ENGAGE download – Wins and takeaways

19 Jun · Tax Section Odyssey

00:28:57

Get a snapshot of the AICPA & CIMA ENGAGE 24 conference held in June at Las Vegas. Conference attendees share their experiences at this premier accounting event along with the knowledge that they gained from various sessions. Highlights include discussions on professional growth, finding balance, mental wellness and the importance of networking.

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.

Today's episode is a little different as it contains snippets and recordings from several participants at the AICPA and SEMA Engage conference, which was held last week in Las Vegas. I have actually been to this conference as a staff member of the association every year.

I believe this is the eighth. 2020 was virtual, of course, but I've been every year and somehow it just always gets a little bit better and better to me. But rather than hear me drone on and on about how great it is, please listen to those who attended.

I have with me Ashley [Francis]. Ashley was in person with me. We're recording this on Tuesday, June 11th. We were together last week at the Engage Conference in lovely, hot -- very hot - Las Vegas last week. Ashley, I'd love to hear your overall impression. How was your week at the conference?

Ashley Francis: So, my overall, overall, is that I am so exhausted, but it is that good exhaustion. Like you go and you do something, and you do the things that you want to do and you have such a wonderful time. That you're tired, but it was a good experience.

Walker: Wonderful, yes. Were you there all four days?

Francis: Oh, I was there longer because I did one of the pre sessions.

Walker: Look at you.

Francis: I did the PFS live pre session, sat for my PFS certificate, and passed the test.

Walker: Congratulations!

Francis: Thank you!

Walker: [Go] you with your new credential.

Francis: I know, it's very exciting,

Walker: Yeah, I think one more day might be do me in.

Francis: I agree, one more day,

Walker: It's wonderful…

Francis: [Five]days was enough, yeah.

Walker: Yeah, it's just a lot. I'm wondering in all of the sessions that you went to, if you had one particular takeaway or one session that really meant something to you. I guess meant something to you professionally or personally. That [included something] you are trying to implement into your life.

Francis: Absolutely. And this is a challenging question because there were three sessions that stood out to me, that I could go back and listen to again and again, but the one that impacted me the most, I would have to say, is Andrea Miller's session on balance and mental wellness. Because I think a lot of times, especially for me, everything is just go, do the next thing, do the next thing. Without stopping to think, wait... is this next thing the thing I actually want to be doing?

And so even though it was a big room, it was full of folks, her session did such a great job, having folks walk through that experience themselves in a very individual way. When I left that session, I was like, holy cow, what am I going to do with my life now? So, it was really big. I ordered [about] 30 books from the library because of it.

Walker: Nice, that's always a good session that creates more work for you to do after the fact. I didn't see that session. I have a long list of sessions that I want to go back to and watch for the first time or watch again. I'm sure you know she used to be staff here at the AICPA and I loved working with her.

Francis: She's great. Her career turn has been exciting to watch also. Can I give a shout out to the other two sessions that I would love? Twyla and Barbara Richardson, their session on “making wow client engagements” that was really good. And then Keila and Carrie talked about bringing in non-accountants to help support and sustain and build our firms.

That one was brilliant as well because it hit on so many different, important things that we need to think about.

Walker: Neither of those which I attended. again, there's so much going on, all the time, which is, not necessarily a negative of engage, but it's just. It's almost like you have FOMO. It's oh, I can't do all this stuff. Yeah. all thank you so much, Ashley, for hopping on and recording with me today. I hope to see you at, if not before, at next year's Engage

Francis: You definitely will.

Walker: Welcome, Brandon. I have with me Brandon Lagarde, who is a wonderful volunteer with me. [He]does a lot of different things, and he was with me at Engage last week. We had a lot of fun, but Brandon, I'd love to hear about your experience overall at the conference last week.

Lagarde: Yes, absolutely. Thanks for having me. Last week was the Engage Conference, and I believe this is the 8th Engage, is that correct?

Walker: yeah, that seems right.

Lagarde: 8th Conference? It's been many of them, and I think I've been to every one of them, and every time I go, I'm just amazed at the scope of what is provided. It just seems every year it gets bigger and bigger.

The speakers are incredible. the exhibitors are getting, better and better, and even, just so much out there. The people that are going. It’s a great experience overall. One thing we hear [a lot] about the accounting population and aging population. I was shocked to see the amount of young people at the conference and excited about accounting and excited about the practice. Also really getting to meet a lot of other people who are trying to do the same thing we're doing. Just this practicing and learning from each other and it was a great experience.

Walker: Yeah, it was. It was a lot of energy and a lot of enthusiasm. And sometimes it doesn't come from the older generation. It comes from the younger generation. But I like to be a hanger on [of the younger generation]. Brandon, are there any connections you made from a networking perspective during the week that you would like to share with us?

Lagarde: As I mentioned, this is my eighth Engage conference. And this is I believe the second annual AICPA Foundation Golf Tournament that was held Sunday morning before the conference kicked off. This year I looked at my schedule and I'm attempting to play golf, trying to get better and improve.

And I've been told that the only way to improve is to play a lot. So, I thought, let me sign up for this tournament. So I actually played in the golf tournament, Sunday morning. Fantastic tournament- I highly recommend it to anyone who's going out there. And got to meet some really great people.

You get put with three other people to play with. Didn't know these people before and played a round of golf. Had some good shots, had some bad shots, enough good shots to go back out there. We did not win the tournament, unfortunately, but we made some good friends and I continued to network with those individuals and keep in touch with them throughout the conference and ran into them multiple times.

I ran into him at the Old Red event, which was an event that was sponsored by AICPA, on Tuesday night at the conference. This was another great time just to network and to listen to the band. Although, it was a little hard to network there because it was a bit loud.

I tried to talk to Damian Martin a couple times, and I think we were screaming at each other at one point just because of the volume of the music. But it was a great place to just meet people.

At the exhibit hall, I'm always amazed at the [number] of vendors that are there that are sure They're there to support the AICPA and their product. But it's just amazing the technology that's out there and the things that are happening. Getting to meet some of the people there and getting to make connections with some of the platforms out there and learning more about people.

A lot of generative AI conversations, a lot of generative AI companies - some better than others- but, just a lot of opportunity out there to meet people. And that’s the benefit of going to something like this and going to a conference like this. It's not just tax people.

It's not just audit people. It's people from all different areas of the CPA practice. At the end of the day, all we're trying to do is help our clients and help our practices improve and getting to see what's out there and getting to meet people who are dealing with the same experiences we're dealing with is you can't put a price tag on that.

Walker: Yeah, I agree. Brandon, thanks for joining me for a quick little snippet of your week. It’s one of my favorite weeks of the year. I look forward to Engage 2025. What shenanigans will we get up to? Time will tell.

Lagarde: We've already started, we've already started [ENGAGE 2025] to do list.

Walker: Yes, we have. Things we didn't get to that we want to accomplish. Most of them are very responsible types of to dos.

Lagarde: Absolutely, I already have it in my calendar next year too. I'm already down to go.

Walker: Wonderful.

Lagarde: [Looking] forward to it.

Walker: Thanks for joining me, Brandon.

Lagarde: Thank you.

Walker: Welcome, Mark. Mark Gallegos was at the ENGAGE conference. We're recording this on a Tuesday, June 11th. Mark, tell me, I know it was not your first time, you've been to ENGAGE several times, but, what specifically, was a highlight for you about last week's ENGAGE conference?

Gallegos: Yeah, I think from the ENGAGE conference, it's the human aspect to me. Meeting people, interacting with people, and really getting to listen and learn from others. The way I look at it is, you get to learn from experts in the field in areas that you think you know a little bit about, and you learn that you have a lot of learning and growth to go forward with.

Learning on the latest trends in the profession, strategies, and regulatory updates from a tax perspective. And then, learning from these experts and staying relevant in the current tax landscape and the changing tax landscape.

But also learning from others in other areas, whether it's accounting and financial planning and estate trust and areas that maybe I don't do enough work in. But it enhanced my growth opportunity while there. At the same time, you just become a more well-rounded person by being inundated with that for a week.

Walker: Yeah, I know that's one thing that is possibly a negative for people about ENGAGE. It is so big and there are so many different topics. But to me, that is a positive, because you're not just meeting tax people. You're meeting people from all across the industry.

I completely agree with you that the human aspect of conferences is something I'm really excited was able to survive the pandemic and come out strong on the other side.

Gallegos: That's right. And I think networking within the conference, whether you're in the classes, between sessions or early in the morning or

Walker: Or late at night, let's just say.

Gallegos: Whatever your flavor is, or maybe all the above, I think that is a great opportunity because you're meeting people from various sectors within the profession.

These valuable connections last beyond the conference. You can even be meeting potential clients, people you could work with or vice versa. And more importantly, thought leaders- people that have great ways of collaborating with others and learning how you can help them, or they can help you. I think that's a huge takeaway for me.

Walker: I think so too. Thank you for sharing your insights. Hopefully, we give people who were not there a little bit of FOMO. And it will happen again next, next June. Thanks again, Mark.

Gallegos: You're welcome.

Walker: I have with me now Dan Moore, who was also out at ENGAGE with me last week. Dan, what's your overall impressions and thoughts about the Engage conference last week?

Moore: Hey, April. Thanks for having me on today. I don't know why the feeling seemed to be different this year. I don't know if it was just the great keynote that we had kick off the conference Monday morning- Eric Weinmayer, who really spoke to me and spoke to a lot of people.

But I just felt like there was a massive amount of energy. At this year's Engage, several of the speakers were just so excited to be there to get up and speak and talk to participants after their sessions. They were excited to meet up with their colleagues and go out to dinner. there just seemed to be so much.

Excitement within the room. The energy was great. And I am still a week later I'm just still really excited about how the event went.

Walker: Yeah, I had the same feeling I was trying to describe to my team members who unfortunately were not able to be out there with me and I said - it's just a vibe. That’s what the kids say. It just a vibe. It is hard to explain, but it’s just a good word for the energy and excitement.

Moore: Our speakers were excited to be there, and that was great to see. Some were speaking on new material, some had revised and revamped some older material. [They were] just so excited to present. Everyone really kept my attention, as much as we were getting tired near the end of the week and day four. They were still keeping my attention and the energy just was everything.

Walker: That's great. We know you did a lot of things during the week, but was there anything that you didn't have time to do? It's hard to make time for everything, but was there anything specific that you have on your to do list, for next year's Engage?

Moore: Several things stick out in my mind. I've already started my to do list for next year's Engage of the things I want to remember to do. Some of them are directly content related. But others are the other activities that are available to you during Engage.

First, it's getting up at 6am and participating in either yoga or the run. I know a group of people get together, they do a walk/run, they go out on the strip, and I didn't take advantage of that this year. So that is definitely on my to do list for next year. But also I felt like I didn't go into the conference as prepared as I wanted to really go out and explore the exhibit hall, as well as explore the solution sessions that were available with many of our vendors.

We are kicking off a project within my office to reevaluate our tech stack, and I really wish I would have taken the time to. start the conversations internally within my firm so that I could go out and seek out the vendors that are on the short list of solutions that we are looking at implementing in our firm.

Because what a great opportunity to meet the frontline of those technology solutions. That was the big thing that I really walked away thinking, next year, I want to take the opportunity to meet people. There's a number of solution sessions, I want to say there was probably at least

4 or 5 running every morning, also solution sessions during lunch, where you could go out and hear specific presentations from various vendors and I missed out on that opportunity. But you know what? I'm not going to beat myself up about that. That's next year. but I think it takes a lot of planning.

To come to the conference, you get the exhibit hall list ahead of time. So, you can go ahead and take a look and see what vendors are going to be in the exhibit hall and start thinking about those vendors that you want to visit. You can make the list up ahead of time to seek them out and not only get to meet them, but see, hey, are they offering some sort of special pricing for attendees?

And, hey, you can also fill up your swag bag. Go home with free stuff.

Walker: That's right.

I know that they were doing demos of certain things, and that would be cool to do. But like you said, you have to go into the conference planning exactly what you're going to do almost every minute, which is hard to do. It's hard for somebody like me to do, because I'm more of a wing-it kind of person. But if you plan, you can really take the full opportunities for what's available there.

Moore: The other thing too, if you're talking to a vendor and one of their the vendor's customers, come up, you can start the conversation with another firm owner. They're like, oh, I'm using this solution. Later on, you can meet up with them, and you can say, hey, now that we're alone, can I ask you some questions, how did you implement this into your firm?

What works? What doesn't work? What are some best practices you would suggest if you're thinking of implementing a new solution? And so that's also a great help. If you know a firm that said, hey, this is a great solution, but if I had to do it again, what would it be? I would have approached it this way. That connection really is invaluable.

Walker: Alright, thanks so much for sharing, Dan and we look forward to hearing more. Dan is the chair of the Tax Strategies conference, he will definitely be there next year, no question. Truly, in a couple of months, we start planning for next year's conference. Looking forward to doing that. Looking forward to seeing all the new and exciting stuff we can incorporate for the 2025 conference.

Moore: Thank you, April.

Walker: Yep. Thanks so much.

