite a fun town, so glad you were. And that was a without-kids trip?

Dan Chodan: Yeah.

April Walker: Those are always the best. Love the kids. Love them. You all are great. But so nice to be having adulting trip. Chris, maybe one day.

Dan Chodan: Different kind of fun.

April Walker: Exactly. Thank you guys so much for sitting down with me. I think this was a great important conversation. In the next stage, I feel sure we're going to talk again, so look forward to that.

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 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 in this episode as well as linked back to other podcast episodes as we discussed. Thank you so much for listening and stay cool everybody.

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.

Securing data against bad actors is crucial to the long-term success of a business. The average cost of a data breach in the U.S. in 2022 was over $9 million. With proper planning the risk can be mitigated, and even if an incident occurs, the cost and the time to recover can be significantly reduced.

In this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, Association of International Certified Professional Accountants, representing AICPA & CIMA, speaks with Ashley Grover, Cybersecurity Threat Intelligence Analyst — Sylint, on the latest trends in cybersecurity and how businesses can better protect themselves.

What you’ll learn in this episode

• Ashley’s role as a cyber threat analyst (0.33)
• Why businesses should take cyber threats seriously (2.20)
• Coordination with information technology (IT) department/providers (4.47)
• Safeguards rule contained in the Gramm-Leach-Bliley Act (7.53)
• Actions for an IT department to safeguard data (8.32)
• Current cyber threat trends and infiltration techniques (11.42)
• Specific recommendations for tax professionals (17.58)
• Remediation tips should a cybersecurity incident occur (19.38)
• What a cyber incident response would entail (21.20)
• Final thoughts (23.44)
• A page from Ashley’s travel journal (26.30)

 AICPA resources

• Gramm-Leach-Bliley Information Security Plan Template — Tax preparers must implement security plans to protect client data. Failure to do so may result in an FTC investigation. Download and customize this template to document your firm’s policies.
• Professional responsibilities in data security for tax professionals — Safeguarding your client’s data is paramount. Use these laws and guidelines to help you help your clients.
• Tax Identity Theft Toolkit — CPA tax practitioners need to combat tax-related identity theft daily as it has become pervasive globally. Use this toolkit to tackle tax identity theft issues with your clients.

Other resources

• Cybersecurity and Infrastructure Security Agency (CISA) — CISA works with partners to defend against today’s threats and collaborates to build a more secure and resilient infrastructure for the future.
• National Institute of Standards and Technology (NIST) Cybersecurity Framework — A set of industry standards and best practices developed by NIST to help organizations manage cybersecurity risks.
• Center for Internet Security (CIS) Controls Framework — A prioritized set of actions to protect an organization and data from cyber-attack vectors.

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.

The employee retention credit (ERC) has been an important lifeline to many struggling businesses impacted by the economic uncertainty around the COVID-19 pandemic.

The ERC has helped support many businesses through the onset of the COVID-19 pandemic and taxpayers, many with the help of their CPA practitioners, have faithfully filed for refund claims.

However, some taxpayers have been approached by firms or consultants who may promote an overly aggressive narrative with the promise that any and every business can qualify for the ERC. Taxpayers should be wary of such aggressive claims and be conscientious of how to mitigate risks when applying for the ERC.

In this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, Association of International Certified Professional Accountants, representing AICPA & CIMA, welcomes back Kristin Esposito, CPA, MST, Director — Tax Policy & Advocacy, Association of International Certified Professional Accountants, representing AICPA & CIMA, to discuss this top-of-mind topic.

