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. 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Steve Turanchik from the AICPA’s Digital Assets Tax Task Force discusses upcoming reporting requirements for digital assets. Sec. 6045 will require brokers to report transactions involving digital assets, similar to how they report securities transactions currently. This is meant to combat anonymity concerns and improve tax compliance. However, the reporting rules have been delayed multiple times. The AICPA continues advocacy efforts in this area, providing comments to highlight issues and gaps in reporting requirements. AICPA resources Digital assets and virtual currency tax guidance and resources — This hub is your go-to library for AICPA guidance and resources as well as current legislation, IRS initiatives and tax advocacy projects.   .  Advocacy ·      AICPA submits additional comments on the proposed Sec. 6045 regulations on gross proceeds and basis reporting by brokers and determination of amount realized and basis for digital asset transactions, March 4, 2023   ·       AICPA comments on the proposed Sec. 6045 regulations on gross proceeds and basis reporting by brokers and determination of amount realized and basis for digital asset transactions, Nov. 8, 2023   ·       AICPA comments on virtual currency reporting under Sec. 6045 and Sec. 6050I, Form 8300 and instructions, Oct. 28, 2022 Other resources IRS Digital Asset page — Recently redesigned page to provide the latest IRS information on digital assets Treasury and IRS announce that businesses do not have to report certain transactions involving digital assets until regulations are issued, Jan. 16, 2024 Transcript April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the Tax Section. I'm here today with Steve Turanchik. He's an attorney with Paul Hastings in their tax, litigation, and controversy practice. He's also a member of the AICPA's Digital Assets Tax Task Force. That is a mouthful. We are wrapping up this three-part series, I hope you've been listening, but you can always go back and listen to the first two parts, on digital assets here on the Tax Section Odyssey. It's been a wild and fun ride. In today's episode, we're going to focus on reporting for digital assets. We're going to be talking about when that's scheduled to happen, what it will mean, what it will not mean, when it will actually happen as far as we know, at least at this moment, and what you need to do to help businesses and individuals that you work with in this space. Steve, always, especially with this topic, I like to start off at a foundational level. I'm still learning terminology in this world and I bet our listeners are also, but talk to me about what we need to know about Sec. 6045 and 6050I. What are the key things that we need to be paying attention to? Steve Turanchik: I'm happy to address it. Let me say, information reporting is rarely a fun topic. But for our members, it's going to be incredibly important because as information is reported to the IRS and to their clients, the practitioners are going to need to decide how they handle that information that's reported. You've got to account for it someplace. If you don't, the IRS sends you notices asking — hey, where is this information? Let's step back prior to these code sections dealing with digital assets. We'll just talk about them generally. [Sec.] 6045 is in the code because it requires brokers — that is the JPMorgans, the Schwabs of the world — to report when their customers have transactions involving securities. If you have an account at JPMorgan and you sell a security during the course of the year, JPMorgan will report that to you and the IRS on a Form 1099-B that is dealing with the reporting of securities. There was a bit of a hullabaloo when that first came into play so far as information reporting to making sure basis was reported. This was one of the tools in Congress's toolbox to get people who are dealing in digital assets to report those transactions dealing in digital assets. Remember the big concern about this. When you go back to Bitcoin and the Blockchain and the various types of protocols that exist in the world, the concern from the government's perspective, including the IRS, is that these transactions were taking place anonymously. There was no real way to go about tracking these transactions. Congress, in its infinite wisdom, has put into place an amendment to [Sec.] 6045 that requires people who are dealing in transactions on the Blockchain to report those transactions to the IRS. We're going to get into what hazards are going to come along with that and the various snafus that we are invariably going to see in a few minutes, but the basis of [Sec.] 6045 reporting was the brokerage reporting. That is, your JPMorgan and Schwabs reporting securities transactions to the IRS to assure that people who had money or had assets on those exchanges would report them to the IRS. Now let's turn to [Sec.] 6050I. [Sec.] 6050I is historically been used to report transactions in cash. That is, greenbacks. If an individual or business comes into an art dealership or an automobile dealership and they bring in more than $10,000 in one transaction or a series of transactions, that trade or business was required to report those transactions to the IRS on a Form 8300 within 15 days of receipt of that cash. For those businesses that dealt heavily in cash, it just became a relatively standard way to go about reporting those transactions. Like it or not, if you're dealing in cash, you're receiving cash and you fail to report those, the penalties can be pretty severe. With that in mind, that's where these two sections come from. Under the new legal requirement, if any person who in the course of their trade or business, it is important to note that it is part of your trade or business, receives more than $10,000 in digital assets in a single transaction or series of transactions, that needs to be reported to the IRS within 15 days. It's not limited to whether it's a taxable transaction. If a borrower is repaying a loan in digital assets, that needs to be reported. If funds are being raised in a capital raise, a venture capital firm, or an investment fund, if they're receiving digital assets as part of an investment, that also needs to be reported to the IRS. The penalties for failing to report that get to be