Walker: I have with me Kelly Rohrs. Kelly, it was your first time at Engage, so I would love for you to share kind of your initial impressions and also what was your favorite part about being at the Engage conference.

Rohrs: Hi, April. Thanks for having me on today. The first time at Engage, first time in Vegas. I couldn't believe how big it was. There were over 4, 500 people were there. Massive. I ran into so many people, so many familiar faces. It was really just such a wonderful event.

Walker: Yeah, one of my favorite things about, that just because it's such a big conference, you do run into people that you've probably only known necessarily through social media or things, so like putting a face to a name is really just the coolest thing.

Rohrs: Absolutely. Totally agree.

Walker: All right, any other kind of takeaways or thoughts you have about the Engage conference? Will you come back?

Rohrs: I think that people think that conferences like these are for large firms, especially put on by the AICPA. People don't think that this would be beneficial for the small firm owner, but I think that is an absolute misconception. I think a lot of the classes were geared towards the small professional, the smaller firm, how to advance your firm, what sort of services.

That you should provide or develop to keep up with the times and, besides the continuing education portion of it, the networking piece and meeting the vendors that were there was phenomenal. to have the two huge Showrooms filled with the best vendors in the country who are willing to, a lot of them are giving demos, handing out free demos, free months of subscriptions.

That is really the power of an event like this. To take away all of these new software or to hear what other people are doing in the hiring space. It’s priceless. It's worth every penny.

Walker: Yeah, it is, it's hard to describe, but it is like two giant rooms of vendors. And then also the vendors do, we call them solution sessions or education labs. And so even more you're able to get like a deeper dive into their services and things, which I think is, like you said, it’s cool and it's not something you can get just anywhere.

Rohrs: Yeah. It's so much better than being behind the screen. You're in person. You're watching these people who are super passionate about what they're doing. You're building true relationships. And I don't think I met anybody I didn't like.

Walker: Oh, that's always a positive. It was delightful. It was our first-time meeting in person, even though we've known each other for years. So that's always delightful to experience that. Next time we'll schedule and spend some more time together. I think we were all both just running around, crazy.

Thank you so much, Kelly, for sharing your experiences with us on Engage.

Rohrs: Thank you.

Walker: I have with me now Damian Martin. Damian was also at the Engage conference last week. Damian, you have been at Engage a couple of times. What was your general impression about last week's conference?

Martin: General impression, is just how inspired I am and, how great it is to see all the things going on in the profession and all the people in the profession, I'll have to say a highlight for me, aside from getting to hang out with my favorite tax podcast host, which is you, obviously, It was watching Tony Nitti accept the Sid Kess award and his acceptance speech and all of that.

That was just, just incredible and a highlight on, on, on many fronts, I'll just say.

Walker: I love those five minutes was like a lot of nuggets in there. If you have access to Engage and you can go back and listen to it, I would listen to it for that first couple of minutes. He's very inspiring, and makes you want to reach out and do bigger and better things.

Martin: Yes. And I'd be remiss if I didn't say too, that it was followed by a very, very good business tax update as well.

Walker: Absolutely, hang on, I wasn't just saying,

Martin: Yeah. No, I know you weren't.

Walker: Brian did an excellent job with the, Brian Lovett, with the business tax update, so yes, hang on for the whole session, the whole 75 minutes. Damian, did you make a networking connection? To me is my absolute favorite part about Engage, seeing people in person and, getting in that face to face connection. Did you make a connection that you'd like to talk about?

Martin: Absolutely. And I completely agree, right? Like it's nice to interact, especially, remotely and whatnot. But just there, there's something to being in person and maybe putting a face to a name and all of that, that happens every year. But this is actually a connection I'll say that even goes back to last year.

So last year at Engage, I reconnected with a group from the firm I started with, which is Bowman Company in Stockton, California. They were the ones that kind of gave me the chance in public accounting, got me inspired. Really the path that, that I got on to where I am today, I attribute all back to them.

And then coming back this year, I have to say, it just, it warmed my heart and it just really meant a ton to me to see Daryl Petrick and, Jeannie Rusick, who are, partners at that firm, sitting in the front row at my session on Monday, for the individual tax update. It just speaks volumes about them.

Back to your point about just the great people that are in this profession, and I generally walk away with, I know there's headwinds and whatever else, that you can focus on, but there's just, there's good people in the profession. So, it's really hard for me not to conclude that there's great things that continue to come for the profession as a result of people like, like Daryl and Jeannie.

Walker: Well said. Yeah, I think there's a lot to be said. There's a lot of positive energy that I feel when I'm at Engage that makes me excited about the profession and about changing and evolving.

Martin: That's right.

Walker: Thank you so much, Damian, for sitting down with me for a quick little interview. We'll have to, we'll have to have you back for a longer discussion at another time.

Martin: Happy to do it. Thank you, April.

Walker: Thank you so much.

Usually when I close these podcasts, I always talk about taking a journey together towards a better profession. And I ask my guest what their bucket list travel destination is. But while I didn't take the time to ask all of our guests today to answer that question specifically, I think it's safe to say that based on their discussions, we'll all be back together in Las Vegas, again, at Engage 2025.

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 SEMA. 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 likeminded friend. You can also find us at aicpa-cima.com/tax and find our other episodes as well as any resources mentioned during this episode and 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.

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Episodes

Analysis, clarity and a quiz: A preview of the National Tax Conference
17 Oct· Tax Section Odyssey
The AICPA & CIMA National Tax Conference will take place on November 11 and 12 in Washington, DC. Join Brandon Lagarde, Tax Partner at EisnerAmper, and April Walker, Lead Manager on AICPA & CIMA’s Tax Practice & Ethics team, to learn more about what to expect from the upcoming conference.

Conference sessions will feature topics such as:
The impact of election results on tax legislation: Investigate the potential legislative outlook based on the recent election results and how it might affect tax policies. Tax Cuts and Jobs Act (TCJA) expiring provisions: Provisions of the TCJA are scheduled to sunset at the end of 2025; learn more about how to prepare and explore planning opportunities. Practical tax strategies: Sessions at the conference will cover various tax tactics, including gifting and income tax planning strategies, for clients who are not currently subject to estate tax. Ethical dilemmas in tax practice: A session will discuss common ethical dilemmas faced by tax practitioners and provide insights on how to handle them. The future of tax practice: Investigate the importance of transforming tax practices with year-round advisory services and how to implement these changes in a tax firm.
AICPA resources

AICPA & CIMA National Tax Conference — For tax practitioners, there’s no better place to get immersed in current events than the AICPA & CIMA National Tax Conference; in-person and virtual options are available.

Reimagining your tax practice — Join us for free upcoming live roundtable sessions to tackle today’s top practice management issues with insights and tips from pioneers in the tax community.

TCJA expiring provisions — This detailed, downloadable resource offers an in-depth look at the expiring provisions under the TCJA and other recent legislation. It categorizes changes across individual tax, estate and gift tax and business tax provisions, organized by year of expiration.

Transcript

Neil Amato: Welcome back to the Journal of Accountancy podcast. This is Neil Amato with the JofA. I'm excited to be joined for today's episode by two top flight tax experts in this special collaboration episode with the Tax Section Odyssey podcast with our guests, we're discussing the AICPA & CIMA National Tax Conference which begins November 11th in Washington.

Those guests, April Walker, lead manager with the tax practice and ethics team and host of the aforementioned Tax Section Odyssey. Also Brandon Lagarde, tax partner at EisnerAmper and Chair of the Tax Conference Planning Committee. We have a lot to get to. We're excited to have you on. First, a quick welcome, April and Brandon, thanks for being repeat guests on the JofA podcasts.

April Walker: Thanks so much for having me Neil. I'm excited to be here.

Brandon Lagarde: It's very exciting to be here Neil. Thank you for having me.

Neil Amato: Yeah, we're glad to have you both on as I said, the Tax Conference is November 11th, less than a week after election day. Brandon for you first, tell me what you're looking forward to about this event which is at the Omni Shoreham Hotel in Washington?

Brandon Lagarde: Yeah. I'm looking forward to just go into DC. It's going to be a week after the election, hoping that we know who the president will be and what the makeup of Congress will be at that time. Again, it's going to be a great atmosphere, a great opportunity to go to the nation's capital, to hear from some of the best tax minds out there.

Neil Amato: April, I know you're a repeat attendee at that conference. You're also running sessions, recording podcasts, taking part in panels. What do you look forward to from the event?

April Walker: It's always a busy conference for me and I love being in DC and it's very exciting for me to be there, like Brandon said right after the election. Speaking of that, really what I'm looking forward to most is hearing more about what the potential legislation outlook could look like based on those results, based on those election results. I think we'll hear more about we've talked a lot about the Tax Cuts and Jobs Act, the TCJA, that it potential expiration, what that means. We'll really be able to dig into that at the conference. I'm excited about that.

Neil Amato: It's almost like we planned this. My next thing was going to be the TCJA. Some of the provisions of that Act, the Tax Cuts and Jobs Act, are scheduled to sunset at the end of 2025. Clearly, there is a lot of uncertainty about the provisions right now as we record and the first part of October. But I imagine that topic is going to be a popular one at the conference. Brandon, What do you think?

Brandon Lagarde: Yes, absolutely and that's why, again, being there at the heart of it all after the election and getting to hear from presenters and speakers about just what the future holds for tax professionals, end of 2024 is going to be really important for us.

2025 is going to be incredibly important for tax practitioners to understand and remind ourselves of here are all these provisions that we've been dealing with for the last seven years that are going to expire. What's going to happen? Where are we going to be? A lot of planning opportunities, lot of reason to get in front of clients to learn about what we have in the horizon. Again, that's why this conference, particularly just the time of the year. It is in the election cycle, and heading into 2025, 2026. It's probably the most important conference that's ever taken place.

This is just a really important time for us to get together and to really try to figure out what's going to happen. Of course, we're not going to know exactly at that time, but at least start to have a better understanding, a clear picture of what we can expect and what should we be talking to clients heading into 2025? What are some things that need to be doing?

Because you can't just turn on the switch in November of 2025 and start to really think about this. Right now is really the time to get ahead of it and remind ourselves what provisions are expiring? What do we need to start thinking about planning opportunities to get ahead of it? That's what's at stake at this time.

April Walker: I love Brandon that you're setting the bar really high. The most important conference of all time. Here we go.

Neil Amato: Yeah, that's great and because it's the most important conference of all time, we will include a link to the conference registration page with the agenda information and all of that in the show notes for this episode. One of the items on that agenda is being led by Marty Finn. He's a previous guest on the podcast. He has a session on tax and financial planning. When estate taxes don't matter. Now not to steal Marty's thunder. But can you give me a little preview of the highlights of that session?

Brandon Lagarde: Certainly. We will spend a lot of time at this conference again, learning about the estate tax world and the sunset provisions and trying to navigate that. But the reality is a lot of our clients are not subject to estate tax. A lot of our clients are not having to worry about the sun setting provisions.

We thought it was important to have sessions that not just focused on the top 1% of our clients, but to the 99% or to the large majority of our client base. Things like gifting strategies, what we need to be talking to clients about, who aren't necessarily dealing with the estate tax. Income tax planning strategies around that.

Really just as practitioners, what do we need to be talking to clients about? We're not super focused on just estate tax and the ultra wealthy or the wealthy. That's one thing that we really try to work hard as committee in this conference is to find sessions that have a very practical application.

That we can take away tips and tricks and things to our client base and back to our hometown and not just focused on the very academic discussion that a lot of tax practitioners like to have. That they can relate to. Try to have sessions that are very practical in nature and the Marty session is definitely one of those. He's going to do a great job giving some really good tips and tricks to people to bring home.

Neil Amato: I liked the practical part you mentioned, and that leads me into another session that I want to ask you about. This is one that April is taking part in with Dan Moore and Mark Gallegos.The title of the session is Tax Practice makeover, transforming with year-round advisory services. Tell me some more about that session.

April Walker: Yeah. I'm really excited about that session. A lot of what I do here at the AICPA is try to help practitioners think about the future, the future of Tax Practice, the future of what a firm could look like. So we had this idea to do like a makeover of a practice. We're going to talk about some of the different aspects of a practice that you could make over- billing, client focus.

One of those is about adding advisory services. We'll talk more about that. So come and join us and learn how you could do a makeover of your practice.

Neil Amato: That's great. Now another session with an intriguing title, this is you, Brandon and you April, test your tax ethics IQ. Now one that sounds like one that people have to do some homework on or some pre-reading, maybe I don't know, but tell us about that session. What's a flavor of it that you can tell attendees about now?

Brandon Lagarde: We're going to try have fun with this session. Play some games that have come up with like a quiz atmosphere. I think April going to try bring a buzzer for people to buzz in and answer our questions. But really focus on ethical dilemmas.

We're faced with ethical dilemmas daily, with clients who are either trying to push the boundaries a little bit or just get into some situations where they find themselves in a bad place. We're constantly being asked to address the situation with our client base. Whether you need amended return for XYZ reason. Can you take on a client because of what's going on? Do you need a fire a client? Because they may be trying to push the envelope a little bit.