What you’ll learn in this episode

• The current environment (1.27)
• Concerns with overly aggressive firms or consultants (2.48)
• Steps for taxpayers who have fallen victim (3.51)
• IRS guidance available and on the horizon around this topic (7.35)
• Impact on those who have filed legitimate claims (9.02)
• The latest in processing times for filed Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, and the coordination with examination activities (10.19)
• AICPA advocacy efforts around ERC (12.20)
• A page from Kristin’s travel journal (15.29)

 AICPA resources

• Employee retention credit guidance and resources — The rules to be eligible to take this refundable payroll tax credit are complex. This resource library will help you understand both the retroactive 2020 credit and the 2021 credit.
• Mythbust and maximize the employee retention credit | Tax Section Odyssey — Helping eligible clients successfully apply for and receive the ERC is a once-in-a-lifetime opportunity for CPAs according to Chris Wittich, MBT, CPA.
• ERC — What we know now | Tax Section Odyssey — Kristin Esposito, CPA, MST, addresses the much-anticipated employee retention credit (ERC) guidance released in August 2021 that answered many outstanding questions.

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.

The Inflation Reduction Act of 2022 increases the IRS budget by roughly $80 billion over 10 years. The funds are broken down into four main categories: taxpayer services, business system modernization, operations support and enforcement.

On this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — AICPA Tax Section, talks with Gloria Sullivan, Managing Director, Tax Controversy & Regulatory Services — PwC, who spent 37 years with the IRS Large Business & International (LB&I) division. Gloria provides her insights on differentiating between the funding categories and understanding the ins and outs of the IRS from a personnel, budgetary and personal perspective.

What you’ll learn in this episode

• Introspection at the IRS — How it’s changed over the years and the current environment (1.20)
• IRS funding provisions set forth in the Inflation Reduction Act of 2022 (8.48)
• Deeper dive and insider look at the funding provisions (14.44)
• Insights regarding the IRS backlog (18.42)
• Can the IRS move funds from one category to another (22.21)
• Enforcement insights on a comparison of statutes and the U.S. Treasury Secretary Janet Yellen’s letter to Commissioner Rettig (25.03)
• A page from Gloria’s travel journal (32.49)

 AICPA resources

• Inside look at the Inflation Reduction Act | Tax Section Odyssey — The Inflation Reduction Act, H.R. 5376, now law, includes a 15% corporate minimum tax, various energy credits and increased IRS funding.
• Breakdown of the Inflation Reduction Act of 2022 — The Inflation Reduction Act of 2022 contains several provisions that could affect your tax clients. Learn what's changed so you can adapt in this webcast.

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.

President Biden signed the Inflation Reduction Act, H.R. 5376, into law on Aug. 16, 2022. Tax professionals must now undertake the task of quickly understanding the tax provisions, including the new corporate minimum tax, based on financial statement, or "book," income and various energy credits, which include several new credits for clean energy and fuels and clean vehicles and other transportation. The bill also extends several temporary existing credits.

On this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — AICPA Tax Section, and Kasey Pittman, CPA, Senior Manager, Washington National Tax — Baker Tilly US, dissect the tax stipulations in the new tax and climate legislation.

What you’ll learn in this episode

• What’s in the Inflation Reduction Act, H.R. 5376 (1.35)
• 15% minimum tax for large corporations (5.07)
• 1% excise tax on corporate stock buybacks (11.12)
• Extension of the Sec. 461(l) business loss limitation (13.24)
• Clean energy measures (17.22)
• IRS funding provisions (24.14)
• A page from Kasey’s travel journal (28.33)

 AICPA resources

• AICPA comments on tax provisions in Senate reconciliation legislation released on July 27, 2022 — On Aug. 4, 2022, the AICPA submitted comments regarding important profession and tax policy issues that are in the Senate reconciliation legislation released on July 27, 2022.
• AICPA comments on the corporate profits minimum tax in reconciliation legislation being considered — On June 21, 2022, the AICPA recommended that Congress reconsider and clarify the rules associated with the proposal regarding implementing a minimum tax on corporate adjusted financial statement income due to complexity and because it may have many significant and potentially negative implications. The AICPA previously submitted a letter on Oct. 28, 2021.
• AICPA request for additional guidance and relief regarding Sec. 461(l) – limitations on excess business losses of noncorporate taxpayers — On June 22, 2020, the AICPA submitted a comment letter requesting for additional guidance and relief regarding Sec. 461(l). The recommendations address treatment of previously reported excess business losses and relief for underpayment of estimated taxes.

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.