pretty severe. I understand the policy reason for it is that the IRS wants to see more and more reporting about a part of the economy that they believe is anonymous, that it's running under the radar. [Sec.] 6050I was put in place really to combat two different things. First was tax evasion. If you're dealing in cash, it's hard to track. But the other part of it was money laundering. That certainly remains a concern here, which is why the IRS and frankly Treasury wants to root out potential money laundering by requiring those transactions to be reported. The reporting requirement involves obtaining the name, the social security number or tax identification number of the transferor. From a policy perspective, I get why they're trying to do that. One thing that I've seen for frankly clients of mine, a question that routinely comes up, and I know for practitioners these are not the clients they want — but they exist out there — is, hey, Steve, I understand this requirement to report the received digital assets within 15 days, is that only for US businesses? If I locate my operation to the Caymans or Malta, do these rules apply to me? The short answer is the IRS could try, but enforcement is going to be very difficult. You see a light bulb go off in the guys who are in this area. They're like, guess what? I'm going to start a foundation in Malta and forget the United States, which is discouraging if we want to see this infrastructure develop here in the US. But for our practitioners, for our members, when this reporting comes in, there's going to be a deluge of information for the IRS. There will be every incentive for recipients of digital assets to be careful. That is, more conservative and over-report. If your clients are the ones providing digital assets, they are going to need to deal with the fact that the information is reported to the IRS and be able to explain why it wasn't a taxable transaction or if it was a taxable transaction, that they'll need to report it. Remember if the person has, let's say $1,000 basis in Bitcoin and Bitcoin is now at $10,000. When they transfer that in exchange for goods or services, that itself is a taxable event for the transferor. [If it is an] event for the transferee, it depends upon the nature of the transaction. [Sec.] 6045 is, at least in its initial drafting, was extremely broad. [Sec.] 6045 requires any person who for consideration is responsible for regularly providing any service, effectuating transfers of digital assets on behalf of other person. When we first read that as practitioners, we said that's going to encompass a lot of people that have no ability to comply. It's not just wanted to be exchanges or financial institutions. It could be anyone who develops software, anyone who is validating blocks on a Blockchain. The good news is that, at least in the proposed regulations this past fall, the IRS has said, we don't intend this to apply to validators. We don't intend for it to apply to miners, or for people who have no ability to comply. Rather the requirement to the extent we're looking at one is for custodians to report this. Now, what's troubling about this is you're going to have reports of transactions that may not be taxable. If the assets are moving from my account at custodian A to my account at custodian B, that's not a taxable transaction. The problem, of course, is because of the anonymity of the Blockchain, the brokers are not going to know whether it's a taxable transaction. You as the practitioner, are going to need to root out with your clients whether or not it's a taxable transaction for them. The sad reality is that many account holders and many clients don't keep the best of records and trying to get those records off the Blockchain while doable is going to be labor intensive. That is the landscape we're looking at on a going forward basis. Walker: That's a lot to unpack there. I was just thinking about as you were talking, I was in practice and I remember when the basis started having to be reported on the 1099-B and all the concern it caused with all the different codes and things. Now that's just old hat and it just happens. It seems like a whole different ball of wax for digital assets. But spoiler alert, these reporting requirements have been started, [saying] they're going to be in place now and then they've been pushed back. Let's talk about where we stand now with the timing of their reporting requirements. I say where we stand now because I feel like we've just continued to push back because maybe the IRS isn't quite ready to deal with all the questions, but where are we right this minute? Turanchik: April, the short answer is, we are in limbo. Walker: That's not a fun place to be in the tax world, but here we are. Turanchik: It is not. We were expecting rules to become effective January 1 of 2024. That is this past year. The reality is on the [Sec.] 6045 broker reporting, those rules will not become effective until the regulations are finalized. Proposed regs were issued last fall. They took comments last summer, they took comments through the fall. It's not entirely clear when the [Sec.] 6045 regulations will be finalized, in part because the IRS has received more than 30,000 comment letters. Now, the backstory behind that and it's a little nefarious. A lot of those comment letters were likely AI or chatGPT generated, but they weren't generated by folks like the ABA or the AICPA. We did provide comment letters. The vast majority of them were created by artificial intelligence and explicitly meant or intended to slow down the IRS's rulemaking procedures. It is my understanding from talking with folks who are working on the final regulations that they will have a way in which to sift out the more bogus comments. The reality is as part of the Administrative Procedures Act, the IRS needs to issue the regs, issue the notice, receive comments and take those comments into play. If the IRS disregards the comments entirely and it's likely the regulations is invalid and that of course, throws everything in a haywire. With all that said, my contacts at Treasury estimate…they expect to have final regulations the summer of 2024. That might be a little ambitious because even if you throw out the bogus comments, there are still really substantive commentary from serious groups explaining — here all the areas that we think you guys need to provide guidance