Really, there's a lot of ethical dilemmas that we face as practitioners. This is really a time for us to again, have some fun with it. To the extent that ethics is fun. We're going to try to test the audience and see what they think. It's always amazing if you ask a room of people what they think about certain tax ethic issue or are really just a tax topic.

In a room of 100 people, there are probably 100 different opinions on what should be done. I think it can be fun. We're going to try have fun with it. Again, I really trying to also provide some education so if you find yourself in these situations, here's some things to consider. But again, April and I, we hope to have fun with that.

April Walker: Just come visit us. There is no pre-work. To answer your question, Neil, there is no pre-work to the session. We'll take a lighthearted take on a potentially tough, dry subject.

Neil Amato: Great, and this quiz is not graded. You still get the CPE as long as you're showing up, right?

April Walker: Absolutely.

Neil Amato: Well, good. One of the themes that I'm hearing is providing advice on the topic of expanding services beyond just, "Hey, we're going to do taxes for someone." But if someone said to you, maybe after a session, "Hey, I really liked what you said there. But gosh, I'm a smaller firm," or "It's only me. I don't know where to start." What do you tell them?

April Walker: What I would do, if they came up to me and I hope they do. You can come up to me at our booth. You can come up to Brandon and I if you see us. We will likely be posted up in the bar at the Omni. Come see us anytime. But what I would tell you, we talk to small firms all the time.

One thing I recommend them is come to a session that I do that's on the computer. It's not live at the conference, but it's called Reimagining your tax practice. I'm really more about re-imagining and having makeovers and that sort of thing it seems like. But in those sessions we really talk about the nitty-gritty. Sometimes it's hard to think about this big process of going from X to Y.

We like to talk in those sessions about practical ways. I like to focus on the practical. How to actually get where you're going, or how to change things in your practice or how to change how you're operating. That's probably what I would say if you came up to see me wherever you might find me.

Neil Amato: This has been great. We've mentioned session by Marty Finn. We've mentioned some sessions you are taking part in. Of course, we've mentioned that key acronym these days, TCJA. Brandon, in closing. Anything you'd like to add as we wrap up this Tax Conference preview episode.

Brandon Lagarde: Yeah. Certainly. A couple of other terms you'll hear out there. AI, which we have a session. Transforming your tax practice. One thing we like to emphasize about all of our conferences, but certainly this one is, there'll be lots of sessions with lots of smart people talk speaking at these sessions with great content.

A lot of times your challenge is which sessions do I go to. Because it's such a great hour, hour-and-a-half of content. You'd have to choose. At the moment, you do have to pick a session. But you have access to recordings of all the sessions after. I often go back and watch sessions that I wasn't able to attend because of that great content. It's just a wealth of information.

Again, you get a little parting gift when you leave. Not only do you meet up, making new friends, meet people at the conference, talk about challenges you're facing with your colleagues and also hear some of the best speakers in DC and have a great time there. But you also get to have access to all the recordings after and watch the sessions after that you missed, and that is invaluable to have access to that content.

Neil Amato: April, how about you? Anything to add in closing?

April Walker: I think one thing that's really important about this conference being in DC, and we haven't mentioned yet, is the ability to have IRS speakers that come and speak to us. We're going to have the taxpayer advocate, Erin Collins. We'll have other IRS speakers scattered throughout the conference.That's another opportunity to really hear where they are on certain things and be able to ask them questions.

Neil Amato: Yeah. That's great. It's a good reminder that there is that access to IRS officials every year at this conference. Really thank both of you for your time. Again, look forward to the conference November 11th, Brandon, April. Thanks for being on the JofA podcast.

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.
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Demystifying IRS guidance on digital assets
3 Oct· Tax Section Odyssey
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.
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Harnessing Technology: The Future of Tax Advisory
19 Sep· Tax Section Odyssey
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.
AICPA resources

Adding AI into your tax practice — Artificial intelligence (AI) is certainly a hot topic of late. Listen to hear Jason Staats and Ashley Francis talk about the latest information in this area and where you should move forward and where you should proceed cautiously in this Reimagining Your Tax Practice archived session.

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.

Upcoming event

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.

Other resources

Harness Wealth — Learn more about how Harness Wealth strives to provide the next generation of builders confidence in the path to their best financial future.

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.

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Global Tax Trends: What CPAs Need to Know Now
5 Sep· Tax Section Odyssey
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.
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Chevron doctrine overturned: Implications for tax professionals
22 Aug· Tax Section Odyssey
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.
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PTET refund roadmap — Expert insights with Dave Kirk
1 Aug· Tax Section Odyssey
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.
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Unraveling the IRS's ERC processing path
19 Jul· Tax Section Odyssey
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.
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Tax policy deep dive — ERC, BOI and IRS performance
12 Jul· Tax Section Odyssey
In this joint episode, Neil Amato, host of the JOA podcast and Melanie Lauridsen, VP of Tax Policy and Advocacy for the AICPA discuss recent updates on three key tax topics: the Employee Retention Credit (ERC), Beneficial Ownership Information (BOI) reporting, and a member survey about IRS performance during tax season. Melanie highlights the IRS’s recent actions and proposed regulations regarding ERC, the implications of BOI reporting requirements, and the mixed feedback from AICPA members on IRS service improvements.

AICPA resources

AICPA Employee retention credit guidance and resources — Access resources providing the latest updates 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).

Transcript

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.

Again, welcome back. Melanie Lauridsen is our guest. She is a repeat guest. Melanie, today, as we record, it's early July, and we're going to focus in particular on three topics: The employee retention credit or ERC, beneficial ownership information reporting or BOI reporting, and then a member survey about IRS performance in tax season.

It sounds like there have been more than a few updates recently on those topics. Let's dive in. ERC first: What's the latest from the IRS and what does that mean for our members?

Melanie Lauridsen: Neil, thanks for having me back and yeah, there definitely have been some updates. As you know, the IRS did make an announcement around ERC and there are a couple of main points that they wanted to bring out.

The first one is that the IRS made a call to action for Congress specifically asking to retroactively stop processing ERC claims.

Also, the second piece of it is for Congress to extend the statute of limitations, but very narrowly defined, and it really is only for IRS assessments. In other words, if a taxpayer wants to make an amendment on their own free will, the statute of limitations will not be extended to that. But if the IRS notices something, says something, or is talking with you, and they recognize there needs to be an adjustment, then you can move forward and make that amendment.

This has some implications, obviously, for our members, specifically the retroactive aspect of it. Now, they worded it differently because there's the Wyden-Smith bill, which we've talked about where that is retroactively stopping making valid ERC claims.

In this case, it is that the IRS has no longer to process claims. It still has that same effect with members and does bring a little bit of nervousness to people. What that really means is that our members really need to have conversations with their clients if they have a valid ERC claim that hasn't been filed.

[In] those conversations, people need to make it clear to the client that, yes, we can do the work, but there could be either the retroactively where the IRS stops processing claims, or there could be a bill that says that no longer, since a certain date, they don't have to accept claims. There's a little bit of risk associated with that. I think in the last time we spoke, we spoke about how there's an unknown around that date and therefore there's uncertainty around it, and clients need to be aware of the risks associated with that.

The other important aspect of this announcement is where the IRS indicated that they have bucketed all these claims into three groups. There's the low-risk, medium-risk, and high-risk.

The high-risk is where there are clear signs of error within the claim. Now, couple of things I need to make sure people understand. We don't know the criteria that the IRS is using to categorize people. They are not making that public. The other thing, too, is you cannot call the IRS and ask what bucket you're in. You just won't know. They can't help you on that front.

What that means is if you're low-risk, the IRS is trying to process that claim as quickly as they can so that people can get the refunds back. If you're a high risk, they're trying to process that claim also as fast as they can to be able to deny those claims. Now, if you're medium-risk, that's the bucket where you're stuck and it will be a while before they actually look at those claims.

Amato: That medium-risk bucket, do you recall: What's the approximate percentage that maybe that has?

Lauridsen: I know that the IRS in their announcement gave a broader range of it, but in a conversation with IRS executives, I was told 57%.

Amato: Good to know.

Lauridsen: That's a big number.

Amato: It is a big number. A lot of people still in limbo. And maybe lost in the shuffle: Can claims still be submitted during this period?

Lauridsen: I get that question quite a bit, and there's a little bit of confusion around it. Some people think that claims, you can't file them. If you have a legitimate claim, you can still file it. The problem is centered around is the IRS going to process it or will it not be considered a valid claim? It goes back to those conversations that our members need to have with clients because we really just don't know what will happen with the claims.

Amato: Does it surprise you the number that were labeled high-risk?

Lauridsen: Not based on feedback that we've seen from our members and other external stakeholders. We do know that there were ERC mills out there promoting the claims and they would tell people "you absolutely qualify," when they absolutely didn't.

We also know of some of our members where they flat out told the client "you don't qualify," but the ERC mills were telling them, "you do." Then they went off to the side to go get that claim because it was a lot of money for some of these people, and money was talking.

Amato: Now, I guess also related to the ERC, on July 1 the IRS published some proposed regulations, so it's hot off the presses for us. What can you tell me about these proposed regs.?

Lauridsen: The IRS did drop proposed regulations. These proposed regulations, they provide that the IRS will assess an underpayment of tax on any overpayment interest paid to the taxpayer on an erroneous ERC fund. In other words, not only would you need to pay back the overpayment of the interest portion that you received of a claim, but you would then also have interest penalties on top of it.

One thing to note with the proposed regs. is it recognizes that the current regulations don't address the recapture of interest paid. They also note that the proposed regulations are to apply only to interest paid after the issuance of the proposed regulations, so not before. It's still very unclear as to the payments – what about the payments are already went out with or without the interest, and whether the IRS will attempt to recapture that interest? There's just still a lot of confusion around it. As we get more clarity, we will also provide that to our members.

Amato: We will post some pertinent resources and also recent JofA coverage of this news and other news we mentioned. Melanie, I mentioned JofA resources, are there other resources that you'd like to recommend that maybe I'm not aware of?

Lauridsen: Absolutely, Neil. The Tax Section Odyssey podcast will be doing a deeper dive around the questions that our members and their clients may have, and that should be posted around the same time as this podcast. (Editor's note: The episode Lauridsen mentioned is scheduled to publish the third week in July).

Amato: Excellent. Now let's talk a little bit about BOI, beneficial ownership information, that reporting requirement. What's new on the BOI front?

Lauridsen: There's quite a few different little updates here. But most recently [the] Maryland attorney general did actually provide and release an opinion on whether assistance by a CPA, with the beneficial ownership information reporting requirement of the Corporate Transparency Act, would constitute the unauthorized practice of law [UPL].

The Maryland attorney general made it very clear that the determination of UPL is fact-specific and that the opinion is only a guideline because, again, they have to take a look at each and every single case.

Making clients aware of the BOI reporting requirements, guiding them through FinCEN's FAQs, through the compliance guide, helping [the client fill out] the BOI reporting form, guiding them through questions and answering questions for them — all of that is not considered unauthorized practice of law, according to the Maryland attorney general.

If you were to fill out the report on behalf of a client without connecting with the client, there might be some issues there. Also, if there's just a lot of uncertainty and you know that legal knowledge is needed, a legal analysis to determine who a beneficial owner is, then you really should be turning to a lawyer to help you answer those questions.

What I'm telling people is what we've been telling members all along, that a CPA will need to use their professional judgment when they engage or work with a client, and they'll have to determine where that line gets drawn as to whether or not a lawyer is needed. If it's a very complex business arrangement, most likely, you will want to include a lawyer.

Again, this is all very in line with what we've been telling members, and it's also similar to what other states have said. But no other state has actually put it into writing, and there have been no other opinions. So far, Maryland is the first.

Amato: Thanks for that update. Now, I understand also that I guess you're working with congressional staffers on a bill being drafted on BOI. What is that bill designed to do?

Lauridsen: Actually, we are working with Congressman [William] Timmons' office and that bill actually works well with the Maryland opinion. The hope is that the bill would be able to avoid having to go to all the many multiple jurisdictions and the bill would be able to take care of all this all in one fell swoop. Specifically, the bill offers two aspects of relief which are a big concern to our members.

Number one: The bill would offer a safe harbor for CPAs who do their due diligence when filing the BOI report on behalf of a client. In other words, if you get information, you have a conversation with the client, you do that due diligence, and yet the client gives you some fraudulent or false information, that you would not be held liable for that.

The second piece that the bill does: The bill flat out states that services under the Corporate Transparency Act are not considered unauthorized practice of law. That really does go a long way in helping with the various states because when the federal [government] gives that nod, an indication, a lot of the states would most likely fall in line with that.

Also, I do want to connect on the other types of work we're doing, not only with Congress. We have worked with a lot of external stakeholders and external coalition members because this concern is not a specific AICPA issue. This is a broader issue for all small business entities.

Those two points that I brought up from the bill, those take care of the biggest pain points. But the third pain point really is the 30-day period to update the BOI report for an error or a beneficial owner's updated information. We're working with FinCEN on this since FinCEN actually has authority to make this change.

Collectively, we are working with [Capitol] Hill, we are working with external stakeholders, and also FinCEN, and we've actually pulled everybody together to start having conversations so that there is awareness of what our pain points are, and what exactly we can do to be able to resolve a lot of these issues.

FinCEN does have concerns, and they've made it very clear that this year they're focusing on awareness and not enforcement. Part of the reason is, so far, keep in mind we're seven months into the year, FinCEN has only received just over 2 million BOI reports. Remember, they're asking for 32.6 million, so awareness is definitely something of a concern for them.

Stay tuned, there will be more to come.

Amato: Thank you for that. You mentioned Congressman Timmons, that's, I guess, Rep. William Timmons from South Carolina, is that correct?

Lauridsen: Correct.

Amato: Great. Yes, we're talking about all these updates and potential changes and things that people want to do but currently the BOI reporting requirement, it remains the same for most small businesses, right?

Lauridsen: It does and that's what makes it very scary. A lot of people have heard about the court cases where they said the Corporate Transparency Act was unconstitutional. But again, that only applied to a small sliver of the population of the members of [the National Small Business Association].

So, it's very confusing. The rules themselves are confusing. But unfortunately, everything remains the same, and people, unless you're one of those 23 exceptions, you still need to file.

Amato: Moving on to IRS survey results. It's not an IRS survey, but it's a survey about the IRS. In our previous podcast, we discussed how the IRS perceived how the filing season went. The IRS released some data showing that they answered [88]% of calls that came to the IRS.

The AICPA conducts an annual member survey immediately after the filing season to see how the members felt about IRS service. What does the feedback say, and is it in alignment with what the IRS said?

Lauridsen: Oh, Neil. No, it's not in alignment with what the IRS said. This year, overall, the IRS did better than last year, which was also an improvement from [the] prior year. But even so, the bottom line is we are not at pre-pandemic levels. The IRS really has a long way to go for us to get to the service that we deserve.

For example, the PPS line did show improvement from our members' perspective, but approximately 56% of our members were able to get through to the IRS on a consistent basis, while 29[%] of our members had hit-or-miss calls, and 15% of our members couldn't get through at all.

The wait times, again, keep in mind the IRS is saying it's about three-minute wait time, those did improve. This year, only 28% of our respondents had to wait an hour or more, compared to 63% just two years ago. Yes, that's an improvement, but 28% of our members having to wait over an hour? That's a little bit painful there.

The biggest pain point is the quality of service our members are getting. Is the IRS able to answer your question, or do you need to be transferred? At which all of us know that if you get transferred, you pretty much get transferred multiple times, and, of course, there's no guarantee of a resolution.

Sadly, we found that only 37% of our members were able to get consistent support from the IRS, meaning a resolution, while 37% rarely or never were able to get a resolution.

Amato: Among our members who are tax practitioners, are they satisfied with the service the IRS provided during filing season?

Lauridsen: Neil, surprisingly, our members are feeling more optimistic about how the IRS is doing, and they've improved for the last two years with the IRS. It has definitely helped that the IRS is answering the calls.

However, to your point, almost half of our membership does not think the IRS is on the right path.

I should also let you know, too, that when we get these survey results, we actually communicate this directly with the IRS and we let them know. Our work is cut out for us as to what we need to be able to continue moving forward with IRS services, and we've definitely portrayed that to the IRS.

Amato: Speaking of moving forward, for the 2025 filing season, what would you say are the top concerns facing AICPA members?

Lauridsen: Given that it's an election year, no shocker that the number one concern for our members, and number one concern comes in about 29%, is the impact of legislative changes. What I was surprised to see was that the lack of guidance actually came in only at 17%. But I actually expect that to go up considerably once we start to see those legislative tax packages becoming law and we are going to need guidance from the IRS and Treasury.

Number two on the list, coming in at about 27%, also no surprise, is the continued delay, which includes the written correspondence and processing of information with the IRS.

I should also note that we did have an option on this survey for people to click "other" and fill in the response, and that came in about 5%. Overwhelmingly, everybody was talking [about] the delay of the brokerage statements and delayed K-1s, which create workload compression areas. That is definitely something that we've been monitoring and we're starting to work again, and we've been keeping an eye on it for a few years.

Neil, all this is really to say that we have identified some issues. There's a lot of work that needs to be improved upon with the IRS, and we're moving forward with it.

Amato: K-1 in particular, that was a term I hadn't even thought about or heard in a while, so I guess it's still out there, along with others.

Melanie, we appreciate this update as we close out our July recording. Again, we're recording early July. This is due to publish in mid-July. What would you like to leave listeners with as a closing thought?

Lauridsen: I think our members should be aware that we are monitoring, we definitely love hearing from them, we take it to heart, and we definitely push for their needs to be able to find resolutions.

Sometimes the work is very slow. But we do start to see results and we do start to see the needle moving. Hopefully soon, we'll have some resolution with ERC and some answers and guidance, and we'll start seeing resolutions for BOI, too.

Amato: That's great. Melanie, thank you very much.

Lauridsen: Thank you, Neil.

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Unpacking Supreme Court decision — Moore v. U.S. with Tony Nitti
27 Jun· Tax Section Odyssey
In this episode of the Tax Section Odyssey podcast, the focus is on the landmark Supreme Court case, Moore v. United States, which examined the constitutionality of the mandatory repatriation tax under Sec. 965 of the Tax Cuts and Jobs Act (TCJA). The Court upheld the tax with a 7–2 majority.

The case opens up further discussion on the taxation of unrealized gains and the constitutionality of a wealth tax. Tony Nitti highlights the significance of the Supreme Court’s decisions on taxation and encourages a thorough reading of the opinions for their educational value.

Also, revisit previous episode from Nov. 22, 2023 — All eyes on Moore v. U.S. plus a history lesson on tax cases.

Transcript

April Walker: Hello everyone and welcome to the Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession and today we have a really quick turnaround podcast that I'm excited about with Tony Nitti, he is a partner at EY National Tax, he is a frequent guest on the show and we recorded late last fall on this topic, the Moore vs. the United States and the podcast was published on November 22nd.

Dare I say riveting podcast or at least it was riveting to me. Hopefully, you listened to it. I will put a link to it on the facts and arguments in the Moore case being heard by the Supreme Court. There was a history lesson, several references to Hamilton, my favorite musical and just an all around fun time.

Here we are Tony, the court took their sweet time I feel like but they dropped the decision last Thursday and here we are first thing Monday morning to record. We are here for the people, so welcome, Tony.

Tony Nitti: Thanks for having me April. Good to be back with you. I'm excited for two reasons. One, you and I and Damian Martin that is also at EY, we did talk about the Moore case back in, I guess it was late November. I know it was right before the oral arguments in our podcasts. Then Damien and I had done a presentation on it at national tax and so I'm excited to come back just to talk about Moore in general.

But I'm also excited because I did get a little jealous when I saw you did a separate podcast with Damien last week and I knew that I had to do something to knock him off the top line of the list of AICPA podcasts. Damien, as soon as this publishes you are relegated to number two. All is right with the world now April.

April Walker: I'm happy to be part of the competition between two greats such as yourselves. The prior podcast did an amazing job, in my opinion, going through all the details but for those who might not want to take a deep dive, that one probably runs 45, 50 minutes, something like that.

For those who don't want to go back and listen, I don't know why you wouldn't but if you don't, Tony, I'd love for you to give us a quick background to set the stage for us on the Moore case.

Tony Nitti: I'll do it as quick as possible and I don't want to bury the lead. Let's talk about the ruling before we even get into the facts but Supreme Court did rule by a 7:2 majority in favor of the government. Effectively saying that section 965 of the code that was added as part of the Tax Cuts and Jobs Act, what we call the mandatory repatriation tax, that it is in fact constitutional and yes, this was a victory for the government.

But let's backup now, let's go through the facts and then talk about why was everybody hanging on that the Supreme Court's decision here, why was this such a eagerly anticipated opinion in the tax community? The facts in Moore, very basic. We've got a retired couple up in the state of Washington and in 2006 they invested some money in an Indian corporation.

They took back more than 10% of the stock, the corporation was owned more than 50% by US shareholders, thereby making it a controlled foreign corporation or CFC. Then from 2006 all the way to the end of 2017, the CFC made money but it never actually repatriated any amounts back to the Moores in the form of a dividend. Under the laws in place at that time, the Moores had no income to recognize at the individual level because they hadn't received any dividends from their CFC.

Now we know that since 1962, part F has imposed a deemed dividend on shareholders of a CFC when that CFC is earning certain types of passive income but that's not what we're talking about here. The corporation CFC in India, it was earning regular operating income, so there was nothing to attribute back to the Moores in the form of a deemed dividend, until December 22nd, 2017 because that's when Congress passed the Tax Cuts and Jobs Act.

As part of that Republican tax bill. One of the things we did was shift from what we call a worldwide system of international taxation to a territorial system of international taxation. With that shift, what was going to happen and what did happen is that income held in a CFC post-2017, when it was repatriated to the US in the form of a dividend would not be subject to tax at the individual level.

But you can't just flip a switch and make that move April because if that income has been stashed in a CFC prior to 2017 and has never been subject to US tax. If you suddenly opened the flood gates and allow what was rumored to be anywhere from 1.5 to $2 trillion that had been stashed in CFCs, never subject to US tax. If you allow that to come back post-2017, tax-free, that's a windfall. That money would have never been subject to US taxation.

To prevent that windfall, Congress enacted Section 965, this mandatory repatriation tax and what it did is it said, look certain shareholders of a CFC as of December 22nd, 2017, you have to pretend that you received a dividend equal to your pro rata share of the CFCs income from whatever came later 1986 or when you acquired the stock all the way through to the end of 2017.

Tony Nitti: By picking up this deemed pretend dividend and paying tax on it, now we can pave the way for this switch to a territorial regime where in the future that same money can actually be repatriated back to the US and not have to be subject to US tax.

Tony Nitti: The Moores dutiful taxpayers that they were, paid the 965 tax, I believe it was $14,729 and then they got around to thinking, what did I just pay tax on? I never received anything. I put money into a CFC and I sat on my hands and I enjoyed the fact that the company was doing well but I never took a penny out.

Tony Nitti: Why on earth am I cutting a check to the Internal Revenue Service? They sued in district court and the district court dismissed in favor of the government. They appealed up to the Ninth Circuit, the Ninth Circuit did the same and then over the summer last year, the Supreme Court decides that they will listen to this case and it certainly surprised a lot of people.

Tony Nitti: Why would the nation's highest court agree to hear an argument over $14,000 in tax? But the root of it was the fact that they were arguing, the Moores were that Section 965 was unconstitutional and that's a big deal. When you're saying something's unconstitutional and that goes beyond just your run-of-the-mill argument, you tend to see in Tax Court.

Tony Nitti: The reason they were saying it was unconstitutional, it was something that was certainly going to pique the interest of the Supreme Court and certainly in this day and age. What they said was, look.

Tony Nitti: The 16th Amendment to the Constitution grants Congress the power to lay and collect taxes on income from whatever source derived without having to apportion that tax among the states based on population. When the 16th Amendment says it can tax income by definition in the 16th Amendment has to be realized. There has to be what we call this realization requirement and we'll examine that further. Just for our purposes right now, it just means that I need to have something in my hands that makes me richer from an economic sense that I can do what I will with.

Now we know that tax law has expanded upon the concept of realization where you can have concepts of constructive realization, but we'll get into all that. The idea is something had to happen to lead me richer in an economic sense. They said, here in 965, I'm being taxed on amounts that clearly I never received. There has been no realization. If there's been no realization than whatever the taxing me on cannot be income. The only thing they could be taxing me on, is my ownership of stock and a CFC as of a specific date and time, December 22nd, 2017.

That type of tax, a tax on ownership of property, is a direct tax under the meaning of Article 1, Section 9 Clause 4 of the constitution, what we call the direct tax clause, and is required by that clause to be apportioned among the states based on population. Since 965, last time I checked it was directly assessed and not apportioned among the states based on population. The tax violated the Constitution.

A really fascinating argument, April, because what it looked like it was doing was setting us up for a showdown for the ages because in their written briefs, the taxpayers, more or less said to the Supreme Court. We need you to rule once and for all that, yes the 16th Amendment contains a requirement that income be realized before it can be taxed as income. You can only imagine, and this is what we discussed in our first podcast at National Tax, what the implications of that type of ruling would be if the Supreme Court last Thursday had handed down a ruling that said income has to be realized. It's not just 965 that would face expulsion from the code. How does partnership roll? How to S corporations? How do they survive if there's now this constitutional realization requirement?

When you think about pass-through taxation, we know that the owners are taxed on their share of the pass-through entities income, whether they get a penny or not in the form of distributions. If you've suddenly got this realization requirement, how do you make peace with Subchapter K and S? Or what about Subpart F that we just talked about? That since 1962 has allowed Congress to say to shareholders that have a CFC, we know you didn't get anything out of the CFC, but the CFC is earning passive income, and to prevent abuses, we're going to pretend that you got your share of that passive income and subjected to tax. How can Subpart F continue to exist if there's this new constitutional realization requirement as established by the Supreme Court?