in and because it is a brand new area. We see potential for reporting transactions that are not taxable and for potentially double reporting. Because remember the standard for the brokers is, any person who regularly provide any service effectuating transfers. You can have more than one person providing the service of effectuating or a transfer from place A to place B. If let's say three or four parties report the same transaction and that assumes it is even a taxable transaction. You now have a potential gain that's four times what should be reported to the taxpayer. That is a recipe for chaos. That's assuming that you have a taxpayer with good records whose straightforward with their return preparer about here are all forms I got. By the way, the same transactions reported twice, three times, four times. You're the return preparer. What do you do with that? You report it four times and then back it out as duplicative. Maybe. I think you probably have to. But when I say it's a recipe for chaos, I'm not kidding about that. Let's imagine you're the IRS examiner and you're either newly trained, let's say you're well experienced in this area. You see the transaction shows up four times on a 1099-B or 1099-DA, which stands for digital assets. Are you going to take the return preparers word for it? That's a dupe. For all you know, you had four transfers of Bitcoin on that day and all of them are taxable. When you pull the Blockchain out and give it to the examiner who can't understand the Blockchain. Just think about that in the course of an audit. Is the examiner going to understand the Blockchain you give to them and even if they do, are they going to trust you? Walker: Potential for, like you said, chaos, yeah. Turanchik: If I had to guess, it is a wild guess, I would suggest we're going to see reporting on the brokers for transactions beginning January 1 of 2026. That's my current best guess. The problem is, let's say the regs come out final this summer. If you make it January 1, 2025, the people who are required to report are not going to have the infrastructure in place. Some might, the established exchanges might, but everyone who's going to be required to comply will not have that capability. Walker: [Sec.] 6050I, I was going to say, with a little bit of the same story but a little different. Turanchik: Little different, because there, there are no proposed regs and under the statute that was to become effective in the express language of the statute was January 1, 2024. That is just at this point two months ago. No proposed regs, nothing from the IRS saying we're delaying this. It wasn't until mid January that the IRS said, without implementing regulations, this cannot be effective despite the express language of the statute. One area that gave me as a practitioner some comfort and I say some comfort, is that there's a lawsuit pending against the enactment of these particular provisions claiming violations of privacy, Fourth Amendment rights and in a brief to the District Court, the Department of Justice said [Sec.] 6050I will not become effective until final implemented regs are promulgated. It gave me some comfort, but just some comfort. Can I really use litigating position from the Department of Justice to justify my clients failure to file the Form 8300, despite the express language of the statute? As a lawyer, that gives me the heebie-jeebies. Walker: Technical term, right? January is the time when people are trying to gather and get their reporting together. The fact that it wasn't delayed until the middle of January, there was this new form that was maybe going to be out there and then anyway, so like you said, some comfort that, okay, it's going to be delayed until we hear more from the regulations. Turanchik:When the regulations are finalized. Regulations have not even been proposed yet. Unfortunately, unlike the broker reporting which takes place in January of the following year, the [Form] 8300 needs to be filed 15 days after you receive your digital assets. The [Form] 8300 currently does not have a place to report digital assets. Walker: A lot of things. We talked a little bit about what the reporting is supposed to accomplish, and we talked about some of the gaps already, but what are some things that are probably not going to be fixed? You talked about tracking records and that sort of thing. Why is it still important for taxpayers to be able to track the cost basis or track their digital asset activity even once this reporting happens, whenever that might be? Turanchik:The concern is if you don't track your cost basis, and you can't prove it up, the IRS's default position is, your cost basis is zero. Yes, zero. I have seen that, and I know this from my days at the Department of Justice, where there would be an IRS audit that came to my desk where the taxpayer simply didn't respond in the course of the examination. Where the IRS had the gross proceeds recorded and until the taxpayer went to prove the cost basis, it was assumed to be zero. Now, one thing that was a success story of sorts. My particular taxpayer was deceased and her executor was a parish priest. He said, Steve, I don't know how to prove my cost basis. I said, don't worry, Father, I have subpoena power and I issued a subpoena to the custodian, and they provided the cost basis. After that, we got to the right tax result and the taxes paid. But look, in the digital asset space, the IRS isn't going to subpoena Coinbase for you, that's going to be on you. You got to be able to track and prove up your cost basis if it becomes an issue. I had one client I brought through the streamline voluntary disclosure and the cost information, I won't say it was unreliable. But we took the conservative position that we're going to treat all of it as gain. The cost basis frankly was nominal to start with, but rather than trying to go through and track all that was a cost basis zero, whatever the proceeds are, and we have that number, that we're going to report as gain. It can be done from an administrative perspective, it is more conservative. But look, the reality is the prices of digital assets have dropped in the last 18 months or so. You might find yourself without significant gains and if you don't have your cost basis information, you may find yourself paying tax on something that you lost money on. Walker: Not a good situation. We talked on part 1 