The reason we got together in November and had a whole session devoted to it at National Tax was because smart people like former House Speaker Paul Ryan, were saying, look, a victory for the taxpayers in Moore could invalidate up to a third of the current tax law. That's a big deal.

Then for the government's part, they appear to be saying to the Supreme Court, it's time for you to rule the opposite, that there is no realization requirement inherent in the 16th Amendment. Imagine what those consequences would be. If we're saying income does not have to be realized. It's not just about preserving Subpart F and Subchapter K and S. It's about the future of tax law.

If income doesn't have to be realized, then Congress, if it needs to, could attempt to tax taxpayers unrealized appreciation in their assets and less anybody think that's far-fetched. Remember that, a couple of weeks after we got together in November, April, Senator Ron widened formally released his proposal for what he calls the billionaires tax, which is a minimum tax that would reach, in part, certain individuals unrealized appreciation in their assets. It's a very real proposal that's floating out there right now.

If the Supreme Court last Thursday would have come down and said, there is no realization requirement. Congress can tax whatever it wants, then it would obviously leave the door open for something like that tax on unrealized appreciation or maybe, and I think this is a slightly different argument that we can get into, or maybe even a wealth tax, which obviously Elizabeth Warren and other candidates in the 2022 election from the Democratic side were proponents of we. In November me, you and Damien, just like every major newspaper, just like every morning talk show we're discussing Moore because of the implications. We thought we were headed for a landmark decision, an absolute showdown with the Supreme Court, backs to the wall had to say once and for all, is there a realization requirement in the 16th Amendment?

April Walker: Very nice. I think that sets us up for that you told us what the decision was, the court came down in favor of the government 7-2. Let's talk now about what that really meant. How did the showdown, how did it come out and what did we learn from this and what significance does it hold for our taxpayers now?

Tony Nitti: When you ask how do the showdown come out? It didn't. That's disappointing to many. It's anticlimactic too many, but it also shouldn't be a surprise. Now how can I sit here and say, it shouldn't be a surprise when Damien, myself, you, we devoted a couple of hours between podcasts and sessions back in November to saying this realization requirement is going to get settled here. What changed that ultimately, the court was able to decide without even addressing the realization requirements and why would I say that shouldn't be a surprise.

We had unfortunate timing with our sessions back in November, April because first week of December is when the oral arguments were held in Moore. It became very clear in the oral arguments that both sides, taxpayers and the government, had perhaps become aware of the gravity of what they had asked the Supreme Court to rule on because they both took steps to give the court an avenue to a more narrow, less impactful ruling, so that the taxpayers, the Moore's, they came in and said, we're reading the same articles everyone else is that we could try to throw out one-third of the code here.

You don't have to do that Supreme Court in order to rule in our favor because what we're going to do here, in these oral arguments is we're going to concede for you that these other provisions that people are looking towards, they're constitutional for their own reasons. Partnerships work because partnerships have always been treated as being a mere aggregate of its partners, like they don't have a separate tax existence. That is why income of a partnership can be taxed at the partner level, whether or not it's been distributed. S corporations, every shareholder who's around at the time the S election is made, has to affirmatively consent to that election. You know what you're getting into.

What you're getting into is being taxed on income that perhaps you haven't realized yet, but as long as you sign up for it, then you're stuck with it. They say that's what makes S corporations different. The fact that you have to consent to it. Then Subpart F, this was a little bit of a reach I think, but they said look, Subpart F is designed to attack specific abuses where people are putting passive income in a CFC when they could just as easily hold it in their individual capacity. We think that one is okay as well.

I think that last piece in particular hurt the taxpayers a bit because if you read Justice Barrett and Alito's concurring and judgment opinion, they're not quite so sure it appears to me that Subpart F would even be necessarily constitutional and we can get into why that would be in just a few moments. They were trying to make it easier in the Supreme Court saying you don't have to worry about throwing out this other stuff but, Sec. 965, it's a different animal. It's not a partnership, it's not an S-Corp, It's not Subpart F.

It is a situation where reinvested money and a CFC got nothing in return for 12 years, and now you're taxing me on income that I've never received, that's got to go. That's unconstitutional. The government, they came in and they said, hey, Supreme Court, guess what? You can rule in our favor without even addressing this realization requirement because if you look hard enough, you'll realize here that income has clearly absolutely been realized. It's just that it was realized at the corporate level, at the CFC level. If we look back at the judicial precedent of this very core, we can see in the mid-20s to the late 30s, a series of cases that allow Congress to attribute the income that's been realized by an entity, specifically when that entity is taxed as a pass-through for US tax purposes.

That's a partnership, that's an S-Corp. In a lot of settings, it's also a CFC, but Congress can attribute the income earned by a pass through to its owners even if it has not been distributed. So they said, Supreme Court, we're giving you an out here. You can rule in our favor without even talking about realization. Instead, just focus on attribution. Acknowledge that the income has been realized at the CFC level, and there's nothing preventing Congress from saying, we're going to attribute that income at the CFC level to its shareholders, including the Moore's and make them pay tax on it even though it is yet to be distributed.

Tony Nitti: After the oral arguments, I think most people who were watching closely saw the writing on the wall. Because the Supreme Court is in the habit of issuing the most narrow opinion that they can in order to rule on a specific set of facts. With the government giving the Supreme Court a pretty clear avenue to a more narrow ruling that didn't have to address the realization requirement, I think a lot of people anticipated that we were going to get a decision that was largely based on attribution rather than realization.

That's what ultimately came down last Thursday and that's why I say it feels anticlimactic to some because we only had to get into to the second footnote in the entire case where the majority opinion drafted by Justice Kavanaugh said, we're not here today to talk about what would happen if Congress were to try to tax unrealized appreciation or even wealth. Then, even in the body of the opinion, Kavanaugh comes out at some point and says, the Moore's wanted us to say there's a realization requirement. The government wanted us to say that there is not, we don't need to address that today in order to opine on this set of facts.

Tony Nitti: That realization debate has just been deferred because instead, what they did is the majority kept it very simple. Just like the government proposed to them, they looked at cases stretching from 1925 there were four of them from 25 to the late 30s and they're slightly different facts in each case. But by and large, you had these four cases that showed that Congress has flexibility when you have an entity taxed as a pass through and you have flexibility if you're Congress to have either taxing at the entity level or taxing at the owner level. Now, the court did put some guardrails around that flexibility. Kavanaugh talked about the fact that, this concept of attributions should generally be limited to, as I mentioned before, entities that are taxes pass-through for US tax purposes, which would be your partnerships, your S corps, things like grantor trust and then CFCs. But then also Justice Kavanaugh was saying that we're not saying that they can tax the same income at both levels under the same character but yes, you can have income at a corporate level, dividend and shareholder level, but they were putting some guardrails around it.

Generally speaking, they kept it very simple and the majority did two things. One, as I said, they looked at that judicial precedent that says, we've got a history here of being able to tax, for example, on Heiner v. Mellon, partners on income that even under state law, they were not permitted to receive in the form of distribution. Then we have the Bruce Baker case where Congress was able to tax partnership income at the entity level because it was effectively acting as if it were a corporation. They looked at these four pieces of precedence and yes, the concept of attribution is alive and well, we can take this income earned at the CFC level and attributed to the Morris.

Then they just took some steps to take apart the Moore's argument that Sec. 965 is somehow vastly different from Subchapter K and S and Subpart F because they said, this argument that partnerships are never respected as separate tax-paying entities. We know that's not the case and we have case-law here that says, at various moments in time, we've been able to levy taxes at the partnership level and we know that for variety of reasons for federal tax purposes, partnerships are respected as their own entity. Maybe not necessarily tax paying entity, but their own entity and aren't mere aggregates of its partners. From an S corporation perspective, you say that every shareholder has to consent to the election and they do.

But think about if the shareholder mix changes and now you have shareholders owning 49% of the stock and they want to revoke that S election. You need more than 50% consent to revoke an S election. You can have 49% of shareholders who do not consent to that election, but they're powerless to do anything about it. They said the mirror requirement that you consent is not enough here to differentiate sub S for 965 and then Subpart F the argument for the Morris was largely based on the degree of control that shareholder had to have in the CFC. But it's the same 10% control for 965 purposes as it is for Subpart F purposes.

The court just basically said your arguments Moore aren't convincing to us. We're going to keep this simple. We're going to attribute the income of the CFC to you here and say that is perfectly constitutional. The decision was a little anticlimactic, but should not have been surprising.

April Walker: Little bit anticlimatic on the decision. And the focus on attribution versus realization. But Tony, is there anything we can gleam or learn from this decision?

Tony Nitti: I certainly think there is. We've got a 33 page dissenting opinion from Justices Thomas and Gorsuch that could best be described as a strongly worded, maybe scathing, whatever you want to call it. But it was very clear that these two justices, in descending to the majority's opinion, really felt like the Supreme Court had a missed opportunity here to address this ambiguity in the law and figure out once and for all whether or not there was a realization requirement. Because they accused the majority of this is a direct quote, “changing the subject in addressing attribution over realization”. But then went on to say pretty definitively, no pretty about it. They went on to say definitively, we believe there's clearly a realization requirement inherent in the 16th Amendment and so we don't agree with this ruling. Listen, it's a dissenting opinion so to some degree that angry arguments set forth is the legal equivalent of Grandpa Simpson shaking his fist at a cloud.

But we should still pay attention to it because I believe that it was a well-crafted argument by Justices Thomas and Gorsuch as it goes through the evolution of the Constitution that I think could absolutely serve as a foundation for future defenses against, for example, a tax on unrealized appreciation. I think there's a lot to be learned from this dissenting opinion where Thomas and Gorsuch build out their argument as far as why there's a realization requirement in the 16th Amendment.

If you've got a couple more minutes April, I certainly wouldn't mind taking our listeners through it. Because like I said, I do think it's well thought out. But we don't have to go through the whole history again, like we did last time about how the constitution came to be but it is important that we understand a couple of steps in the evolution. You want to hear the entire sorted history, you can go back to the original podcasts, get all your fill of Hamilton references as April said.

But for today's purposes, it's 1787 we're at the Constitutional Convention and we are aware that we need to be able to generate revenue for the federal government, but at the same time, we have to be sensitive to the sensibilities of the country's citizens who, after that nasty breakup with England, were not going to be particularly receptive to taxes.

The Constitution starts out with Article 1, Section 8 Clause 1, that just grants the government it's general taxing power. It says that the Congress can enact taxes imposed duties, excises, and pretty much leaves it at that. But that concept of taxes, we knew they were going to need more guardrails around because people were so sensitive to it and after some heated negotiations between the Southern and Northern states that we go into detail about in the first podcast, they come out and say, the two most likely taxes that we're going to impose at the federal level are what we call a poll tax or a tax per head on humans simply for existing and then a tax on the ownership of real property.

One of the guardrails we want to build into the Constitution is that these types of taxes, what we will call it direct taxes had to be apportioned among the states based on relative population. They added a second clause to the Constitution, Article 1, Section 9, Clause 4 what's become known as the Direct Tax Clause and that clause simply just says, all direct taxes have to be apportioned among the states based on population. Quick example of how that would work if Congress were to enact a national tax on each acre of land and the total tax is going to be $10 million to be collected from all the states.

If Connecticut and Virginia, even though they may have different acreages of land within their state boundaries, if they have the same exact population, they're going to pay a portion of that overall federal tax. You take the national tax and you say, each state pays its share based on its relative population as a part of the whole. That was supposed to provide some safeguards and some guardrails. The problem as we delve into in our first podcast is that nobody really understood what a direct tax was and that's been a bit of a problem.

Tony Nitti: A couple of years later we add a supreme court case called Hilton, where the Supreme Court ruled that a tax on the ownership of carriages for the conveyance of persons was not a direct tax. In that case, the justices, each of them, to some degree, came out and said, at this point, we think the only things that truly are direct taxes are taxes on people and taxes on ownership of real property. That's how things stood for the next 100 years, April until post-civil war, Congress tried to enact its first ever peacetime income tax.

Tony Nitti: That got challenged right away in a case called Pollock versus Farmers Trust and the taxpayer said, look, this income tax is unconstitutional. Why? Because it is a direct tax. If we stop right there, like wait a minute, you just said that direct taxes were things like a tax on people and a tax on owning real property. How can an income tax be a direct tax? Well, the taxpayer was arguing, look, we know a tax on ownership of property, like real property is a direct tax. The tax on the income that comes from that property, we don't have any mechanisms in the constitution to distinguish between those two, to separate between the two.

Tony Nitti: We have to treat a tax on income that comes from property like rental income from real estate, the same way constitutionally, we would treat a tax on the underlying ownership of the real property and everybody acknowledges that is a direct tax. A tax on the income from the property should also be a direct tax. Then extending that concept to personal property, they said the same thing. They said, if you own stock and we want to tax the dividends that come from that stock. Well, taxing that income is akin to taxing the ownership because we have no means to distinguish between the two, and so that would also be a direct tax.

Tony Nitti: If you can't tax dividend income, you can't tax rental income, a big part of your income tax isn't going to work anymore and that's exactly what happened, April. Much to the surprise of Congress and in one of the most analyzed, scrutinized, debated cases in the supreme court's history, Pollock versus Farmers Trust, the Supreme Court rules that the income tax, in large part, is a direct tax that has to be apportioned among the states based on population. Obviously that doesn't work to apportion and income tax among the states based on population, and so the tax disappeared. The income tax was gone.

Tony Nitti: But Congress couldn't just sit there and do nothing. They needed a way to generate revenue and so they did something that would be largely unthinkable in today's environment, but they amended the constitution. This piece here, April is critical to understanding the arguments set forth by Justices Thomas and Gorsuch. Because in the 16th Amendment, it was done specifically to counteract the ruling in Pollock. Congress came out and said, okay, we're going to amend the constitution to say that congress shall have the power to lay and collect taxes on income from whatever source derived without apportionment among the states.

Tony Nitti: But what they didn't do, April when they added that 16th Amendment, and again this is critical, is they didn't get rid of the direct taxing clause, right? They could have just ripped that from the pages of the constitution say, we're getting rid of this requirement that a direct tax has to be allocated among the states, but they didn't. They left it there when they added the 16th Amendment, which says, we can tax income without apportionment.

Tony Nitti: In the eyes of Thomas and Gorsuch, and this is not in their eyes, I should say, this is a fact and then I'll get to their opinion, the fact is post 1913, we have three distinct categories of tax regimes in this country. Number one, we have indirect taxes like duties, imports, and exercises that we don't need to worry about for this conversation. Number two, we have the direct tax clause, direct taxes have to be apportioned among the states based on population. Then category three, we have an indirect income tax that doesn't have to be apportioned.

Tony Nitti: The point that Justices Thomas and Gorsuch make, and it is an interesting one, is that if we're going to have category two while adding category three, and we're going to retain both those categories. There has to be some way to distinguish when an item falls in category two as a tax on property, a direct tax, versus when it falls in category three, a tax on income. That process, according to the two justices, by which an item that's being taxed moves from category to a tax on property, a direct tax, to category three a tax on income, is this process of realization, this idea of realization.

Tony Nitti: We can further refine this idea of realization in both legal and layman's terms right, from a legal perspective, they said, hey, look at the 1920s decision the supreme court you had someone who invested money in a corporation, and then got a stock dividend, and that stock dividend didn't make them richer. It gave them more slices of pie in the corporation, but reduced the value of each slice. So their overall value of their ownership hadn't changed.

Tony Nitti: But the IRS tried to tax it and the supreme court said you can't because it's not income. The reason it's not income is because there's been no realization. In defining realization, they said, look, when you make a capital investment in a corporation like this, you don't have realization until you have something of detachable, separable value in your hands as the shareholder that you can do whatever you want with, that you can use at your disposal. Since you don't have anything of value here, there has been no realizations, so that's the legal definition.

Tony Nitti: A more simple definition, April that I find helpful is if we want to distinguish between what is a tax on property in category two, that's a direct tax and what's a tax on income that's not, is to think of it in terms of a tree and the fruit that it bears. You own a tree, you own property, right? Taxing the ownership of that tree would be a direct tax. But if that tree bears fruit, think about fruit. You can only fully enjoy fruit if you sever it, if you detach it, if you harvest it from its source from the property.

Tony Nitti: In the eyes of Thomas and Gorsuch here, the dissenting justices, what they're saying is, we have to have that moment where the fruit is detached from the tree and only then does the fruit become income that can be taxed as income, not have to be apportioned among the states, so it's that critical moment of realization. April, if you appreciate your analogies being food-based, I don't know maybe that tree and fruit analysis helped you.

April Walker: It certainly did.

Tony Nitti: Yes, it's extending that argument two more, the facts and more. It becomes very simple for Justices Gorsuch and Thomas because they say, the Moores invested in a corporation, that is a tree, that is a property investment. Show me where the fruit was. They never got any fruit. They never got a distribution. They never got anything in their individual capacity, and so if we were to tax what is effectively an ownership of stock here and treat it as if it were taxing the fruit that never came, taxing it as if it were a tax on income, then what we're doing from a constitutional sense is we are ignoring Congress's decision to preserve Category 2, to retain that direct tax clause. Because for them to take the time and effort to keep the direct tax clause means that Congress believes some items should continue to be treated as a direct tax on the ownership of property. Until property bears fruit, any tax that you tried to assert on that property should continue to be respected as a direct tax or else what was the point of preserving that direct tax clause when you added the 16th Amendment.

Tony Nitti: They then went on, and hopefully this is making it more clear for the listeners and not more confusing, April, but this concept of a tree and fruit, I think is helpful. Until you've got fruit in your hands, how can anything be taxed as income. They went on to say, think about it in terms of a tax on unrealized appreciation. Imagine that you, April, buy real estate today for a million bucks, and over the next year, you don't rent that real estate out. You don't sell that real estate. You don't generate a penny of income from the real estate, but it does appreciate and value, it doubles by next year at this time.

Tony Nitti: If Congress were to come in and try to tax you on that doubling in value. What Justices Thomas and Gorsuch would say, April, "Is there any fruit in this situation? Did you receive anything of separate detachable value that you harvested from the tree? Now have in your individual capacity to do what you want with?

April Walker: Seems no.

Tony Nitti: Seems like no. They would say is if it seems like no, then you can't possibly be taxing fruit. The only thing you can possibly be taxing is the ownership of the tree, the real estate. Since 1787, people have appreciated that a tax on ownership of real estate is a direct tax that Article 1, Section 9, Clause 4 of the Constitution requires to be apportioned among the states based on population. That's it, that's the thrust of their argument.

But it's really an interesting one because the constitution is obviously very much like the tax law in the sense that, I don't know if a lot of people notice about the tax law, but the way the tax law has to be interpreted by the courts is that no single word in the code or regulations is superfluous or unnecessary. Which seems crazy, right? When we think about the length of the code and regs. But everything has to have a purpose.

Tony Nitti: Same thing with the Constitution, if they took the time to preserve the direct taxing clause, but added a 16th Amendment that allows us to tax income. There's got to be some critical distinction between those two categories of taxation, and then the eyes of dissenting opinion of Justice Thomas and Gorsuch, that critical distinction is when income becomes realized when the tree ultimately bears fruit. I think because their analysis is one of constitutional evolution, that it is well formulated and that it very well may serve as the backbone for a future defense because at some point, we're going to end up right back in front of the Supreme Court finally, deciding whether or not realization is required. Who knows what the composition of the court looks like at that time? I say their argument is well crafted. What do I know?

Tony Nitti: People could put together other arguments that are more well-crafted or contrary arguments that are better crafted. But I do think that this is something we should be paying attention to in this more opinion, even though it's in the dissenting opinion, even though they were overruled 7-2, because I think it is logical. I think it is, as I said, well put together when you look at the evolution of the Constitution. You can get some insight into at least how these two justices view a realization requirement. I think also if you were to go and read the concurring judgment opinion by Justice Barrett and Alito, you'll see that they certainly have some concerns about realization as well. But that's a decision for another day. I did say decision for another day, and so for people who are frustrated, I get it. But we shouldn't have been surprised because the writing has been on the wall since December.

April Walker: Wonderful. As we're wrapping up a little bit, I'd like to talk about what your opinion is on how this decision might affect future tax reform efforts. I guess I'm thinking wealth tax.

Tony Nitti: Maybe I'm wrong about this, but I view the wealth tax as being an entirely different issue with much bigger hurdles to get past than, for example, a tax on unrealized appreciation. The reason I think I say that is because with a wealth tax, it gets very hard to argue necessarily that there has been any fruit born because you haven't earned any income at all. They're not even attempting to tax you on income necessarily. They're taxing on the value of assets. I don't know how a wealth tax and necessarily fits within the 16th Amendment definition of income.

Tony Nitti: One of the things that I found very fascinating about the Moore case when we got to the oral arguments, is that they talked in the oral arguments with the government about their thoughts on a wealth tax. In this case, the government conceded that, look, if we were to try to tax the value of someone's assets for just a specific moment in time, I believe they said that was a quintessential direct tax that must be apportioned and I might be quoting it wrong, so please somebody double-check me on that. But I think they more or less said the government, hey, in this case, we can see that a tax on value for specific moment in time would be a quintessential direct tax. But we can tax and increase in value between two different points of time because that represents income.

Tony Nitti: I think a tax on unrealized appreciation, we saw how that argument may well go. You've got Justice Jackson saying that Congress can tax whatever they want. There's no realization requirement. You've got, at the very least Justices Thomas Gorsuch saying, " Not a chance, there's absolutely a realization requirement." I would presume that some other justices will join them. But a wealth tax, I just think is a more difficult argument to make unless there's constitutional angles and there probably are that I just don't see. Because you're not even pretending to tax income necessarily, you're taxing value at a specific point in time. If you go back to my tree verse fruit analogy, how in a wealth tax environment are you not conceding that you are taxing ownership of the tree rather than the fruit that it bears.

April Walker: Well, this is about as breaking news as this podcast gets. Any final thoughts you want to share with us, Tony, as we're reflecting on this long awaited decision.

Tony Nitti: Anytime the Supreme Court talks tax, we have to pay attention, we have to listen. I would just encourage people to read it all of it, read the majority opinion, read the two concurring opinions, and certainly read the dissenting opinion just to see how this may all shake out at some point in the future. But obviously it's all at the mercy of when it eventually becomes in front of the court. But to me, it's just a fascinating history lesson on the evolution of taxes. Really, I've always said, when I do podcasts with my old buddy Damian Martin. Bring him up one last time, I've always said there's no better way to learn the tax law than reading case law. I think the 80 pages or so here, more, even though it may not be what everyone hoped it would be, certainly offers a lot of insight and a lot of educational value.

April Walker: Perfect. Yes, I like to leave people with some homework and that's some good homework to do. Go read the decision. Thanks again, Tony. This has been delightful. I appreciate your time and energy on this.

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 and please feel free to share with a like-minded friends. You can also find us at aicpa-cima.com/tax. Check out our other episodes, as well as the aforementioned one earlier about this case and also get access to the resources. Thanks again 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.

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ENGAGE download – Wins and takeaways
19 Jun· Tax Section Odyssey
Get a snapshot of the AICPA & CIMA ENGAGE 24 conference held in June at Las Vegas. Conference attendees share their experiences at this premier accounting event along with the knowledge that they gained from various sessions. Highlights include discussions on professional growth, finding balance, mental wellness and the importance of networking.

Register now to attend AICPA & CIMA ENGAGE 25.

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.

Today's episode is a little different as it contains snippets and recordings from several participants at the AICPA and SEMA Engage conference, which was held last week in Las Vegas. I have actually been to this conference as a staff member of the association every year.

I believe this is the eighth. 2020 was virtual, of course, but I've been every year and somehow it just always gets a little bit better and better to me. But rather than hear me drone on and on about how great it is, please listen to those who attended.

I have with me Ashley [Francis]. Ashley was in person with me. We're recording this on Tuesday, June 11th. We were together last week at the Engage Conference in lovely, hot -- very hot - Las Vegas last week. Ashley, I'd love to hear your overall impression. How was your week at the conference?

Ashley Francis: So, my overall, overall, is that I am so exhausted, but it is that good exhaustion. Like you go and you do something, and you do the things that you want to do and you have such a wonderful time. That you're tired, but it was a good experience.

Walker: Wonderful, yes. Were you there all four days?

Francis: Oh, I was there longer because I did one of the pre sessions.

Walker: Look at you.

Francis: I did the PFS live pre session, sat for my PFS certificate, and passed the test.

Walker: Congratulations!

Francis: Thank you!

Walker: [Go] you with your new credential.

Francis: I know, it's very exciting,

Walker: Yeah, I think one more day might be do me in.

Francis: I agree, one more day,

Walker: It's wonderful…

Francis: [Five]days was enough, yeah.

Walker: Yeah, it's just a lot. I'm wondering in all of the sessions that you went to, if you had one particular takeaway or one session that really meant something to you. I guess meant something to you professionally or personally. That [included something] you are trying to implement into your life.

Francis: Absolutely. And this is a challenging question because there were three sessions that stood out to me, that I could go back and listen to again and again, but the one that impacted me the most, I would have to say, is Andrea Miller's session on balance and mental wellness. Because I think a lot of times, especially for me, everything is just go, do the next thing, do the next thing. Without stopping to think, wait... is this next thing the thing I actually want to be doing?

And so even though it was a big room, it was full of folks, her session did such a great job, having folks walk through that experience themselves in a very individual way. When I left that session, I was like, holy cow, what am I going to do with my life now? So, it was really big. I ordered [about] 30 books from the library because of it.

Walker: Nice, that's always a good session that creates more work for you to do after the fact. I didn't see that session. I have a long list of sessions that I want to go back to and watch for the first time or watch again. I'm sure you know she used to be staff here at the AICPA and I loved working with her.

Francis: She's great. Her career turn has been exciting to watch also. Can I give a shout out to the other two sessions that I would love? Twyla and Barbara Richardson, their session on “making wow client engagements” that was really good. And then Keila and Carrie talked about bringing in non-accountants to help support and sustain and build our firms.