of the podcast with Nick. We talked to a decent amount about possible options for people. Go back and listen to that one again, if you want to learn more about why you need to track, and maybe an Excel spreadsheet, not your best idea. I mentioned at the top that you're on the digital asset tax task force and so let's talk a little bit about the continued advocacy work that's being done in this area throughout this time, and will definitely continue. Turanchik:We have provided comments on the [Sec.] 6045 proposed regs in an effort to highlight areas where we think there are real issues, gaps in reporting, the double reporting is a problem. The cost basis tracking, the more guidance the IRS can provide for practitioners, the more fluid it's going to be for tax compliance. The simple reality is tax return preparers, we are the first guideposts. We are the first guardians of the Fisc, that if the return preparer is getting it wrong, you're less likely to have good compliance and the appropriate amount of tax reporting and payment. That guidance for return preparers provides us with the tools we need to tell our clients what needs to be done, and the reality is the IRS, even with the increased funding, doesn't have the ability to audit all taxpayers. Rather, they're going to rely upon return preparers to ensure at least, the best compliance as possible for their clients. I also expect that we will be providing some comments on [Sec.] 6050I regs. On a personal matter, I think they should be repealed, but I don't think that's going to happen. I think the amount of information that's going to be reported to the IRS is going to be entirely overwhelming, and I will tell you in my conversations with folks both on the Hill and Treasury that they're not concerned. Their worst-case scenario is fine, we have more information we know what to do with, we'll figure it out or not figure it out. Walker: I just go back to — it's not the same — but the whole discussion about the 1099-K and $600 is not a lot of money to have all these forms out there. Reporting is important. We're on this podcast to talk about reporting, and it is important. But also we have to think about the reality of the world. Turanchik: I've done a fair amount of consulting on the 1099-K issues with third-party seller organizations, and it's a real issue. The biggest issue for me on the 1099-Ks is the payment for goods or services. Because a lot of transfers on those payment services, whether it's Venmo or PayPal, it's friends sharing expenses for dinner. Walker: They just don't mark the right box or whatever it is. Turanchik: They're not income events and the problem is if the wrong box is marked or worse, no box is marked, the [1099-] K gets reported to the IRS and the taxpayer now has received the form. They've got to go to their accountant. Walker:What do I do with this? Turanchik: I've got to deal with it in some way, shape or form. I think you report it and then back it out. Walker: Again, we're talking about reporting. It's important. We'll just end on that note. Steve, any final thoughts to share with our listeners on just this topic of digital asset reporting, we'll definitely be talking more about this as things get finalized. Turanchik:It's more a stay tuned because things will be changing. There will be additional developments. It's hard to say what they'll be. There's a lot out there, that still needs to be decided and we're still - early stages. This hasn't gone through litigation, it hasn't been tested. The good news, did I say there's good news? Treasury and the IRS at least are willing to listen to us and that is a good thing. It's actually one thing I like about being in the tax community is that the folks at Treasury often times used to be in private practice and vice versa. The conversation is there not because practitioners are trying to help their clients evade taxes. It's that we are trying to make it as easy to be tax-compliant as possible. We want our clients to follow the law. We don't want them to get in trouble. Will there be bad actors? Of course, there will be. Walker: There always are, in some worlds. Absolutely. Turanchik: The vast majority want to be good actors, and that includes practitioners as well. Walker: Absolutely. In closing on these podcasts, I like to think about us taking a journey together towards a better profession and in doing so I like to get a glimpse of my guests other journeys outside of the world of tax and digital assets and all of those things. Steve, share a page from your travel journey bucket list or a trip you have planned or something on your mind in that area. Turanchik: During the pandemic, the year 2020, I turned 50, and I was supposed to go on a Safari with my wife that summer. That did not happen for a variety of reasons. Didn't happen in 2021 either. But in 2022, we did go on a Safari in Kenya, and it was the experience of a lifetime. It was absolutely amazing. I love the big cats, and we saw leopards, lions, elephants, zebras of course, and we were there for part of the migration, that was absolutely intense. It was always on my bucket list and my wife, you know what? I'll humor him. I'll go on it. She also absolutely loved it. It was fantastic. The downside is I'm not sure, I need to go at and again, I've seen everything I wanted to see. It was absolutely intense. Walker:That's amazing. We had another guest who said the same thing. I can't remember which country they were in but said that the Safari was amazing. My husband also turned 50 in 2020. You and him are the same age. I'm a little bit younger, just a little bit. Thank you so much, Steve, for chatting with us today. We talked about reporting and all the things that are up in the air, but we're trying to help you learn what you need to know next. This is April Walker from the Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcast, and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much, and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax and check out our other Odyssey episodes, as well as getting access to any resources we mentioned during the episode. Thank you so much for listening. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. 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Melanie Lauridsen, AICPA & CIMA VP of Tax Policy & Advocacy, provides an update on several key tax initiatives that are top of mind right now. Highlights include the latest updates on beneficial ownership interest (BOI) reporting as well as what to expect from pending tax legislation.    