That one was brilliant as well because it hit on so many different, important things that we need to think about.

Walker: Neither of those which I attended. again, there's so much going on, all the time, which is, not necessarily a negative of engage, but it's just. It's almost like you have FOMO. It's oh, I can't do all this stuff. Yeah. all thank you so much, Ashley, for hopping on and recording with me today. I hope to see you at, if not before, at next year's Engage

Francis: You definitely will.

Walker: Welcome, Brandon. I have with me Brandon Lagarde, who is a wonderful volunteer with me. [He]does a lot of different things, and he was with me at Engage last week. We had a lot of fun, but Brandon, I'd love to hear about your experience overall at the conference last week.

Lagarde: Yes, absolutely. Thanks for having me. Last week was the Engage Conference, and I believe this is the 8th Engage, is that correct?

Walker: yeah, that seems right.

Lagarde: 8th Conference? It's been many of them, and I think I've been to every one of them, and every time I go, I'm just amazed at the scope of what is provided. It just seems every year it gets bigger and bigger.

The speakers are incredible. the exhibitors are getting, better and better, and even, just so much out there. The people that are going. It’s a great experience overall. One thing we hear [a lot] about the accounting population and aging population. I was shocked to see the amount of young people at the conference and excited about accounting and excited about the practice. Also really getting to meet a lot of other people who are trying to do the same thing we're doing. Just this practicing and learning from each other and it was a great experience.

Walker: Yeah, it was. It was a lot of energy and a lot of enthusiasm. And sometimes it doesn't come from the older generation. It comes from the younger generation. But I like to be a hanger on [of the younger generation]. Brandon, are there any connections you made from a networking perspective during the week that you would like to share with us?

Lagarde: As I mentioned, this is my eighth Engage conference. And this is I believe the second annual AICPA Foundation Golf Tournament that was held Sunday morning before the conference kicked off. This year I looked at my schedule and I'm attempting to play golf, trying to get better and improve.

And I've been told that the only way to improve is to play a lot. So, I thought, let me sign up for this tournament. So I actually played in the golf tournament, Sunday morning. Fantastic tournament- I highly recommend it to anyone who's going out there. And got to meet some really great people.

You get put with three other people to play with. Didn't know these people before and played a round of golf. Had some good shots, had some bad shots, enough good shots to go back out there. We did not win the tournament, unfortunately, but we made some good friends and I continued to network with those individuals and keep in touch with them throughout the conference and ran into them multiple times.

I ran into him at the Old Red event, which was an event that was sponsored by AICPA, on Tuesday night at the conference. This was another great time just to network and to listen to the band. Although, it was a little hard to network there because it was a bit loud.

I tried to talk to Damian Martin a couple times, and I think we were screaming at each other at one point just because of the volume of the music. But it was a great place to just meet people.

At the exhibit hall, I'm always amazed at the [number] of vendors that are there that are sure They're there to support the AICPA and their product. But it's just amazing the technology that's out there and the things that are happening. Getting to meet some of the people there and getting to make connections with some of the platforms out there and learning more about people.

A lot of generative AI conversations, a lot of generative AI companies - some better than others- but, just a lot of opportunity out there to meet people. And that’s the benefit of going to something like this and going to a conference like this. It's not just tax people.

It's not just audit people. It's people from all different areas of the CPA practice. At the end of the day, all we're trying to do is help our clients and help our practices improve and getting to see what's out there and getting to meet people who are dealing with the same experiences we're dealing with is you can't put a price tag on that.

Walker: Yeah, I agree. Brandon, thanks for joining me for a quick little snippet of your week. It’s one of my favorite weeks of the year. I look forward to Engage 2025. What shenanigans will we get up to? Time will tell.

Lagarde: We've already started, we've already started [ENGAGE 2025] to do list.

Walker: Yes, we have. Things we didn't get to that we want to accomplish. Most of them are very responsible types of to dos.

Lagarde: Absolutely, I already have it in my calendar next year too. I'm already down to go.

Walker: Wonderful.

Lagarde: [Looking] forward to it.

Walker: Thanks for joining me, Brandon.

Lagarde: Thank you.

Walker: Welcome, Mark. Mark Gallegos was at the ENGAGE conference. We're recording this on a Tuesday, June 11th. Mark, tell me, I know it was not your first time, you've been to ENGAGE several times, but, what specifically, was a highlight for you about last week's ENGAGE conference?

Gallegos: Yeah, I think from the ENGAGE conference, it's the human aspect to me. Meeting people, interacting with people, and really getting to listen and learn from others. The way I look at it is, you get to learn from experts in the field in areas that you think you know a little bit about, and you learn that you have a lot of learning and growth to go forward with.

Learning on the latest trends in the profession, strategies, and regulatory updates from a tax perspective. And then, learning from these experts and staying relevant in the current tax landscape and the changing tax landscape.

But also learning from others in other areas, whether it's accounting and financial planning and estate trust and areas that maybe I don't do enough work in. But it enhanced my growth opportunity while there. At the same time, you just become a more well-rounded person by being inundated with that for a week.

Walker: Yeah, I know that's one thing that is possibly a negative for people about ENGAGE. It is so big and there are so many different topics. But to me, that is a positive, because you're not just meeting tax people. You're meeting people from all across the industry.

I completely agree with you that the human aspect of conferences is something I'm really excited was able to survive the pandemic and come out strong on the other side.

Gallegos: That's right. And I think networking within the conference, whether you're in the classes, between sessions or early in the morning or

Walker: Or late at night, let's just say.

Gallegos: Whatever your flavor is, or maybe all the above, I think that is a great opportunity because you're meeting people from various sectors within the profession.

These valuable connections last beyond the conference. You can even be meeting potential clients, people you could work with or vice versa. And more importantly, thought leaders- people that have great ways of collaborating with others and learning how you can help them, or they can help you. I think that's a huge takeaway for me.

Walker: I think so too. Thank you for sharing your insights. Hopefully, we give people who were not there a little bit of FOMO. And it will happen again next, next June. Thanks again, Mark.

Gallegos: You're welcome.

Walker: I have with me now Dan Moore, who was also out at ENGAGE with me last week. Dan, what's your overall impressions and thoughts about the Engage conference last week?

Moore: Hey, April. Thanks for having me on today. I don't know why the feeling seemed to be different this year. I don't know if it was just the great keynote that we had kick off the conference Monday morning- Eric Weinmayer, who really spoke to me and spoke to a lot of people.

But I just felt like there was a massive amount of energy. At this year's Engage, several of the speakers were just so excited to be there to get up and speak and talk to participants after their sessions. They were excited to meet up with their colleagues and go out to dinner. there just seemed to be so much.

Excitement within the room. The energy was great. And I am still a week later I'm just still really excited about how the event went.

Walker: Yeah, I had the same feeling I was trying to describe to my team members who unfortunately were not able to be out there with me and I said - it's just a vibe. That’s what the kids say. It just a vibe. It is hard to explain, but it’s just a good word for the energy and excitement.

Moore: Our speakers were excited to be there, and that was great to see. Some were speaking on new material, some had revised and revamped some older material. [They were] just so excited to present. Everyone really kept my attention, as much as we were getting tired near the end of the week and day four. They were still keeping my attention and the energy just was everything.

Walker: That's great. We know you did a lot of things during the week, but was there anything that you didn't have time to do? It's hard to make time for everything, but was there anything specific that you have on your to do list, for next year's Engage?

Moore: Several things stick out in my mind. I've already started my to do list for next year's Engage of the things I want to remember to do. Some of them are directly content related. But others are the other activities that are available to you during Engage.

First, it's getting up at 6am and participating in either yoga or the run. I know a group of people get together, they do a walk/run, they go out on the strip, and I didn't take advantage of that this year. So that is definitely on my to do list for next year. But also I felt like I didn't go into the conference as prepared as I wanted to really go out and explore the exhibit hall, as well as explore the solution sessions that were available with many of our vendors.

We are kicking off a project within my office to reevaluate our tech stack, and I really wish I would have taken the time to. start the conversations internally within my firm so that I could go out and seek out the vendors that are on the short list of solutions that we are looking at implementing in our firm.

Because what a great opportunity to meet the frontline of those technology solutions. That was the big thing that I really walked away thinking, next year, I want to take the opportunity to meet people. There's a number of solution sessions, I want to say there was probably at least

4 or 5 running every morning, also solution sessions during lunch, where you could go out and hear specific presentations from various vendors and I missed out on that opportunity. But you know what? I'm not going to beat myself up about that. That's next year. but I think it takes a lot of planning.

To come to the conference, you get the exhibit hall list ahead of time. So, you can go ahead and take a look and see what vendors are going to be in the exhibit hall and start thinking about those vendors that you want to visit. You can make the list up ahead of time to seek them out and not only get to meet them, but see, hey, are they offering some sort of special pricing for attendees?

And, hey, you can also fill up your swag bag. Go home with free stuff.

Walker: That's right.

I know that they were doing demos of certain things, and that would be cool to do. But like you said, you have to go into the conference planning exactly what you're going to do almost every minute, which is hard to do. It's hard for somebody like me to do, because I'm more of a wing-it kind of person. But if you plan, you can really take the full opportunities for what's available there.

Moore: The other thing too, if you're talking to a vendor and one of their the vendor's customers, come up, you can start the conversation with another firm owner. They're like, oh, I'm using this solution. Later on, you can meet up with them, and you can say, hey, now that we're alone, can I ask you some questions, how did you implement this into your firm?

What works? What doesn't work? What are some best practices you would suggest if you're thinking of implementing a new solution? And so that's also a great help. If you know a firm that said, hey, this is a great solution, but if I had to do it again, what would it be? I would have approached it this way. That connection really is invaluable.

Walker: Alright, thanks so much for sharing, Dan and we look forward to hearing more. Dan is the chair of the Tax Strategies conference, he will definitely be there next year, no question. Truly, in a couple of months, we start planning for next year's conference. Looking forward to doing that. Looking forward to seeing all the new and exciting stuff we can incorporate for the 2025 conference.

Moore: Thank you, April.

Walker: Yep. Thanks so much.

Walker: I have with me Kelly Rohrs. Kelly, it was your first time at Engage, so I would love for you to share kind of your initial impressions and also what was your favorite part about being at the Engage conference.

Rohrs: Hi, April. Thanks for having me on today. The first time at Engage, first time in Vegas. I couldn't believe how big it was. There were over 4, 500 people were there. Massive. I ran into so many people, so many familiar faces. It was really just such a wonderful event.

Walker: Yeah, one of my favorite things about, that just because it's such a big conference, you do run into people that you've probably only known necessarily through social media or things, so like putting a face to a name is really just the coolest thing.

Rohrs: Absolutely. Totally agree.

Walker: All right, any other kind of takeaways or thoughts you have about the Engage conference? Will you come back?

Rohrs: I think that people think that conferences like these are for large firms, especially put on by the AICPA. People don't think that this would be beneficial for the small firm owner, but I think that is an absolute misconception. I think a lot of the classes were geared towards the small professional, the smaller firm, how to advance your firm, what sort of services.

That you should provide or develop to keep up with the times and, besides the continuing education portion of it, the networking piece and meeting the vendors that were there was phenomenal. to have the two huge Showrooms filled with the best vendors in the country who are willing to, a lot of them are giving demos, handing out free demos, free months of subscriptions.

That is really the power of an event like this. To take away all of these new software or to hear what other people are doing in the hiring space. It’s priceless. It's worth every penny.

Walker: Yeah, it is, it's hard to describe, but it is like two giant rooms of vendors. And then also the vendors do, we call them solution sessions or education labs. And so even more you're able to get like a deeper dive into their services and things, which I think is, like you said, it’s cool and it's not something you can get just anywhere.

Rohrs: Yeah. It's so much better than being behind the screen. You're in person. You're watching these people who are super passionate about what they're doing. You're building true relationships. And I don't think I met anybody I didn't like.

Walker: Oh, that's always a positive. It was delightful. It was our first-time meeting in person, even though we've known each other for years. So that's always delightful to experience that. Next time we'll schedule and spend some more time together. I think we were all both just running around, crazy.

Thank you so much, Kelly, for sharing your experiences with us on Engage.

Rohrs: Thank you.

Walker: I have with me now Damian Martin. Damian was also at the Engage conference last week. Damian, you have been at Engage a couple of times. What was your general impression about last week's conference?

Martin: General impression, is just how inspired I am and, how great it is to see all the things going on in the profession and all the people in the profession, I'll have to say a highlight for me, aside from getting to hang out with my favorite tax podcast host, which is you, obviously, It was watching Tony Nitti accept the Sid Kess award and his acceptance speech and all of that.

That was just, just incredible and a highlight on, on, on many fronts, I'll just say.

Walker: I love those five minutes was like a lot of nuggets in there. If you have access to Engage and you can go back and listen to it, I would listen to it for that first couple of minutes. He's very inspiring, and makes you want to reach out and do bigger and better things.

Martin: Yes. And I'd be remiss if I didn't say too, that it was followed by a very, very good business tax update as well.