AICPA resources Decision holding Corporate Transparency Act unconstitutional appealed, The Tax Adviser, March 12, 2024 Federal court holds Corporate Transparency Act unconstitutional, The Tax Adviser, March 5, 2024 Plaintiffs: FinCEN should pause all CTA enforcement, The Tax Adviser, March 5, 2024 Beneficial ownership information (BOI) reporting resource center  — Access resources to learn about the beneficial ownership information reporting requirement under FinCEN’s Corporate Transparency Act (CTA). Client letter and FAQ for a government shutdown during tax season — Share some considerations with your clients as the potential for a government shutdown looms, and IRS services will be affected during tax season. Transcript Neil Amato: Welcome back to the Journal of Accountancy podcast. This is Neil Amato with the JofA. I'm again joined by Melanie Lauridsen, Vice President ­– Tax Policy & Advocacy for the AICPA. This is a special episode — a special collaboration episode between the JofA podcast and the Tax Section Odyssey podcast. Melanie and I are going to talk about a host of tax topics that are on the minds of practitioners as we record in early March. Melanie, first, welcome back to the JofA podcast. How are you? Melanie Lauridsen: I’m good. Thank you for having me back. Amato: Tell me first, what’s new in the world of tax advocacy these days? Lauridsen: As you’re probably aware, there are some big things happening on tax, and sometimes with tax, it can linger and sometimes they move super, super quick, so it’s an interesting world. But right now, the big issues that we're tackling are beneficial ownership information, ERC, which is employee retention credit, there's the government shutdown, which hopefully there won't be a government shutdown. We do a lot of work behind the scenes, but that may never come to light. Of course, there's the House Ways and Means tax bill, but that doesn't mean there aren't a lot of other pieces of work that we're working on. For example, this year, we've already started working on guidance for SECURE 2.0. We have the FBAR extension for those affected by the disasters. We have virtual currency. There's limitations of excess business losses. There's just a lot of work that's happening. Amato: You've touched on some of those issues. I guess, through comment letters and other advocacy, what would you say are some of the highlights of those important issues right now that members should be aware of? Lauridsen: Well, off the top of my head, the biggest one right now is beneficial ownership information. The interesting thing about this topic is every time we connect, something new is arising, something new has happened. Then of course, that creates a flood of activity, sometimes confusion, and people needing a little bit more guidance with that. Most recently there was a court case that has impacted BOI. With employee retention credit, there are some tax bills that are impacting the timing of how long people can submit claims for it, and there's a flood of activity and some confusion also associated with that. It just depends on the topic that we're touching base on what you want to dive into. Amato: On the topic of beneficial ownership information or BOI — I guess that falls under the Corporate Transparency Act — a court ruling a week ago today as of this recording, deemed the Corporate Transparency Act unconstitutional. Tell me a little more about what that means, how it changes or doesn't change what the AICPA is advocating for, etc. Lauridsen: The court ruling — there have been different press releases that have come out. Again, I can't stress enough that it's created a lot of confusion. There was a court ruling from a lower court, and it comes from the state of Alabama, in which it did deem the Corporate Transparency Act — CTA is what I call it sometimes. It did deem the CTA to be unconstitutional. But the thing that people need to understand with that ruling, there was an injunction associated with it that was very narrow and limited in scope. FinCEN has actually come forward and said that based on this court ruling, it is only the plaintiff, the association, National Small Business Association and its members, which is roughly [65,000] members, that do not need to file the BOI report. Everyone else still has the requirement to file, and FinCEN has said that they will be enforcing that. Now, what that means too from FinCEN's perspective is we've heard on good authority that they will appeal the court case, and they will also ask for a stay of the injunction. One of the questions I do get is like, “Then we're going to become NSBA members because then we don't have to file the BOI reports.” That's not actually accurate. It's of members as of March 1, which was the date of the court ruling. Rushing out and becoming a member isn't going to help people. Our position and what that means for our members, if you are not an NSBA member, it means that you are still under the requirement to file the BOI reports. I would say it's business as usual. I would also clarify that for the existing entities, that was an entity that was created before 2024, that they have a full year to file. Like I said earlier with BOI, things keep changing and they seem to change rapidly. I would encourage those people to not rush out to file right now but to go ahead and take their time. They have time. Use that time until we can get more clarity and take that time necessary to file. Amato: To clarify on that, entities formed before 2024, do they have until 12/31/2024 to file a BOI report? Lauridsen: They have till January 1 of 2025, which is interesting. That extra day matters to some people. Amato: Well, it's a leap year, so, get the extra day. Whether it's fast or slow, there probably will be some change as the year progresses. What are the differences between the customer due diligence rule and BOI. And, I guess, are both needed? Can you explain a little more about that? Lauridsen: Absolutely. In tax, as CPAs, we are bound by certain ethical requirements, whenever we do a tax return. One thing to keep in mind is BOI is not tax. A lot of people think it is tax simply because the entities — you know, it’s a form, it's got numbers — they’re going to be turning toward their