Walker: Absolutely, hang on, I wasn't just saying,

Martin: Yeah. No, I know you weren't.

Walker: Brian did an excellent job with the, Brian Lovett, with the business tax update, so yes, hang on for the whole session, the whole 75 minutes. Damian, did you make a networking connection? To me is my absolute favorite part about Engage, seeing people in person and, getting in that face to face connection. Did you make a connection that you'd like to talk about?

Martin: Absolutely. And I completely agree, right? Like it's nice to interact, especially, remotely and whatnot. But just there, there's something to being in person and maybe putting a face to a name and all of that, that happens every year. But this is actually a connection I'll say that even goes back to last year.

So last year at Engage, I reconnected with a group from the firm I started with, which is Bowman Company in Stockton, California. They were the ones that kind of gave me the chance in public accounting, got me inspired. Really the path that, that I got on to where I am today, I attribute all back to them.

And then coming back this year, I have to say, it just, it warmed my heart and it just really meant a ton to me to see Daryl Petrick and, Jeannie Rusick, who are, partners at that firm, sitting in the front row at my session on Monday, for the individual tax update. It just speaks volumes about them.

Back to your point about just the great people that are in this profession, and I generally walk away with, I know there's headwinds and whatever else, that you can focus on, but there's just, there's good people in the profession. So, it's really hard for me not to conclude that there's great things that continue to come for the profession as a result of people like, like Daryl and Jeannie.

Walker: Well said. Yeah, I think there's a lot to be said. There's a lot of positive energy that I feel when I'm at Engage that makes me excited about the profession and about changing and evolving.

Martin: That's right.

Walker: Thank you so much, Damian, for sitting down with me for a quick little interview. We'll have to, we'll have to have you back for a longer discussion at another time.

Martin: Happy to do it. Thank you, April.

Walker: Thank you so much.

Usually when I close these podcasts, I always talk about taking a journey together towards a better profession. And I ask my guest what their bucket list travel destination is. But while I didn't take the time to ask all of our guests today to answer that question specifically, I think it's safe to say that based on their discussions, we'll all be back together in Las Vegas, again, at Engage 2025.

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 SEMA. 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 likeminded friend. You can also find us at aicpa-cima.com/tax and find our other episodes as well as any resources mentioned during this episode and 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.
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What you need to know about BEPS 2.0: Pillar One and Pillar Two
24 May· Tax Section Odyssey
The OECD BEPS 2.0 project consists of two pillars. Pillar One applies to the biggest and most profitable multinational enterprises and reallocates part of their profit and taxing rights to the countries where they sell their products and services. Pillar Two introduces a global minimum corporate tax of 15% to prevent tax avoidance and base erosion.

The U.S. has not yet adopted the OECD project into its tax system, but it will still impact U.S. multinational businesses that operate abroad. Practitioners need to know about the OECD project because it is a major change in the international tax system that will affect many multinational enterprises and their tax compliance.

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.

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 friend and colleague, Henry Grzes. He's a colleague here with me on the AICPA's Tax Practice & Ethics team. Welcome back, Henry.

Henry Grzes: Thanks April. Happy to be back.

Walker: Wonderful.

The aim and goal of this podcast is definitely not to teach you everything you ever wanted to know about OECD and Pillar One and Pillar Two because we certainly couldn't do that on this podcast. But, we would like to talk about why you need to care, why you do need to know high level what this framework is about, and I'm going to try to listen also because I know when I start hearing this, I definitely tend to turn off my listening ears.

Everyone turn on your listening ears, as they say in preschool, and let's get going. First, I've been saying and I've said it a couple of times, and I know that we as accountants love acronyms, OECD. Who is this, and what are their goals?

Grzes: We're going to start basic, as you said. OECD stands for the Organization for Economic Co-operation and Development. Now from their website, they describe themselves as an international organization that works to build better policies which result in better lives. Their goal is to shape policies that foster prosperity, equality, opportunity, and well-being for us all.

Together with governments and policymakers and citizens, they work on establishing evidence-based international standards and finding solutions to a range of social, economic, and environmental challenges. These include economic performance, creating jobs to foster strong education, and fighting international tax evasion and international standard setting.

The goal of the OECD project we're talking about today is to reform the international tax system and provide a more transparent environment for tax. The official title of the project is referred to as the OECD BEPS 2.0, Pillar One and Pillar Two. By the way, BEPS stands for Base Erosion and Profit Shifting.

Walker: Thanks, Henry. I think we can all agree that transparent tax environment sounds like a good goal, but when I start hearing about pillars, I think about building buildings, but that's not what this is about at all. So tell me more about Pillar One and Pillar Two.

Grzes: Each pillar addresses a different gap in the existing rules that allow multinational enterprises, also referred to as MNEs, to avoid paying taxes.

First, Pillar One applies to the biggest and most profitable MNEs and reallocates part of their profit and taxing rights to the countries where they sell their products and provide their services. In effect, where their consumers are. It deals with transfer pricing issues and the allocation of profits and adopts new nexus and profit allocation rules with the objective of assigning a greater share of taxing rights over global business income to market countries.

Without these rules, these companies can earn significant profits in a market without paying much tax there. It is a plan to reallocate some taxing rights to countries based on where their customers are located.

Pillar One originally targeted large, profitable digital companies, but now applies to most large profitable multinationals. The G20 OECD project on addressing the taxation of digital economy began in 2019, building on the final reports issued in 2015 in the earlier projects on BEPS.

Pillar Two was released in December 2021, and when adopted, would apply to a much larger group of MNEs with global annual revenue of 750 million EUR. These companies would be subject to a global minimum corporate tax.

With these new rules, companies organizing their affairs in a way that their profits, in a given jurisdiction, whether that jurisdiction is deemed to be a low tax one or otherwise, are subject to an effective tax rate lower than the minimum rate. If that is the case, those profits would be still taxed at the minimum rate of 15%.

Walker: In April-language, Pillar One is talking about transfer pricing, which transfer pricing obviously has been an issue for the whole time I've been doing tax, which is a long time, and then Pillar Two is a minimum tax, and it's a high level, 750 million EUR. Where does this regime stand in the United States?

Grzes: Currently, there are no enacted laws that incorporate Pillar Two into the U.S. taxing system. There has been proposed legislation, but the implemented laws abroad will still affect U.S. multinational businesses. U.S. adoption of these pillars would require Congress's approval.

While countries are already adopting Pillar Two without a U.S. agreement, Pillar One would likely require U.S. approval to go forward since a large fraction of the income affected is from U.S. multinationals. The deadline for the agreement on Pillar One was extended for a year through 2024.

Canada was considering a digital service tax, also known as a DST, and delayed adoption while Pillar One was under consideration, but it is now continuing with a retroactive DST.

According to the Congressional Research Service, which is a nonpartisan shared staff to congressional committees and members of Congress, if Pillar One is adopted, there will likely be a revenue loss to the U.S. due to the reallocation of taxing rights, and increased tax on U.S. firms, and an associated increase claim of foreign tax credits. If Pillar One is not adopted, DSTs that have been adopted over the past few years in other countries would likely remain in effect and proliferate in other jurisdictions.

There is no current proposed regulation in the U.S. that incorporates Pillar Two into the U..S taxing system, as I mentioned earlier. The IRS issued a notice released in December of 2023 which barely scratches the surface on the relation of Pillar Two with foreign tax credit and dual consolidated losses.

But Pillar Two has not yet been enacted in the U.S. Despite the lack of adoption in the U.S. at this point, the laws impact MNEs because they do business abroad, but there is still much needed guidance in the U.S. on these taxes.

Walker: Quick summary, no U.S. taxes have been implemented by this minimum tax so far for Pillar Two, but still, we'll talk about this in a few minutes, still we can't ignore this and we'll talk about why.

A question came up for me, again, I'm no international tax expert by any means, but I hear minimum tax and I think how does this relate, if at all, to the corporate alternative minimum tax, CAMT, I think it's also called, affectionately, imposed by the Inflation Reduction Act a few years ago. Are they connected or like each other in any way, and also how about the GILTI regime that was added as part of TCJA? I know that's also an international tax provision.

Grzes: The two taxes CAMT and Pillar 2 are completely unrelated. Inflation Reduction Act imposed a Corporate Alternative Minimum Tax, as you mentioned, CAMT is the acronym equal to the excess of 15% of a corporation's adjusted financial statement income.

Keeping with the theme of acronyms, that would be AFSI over its corporate alternative minimum tax, foreign tax credit. AFSI is the net income or loss set forth on an applicable financial statement with certain adjustments. This tax is effective as of December 31, 2022. Pillar 2, however, is a 15% effective tax rate and CAMT is a 15% tax based on AFSI, which is effectively booked income.

In regards to GILTI as part of the Tax Cuts and Jobs Act, the U.S. adopted various changes to its international tax rules, including this new tax, which we refer to as GILTI, which stands for Global Intangible Low Tax Income. These rules apply to the revenue of non U.S. companies that U.S. corporations and other citizens control. These entities are referred to as controlled foreign corporations or CFCs. GILTI is a CFC blended tax regime under Pillar 2, but it's important to note the taxing of GILTI is much different than Pillar 2, even though Pillar 2, as it was being developed, used GILTI as its basis. GILTI is based on a blended tax regime versus Pillar 2, which is based on a country-by-country one.

Walker: That's helpful to help me understand. Definitely still no expert on this, but I certainly want people to understand why they need to know to be able to talk intelligently about these different regimes and taxes. Tell me, give me a case for why I need to know more and care about these developments?

Grzes: Well, that's a great question, and as we all know, the world is becoming a smaller place by the day. Although these rules primarily impact large corporations, the accounting profession has a role because many practitioners will need to understand these rules and stay abreast of the changes which are happening quickly so they can guide their clients through the complexities of compliance.

Walker: Got it. Definitely more to come on this issue. Let's talk through the challenges that we'll face in the businesses that we serve and represent in working through these new regimes.

Grzes: As you indicated, there are many challenges and those include understanding the rules and the compliance associated with that. That's a big one. Increased reporting and tracking requirements, including increased documentation burdens and reporting.

There's also the cost of implementation, administrative burden of complying with Pillar 2 will significantly increase compliance costs. Also understanding the transfer pricing rules, especially when it comes to Pillar 1. We think all practitioners anticipate some form of tax law changes in conjunction with the numerous provisions of the Tax Cuts and Jobs Act scheduled to expire at the end of 2025. And it is possible that these OECD rules may be addressed as part of this anticipated legislation.

Walker: Perfect. We're definitely continuing to do more work in this area with resources and we're definitely following all the potential legislation that's coming up or that we expect will come up either towards the end of this year, end of 2024 or certainly towards the end of 2025. There's so many provisions that are expiring, so we will continue to follow this.

Henry, I like to have a little fun with my guests. In closing, I like to think about is taking a journey together. Today on our journey, we're taking an international journey, but it doesn't have to be -towards a better profession. In doing so, I love to hear about your bucket list items or a trip you have planned. You are a well-traveled individual, I know, because you are a friend of mine, but I'd love for you to share something that you're excited about.

Grzes: My wife and I will be spending a week or so the summer in the Azores, which are the islands off of Portugal, as well as within Portugal on the continent itself. Very much looking forward, we've never been, we know people who have visited those places and they loved it. We're very much looking forward to visiting the country and experiencing the culture and everything that it has to offer.

Walker: Very nice. You speak Portuguese?

Grzes: I do not, but I will find a way between now and then to expose myself to the language. So that I can at least…

Walker: At least ask for a drink.

Grzes: Ask for a drink and identify where the bathroom is.

Walker: Very good. Those are the important things. Thank you again so much Henry, for sitting down with me and talking about this very complex topic. Again, we really just wanted to give you a nice highlight of what you need to know and that there's more to come from us on this 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 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 the aicpa.com/tax to our other episodes, as well as get access to the resources 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.
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Post-April 15: Top-of-mind tax advocacy topics, including the ERC
9 May· Tax Section Odyssey
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).
Transcript
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.
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From filing cabinets to cloud — Records management in the digital age
2 May· Tax Section Odyssey
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.
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 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.
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A radical approach to client relationship building
18 Apr· Tax Section Odyssey
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.
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Deadline Dilemmas: Navigating Tax Extensions and Risks
4 Apr· Tax Section Odyssey
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.
Transcript
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.
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Digital asset playbook: Part 3 — Reporting requirements
21 Mar· Tax Section Odyssey
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.

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Clearing up BOI confusion and other tax advocacy updates
14 Mar· Tax Section Odyssey
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.
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What's under the hood — Superseded returns
7 Mar· Tax Section Odyssey
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
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 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.
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Digital asset playbook: Part 2 — The loss ledger
22 Feb· Tax Section Odyssey
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.
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Digital asset playbook: Part 1 — Questions and misconceptions
8 Feb· Tax Section Odyssey
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.
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Digital asset playbook: Part 3 — Reporting requirements

Clearing up BOI confusion and other tax advocacy updates

What's under the hood — Superseded returns

Digital asset playbook: Part 2 — The loss ledger

Digital asset playbook: Part 1 — Questions and misconceptions