tax preparers for help on this form. But, to be clear, BOI is not tax. Anyhow, CPAs, they're bound by due diligence. When they get a client, they look at the client and make sure it is a valid client. They verify information, driver's license, Social Security numbers. They know the client, and CPAs also have tendencies to have long-running trusted relationships with the client. In other words, as a CPA, I'm not going to have a client who is running all these shady business dealings. I would know my client, and I would have that due diligence. So, BOI, its intention is anti-money laundering. They're trying to capture those shell companies and trying to capture, really, money laundering associated with it. I think people believe, “Well, we have the due diligence piece. Why do we need the BOI piece?” And, is that necessary? The first thing is keep in mind, CPAs already have that due diligence piece from our perspective. But not everybody is a CPA, and not everybody is working on ethical levels. That is the intention of BOI and why some people in our worlds, I completely understand why they think, “What's the point of it?” But there is a purpose. Amato: That makes sense. Thank you for that. Let's talk some about the tax bill that you mentioned at the top. It's with Congress right now. It's in committee still. What does that bill mean for practitioners, and what do you expect to come next? Lauridsen: The tax bill, officially named the Tax Relief for American Families and Workers Act, which is a very long name. I have a tendency to just call it the House Ways and Means bill. Essentially, what's happened is House Ways and Means. It's Chairman [Ron] Wyden and Chairman Jason Smith who came together. They had been working together on this bill for over a year and they came together, and it passed the House with lots of support there. The core of this bill really is the expansion of the child tax credit, which is a Democratic priority. But in exchange, they also agreed to some business tax provisions of some fixes from the Tax Cuts and Jobs Act business tax provision, some extensions there, which is the Republican priority. What the bill entails, just high-level, it would allow essentially the refundable portion for the child tax credit to be increased in time for taxpayers who work. As far as the business taxes, what that means is it would reinstate the 100% bonus depreciation. It would also allow for immediate deduction of the Sec. 174 expenses, and Sec. 174 expenses are the research and experimentation expenses. It also allows for victims of disaster relief to be able to deduct those casualty losses without meeting the [adjusted gross income] 10% threshold. They also don't need to itemize. They can take what's called an above-the-line deduction for it. The real big kick of the bill is ERC, where the bill would be retroactive at this point if it were to pass through, as it stands, which is saying that ERC claims would be stopped as of Jan. 31. The reason this is such a big deal is because ERC, stopping the credit claims, that is the “pay for,” meaning that is what would allow for all the other provisions to go through. That piece is nonnegotiable in the way it's written in the bill. There's a lot of questions associated with retroactivity in the bill Amato: Again, as we're recording early March, you mentioned the word “shutdown” a little bit earlier. What would be the effect of a government shutdown during tax season? I guess the next deadline we're facing is March 22 for funding several agencies of the government. Lauridsen: Well, let me start by saying there is never a good time for the IRS to shut down. There's just a lot of lost efficiencies or inefficiencies, I guess, within the IRS in shutting down and then opening back up again. With all the IRS service issues that our members face, it would never be a good time. Having said that, having a shutdown in the middle of a filing season would be first of all, unheard of. It hasn't happened. The closest that we've come to a shutdown in a filing season is when we delayed the start of a filing season by two weeks, which is very different than having a shutdown right before tax returns are due. That would be, in my opinion, detrimental. The AICPA has positions to maintain the IRS 100% open for them to provide all the necessary services to people. But all of this depends and hinges on the IRS’s contingency plan. The IRS did release a contingency plan at the end of last year, but that contingency plan is for nonfiling season. We don't actually know what's going to happen with the IRS, were it to shut down during filing season. And they would issue that plan if the government shutdown was imminent. Amato: Well, we will have to wait and see on that. We’ll know more, again at this recording, in a few weeks. Melanie, there's always plenty going on. Clearly, by this conversation, there's a lot going on, but anything else you'd like to touch on before we conclude? Lauridsen: Yeah. Touching back again on the tax bill that I was referencing, there are some retroactive provisions in there. Some of them would be great to see passed and then, of course, the ERC, there's a lot of question. And we get a lot of questions from the members regarding should we file, should we extend. We don't really particularly want to amend. So couple of things that I do want to say what the bill is right now — at this moment in time and things change when it comes to legislative bills, so tomorrow it could be a different answer — but as of right now, it's not looking great that the bill would pass the Senate and it would become effective. Even if it could pass and become legislative rule, what would end up as the final bill would probably be different than would have some edits made to it. Meaning, would it be retroactive, take the ERC provisions to Jan. 31? I don't know. Would people have to do amendments? We don't know. But again, it's not looking great for the bill. The IRS has made it very clear people should go ahead and file and file now. We support “go ahead and file and file now.” We understand amending can create some roadblocks and some issues, but just things are up in the air in a way that, right now, it's not looking good for the bill. Amato: Melanie Lauridsen, thank you very much for that update. Lauridsen: Thank you, Neil.          

Superseded returns — essentially a replacement for an originally filed tax return — can be a useful tool, especially as it relates to partnership returns which operate in the centralized partnership audit regime (CPAR). Learn more about when these “do-over returns” should be considered and what implications they may have for statutes of limitations.  AICPA resources Superseding returns and statutes of limitations, July 1, 2021, The Tax Adviser BBA Partnership Audit and Adjustment Rules FAQ — Gain answers to frequently asked questions about the centralized partnership audit regime under the Bipartisan Budget Act of 2015 (BBA). Other resources Amended and Superseding Corporate Returns — Information from the IRS on filing a superseded return electronically   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.  

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. 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Misconceptions about digital asset tax compliance are common. With business tax returns now requiring taxpayers to affirm their taxable digital asset transactions, it is even more important to ask the right questions. Educating yourself and your clients in this area is important to fulfill your due diligence requirements as a tax practitioner. AICPA resources  Digital assets and virtual currency tax guidance and resources —This hub is your go-to library for AICPA guidance and resources as well as current legislation, IRS initiatives and tax advocacy projects.    Questionnaire for Individual Clients — Before accepting clients that are engaged in digital asset activities, there are certain questions CPA practitioners should have answers to. Advocacy AICPA comments on the proposed Sec. 6045 regulations on gross proceeds and basis reporting by brokers, Nov. 8, 2023 AICPA comments in response to the July 11, 2023, Senate Finance Committee letter on taxation of digital assets, Sept. 8, 2023    AICPA comments on the IRS draft 2023 tax forms digital asset question, July 28, 2023 Other resources  IRS Digital Assets  — Resources and guidance available on the IRS.gov website Transcript On today's podcast, listen to hear more about how you need to carefully ask your clients about their digital asset activity. April Walker: Hello everyone, and welcome to the AICPA's tax section Odyssey Podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the tax section, and I'm here today with Nik Fahrer. He's a senior manager at FORVIS in their National Tax Professional Standards Group. He's been with us before talking about this topic, and I'm delighted to have you back, Nik. Nik Fahrer: Thank you for having me back, April. I'm excited to be here. Walker: You are our digital asset expert on the podcast. No pressure. We're going to delve into some questions that [are centered around that] here we are in February and we're getting ready to start talking to our clients. We're going to talk a little bit about that. I feel like the more I learn about digital assets, they have different names- cryptocurrency, virtual assets, the more I need to learn. Hopefully today we're going to help you be able to have a conversation with your clients. Maybe your client is more knowledgeable than you are or you just need to get up to speed. That's our focus for today. I'd like to start with what are your most common misconceptions that you encounter about digital asset tax compliance when you're thinking about working with clients? Fahrer: Sure. I really like to break this down into four different categories. I think the first category is, do we have a taxable event? There's a big common misconception out there, especially with clients, that maybe there needs to be some education and educating our clients. That just because you invest in crypto and perform some trades, but haven't settled back to US dollars, doesn't necessarily mean that you don't have a taxable event. Let's take an example. Let's say I buy some Bitcoin and then I trade that Bitcoin directly for Etherium, then I trade that Etherium directly for Solana. There's multiple taxable events in there because the IRS treats cryptocurrency as property. Even though I haven't settled back to US dollars and cashed out, a lot of clients think, I haven't traded my crypto back into US dollars, so I don't have to report it on my tax return. That's actually false. Those trades in that example, from Bitcoin to Etherium, that's a taxable event, and then from Etherium to Solana, another taxable event. The second bucket, I would say here is completeness, so really making sure that we have all of our sources and transactions accounted for. What do I mean by that? Another example, if you have a client that comes to you and says, hey, I transacted in crypto in 2023 and I need help reporting that. Clearly identifying what were all of the exchanges that they used, what were all of the wallets that they used, and does that account for all of their transactions. Like we just mentioned in the previous bucket, do we have a taxable event? Almost every single transaction in the space is going to be a taxable event. We have to make sure that we can account for all of those and have the proper records. It can be difficult to track them all down because it's so easy to just open up a new wallet. Third bucket, I would say, is understanding the character of the gain or loss. I mentioned earlier the IRS says this is treated as property. That doesn't necessarily mean that all of the transactions are capital gain or loss, some of them could be ordinary. Some examples would be mining income, staking income, air drops, hard forks. All of these in the eyes of the IRS are likely considered ordinary income at the fair market value at the time of receipt. One question you want to make sure that you're asking your clients is, not only can you give me list of your transactions of trades, but you also want to make sure that you're getting a list of transactions for some of these ordinary income items, which may be listed separately. A lot of times our clients are using a software provider to generate a [Form] 8949. Well, those ordinary transactions aren't necessarily going to be captured on that [Form] 8949 because that [Form] 8949 is going to be your capital gain or loss. Second, within this third bucket of the character of the gain or loss of NFTs, the IRS has come out and said that, are likely treated as collectibles and those could be subject to a higher tax rate as well. We want to make sure that we are capturing those NFT's and marking the appropriate box and letter associated letter on the [Form] 8949. The fourth bucket, and I would say this one probably gets looked over the most, is are there any additional surtaxes associated with the client's activity? For example, net investment income tax. A lot of our clients are not CPAs, they're not accountants [and] are not aware of this may be additional tax that their capital gain or loss may be subject to. It's making sure that we're having these conversations with them so that they're aware that the max capital gain rate is 20%, but may be subject to this net investment income tax, which is an additional 3.8%. That's important when we're thinking through estimated tax payments, things like that. Of course, there's self-employment tax if you're in the trade or business of mining or staking, for example, and that could be up to 15.3%. Then the additional Medicare tax of an additional 0.9% on maybe the net self-employment earnings associated with mining or staking or some of these other activities. Just to recap, the four buckets that I would really say are, one, making sure that we identify all of the taxable events. Two, completeness. Making sure that we have all of our activity in some sort of Excel spreadsheet or [Form] 8949 that's generated from a software. Number 3, what's the character of the gain or loss? Doesn't necessarily mean it's always going to be capital. Could be ordinary. Then four, what additional taxes may be applicable as well? Net investment income tax, self-employment tax, additional Medicare tax, things like that. Walker: Thanks Nik. That's super helpful. Definitely things I've heard too and probably misconceptions that I have as I'm still learning and try to understand and wrap my head around these topics and how the IRS treat digital assets compliance. Another thing I wanted to bring up, and you've likely seen it, the IRS just did an announcement about it. We've talked for several years — I should have gone back and looked and seen how many years there has been a digital asset question on the 1040. But, in addition to that, they've tweaked the language throughout time. But in addition to the 1040, there's also now that same digital asset question about, did you receive sell, or exchange or otherwise dispose of a digital asset? Those are going to be on business returns and also trust returns for 2023. Just thinking about that, how are you thinking about getting that information from clients? Probably the same situation as you have been already for individuals. But any tips and tricks on navigating those questions that might be new for people? Fahrer: I think this is a very important topic because that question is subject to penalties of perjury. So we want to make sure that we're probably erring on the side of caution and making sure that we're capturing this information from our clients. One thing that we do is we add this question to our client questionnaires. Every single one of our clients fills out a questionnaire, and we word it almost verbatim to the question on the 1040, and now these other forms that you mentioned. Did you essentially transact in digital assets? I'm oversimplifying it, but that's basically what it's asking. Put that question on your client questionnaires and that's a really easy way to get that information from your clients. Maybe another suggestion is consider adding this as a question to your client acceptance process as well. When you're first going through the process of having conversations with clients or whatever that intake process looks for you and your firm, consider adding that as a question to your client acceptance process. Then I always recommend getting ahead of it as well. Get a good idea of the types of records that your clients can provide on the front end. This goes back to client acceptance as well. Good records go a long way whenever we're talking about reporting digital asset activity. If a client can't provide you with good records, or maybe for example, they provide you a spreadsheet with hundreds or thousands of transactions and you have to go in there and manually calculate cost, basis, and proceeds. It's very time intensive, very costly, and that's going to help you understand what to quote them on fees. It may also help you push them in direction of maybe trying to sign up for a software like a CoinTracker or Ledgible or Cryptio, or Koinly. There's several different softwares in the market where clients can go out there and connect their wallets, connect their exchanges and it will do a really good job of summarizing almost all of the activity on your behalf and generate [a Form] 8949, generate supporting schedules and things like that. Most of the time you're going to run into scenarios where there's software, it's an extra expense, but it's going to more than cover its cost to save you all the headache and time that you're going to have to calculate everything manually. Walker: Definitely, some unique challenges in tracking and reporting digital assets as opposed to if somebody is just holding securities or mutual funds in a brokerage account, that's pretty easy. There can be some complicated transactions in there, but it's not the same thing as digital assets. Then, like you said, there's so many different, usually if they're transacting, it's going to be a large number of transactions, that Excel spreadsheet could look like a nightmare, I would imagine. Any best practices or strategies or tips, and you mentioned some softwares and things, when do you see that a client has made the flip from I can just track this in an Excel spreadsheet to needing software? Fahrer: Yeah, that's a really good point. Maybe to add some context to why we even have these Excel spreadsheets. [Form] 1099 reporting is not currently required for crypto transactions. Typically clients get to 1099B at the end of the year for their stocks and securities. Those transactions are all summarized for us and it’s super easy as a practitioner to then take that information and transfer it to the tax return. Whereas here there is no [Form] 1099. Maybe going back to the misconceptions that we talked about earlier, another misconception is that a receipt of a [Form] 1099 triggers the tax reporting requirement. Most of us know that's not true. It's not the receipt of the 1099 that triggers the reporting requirement, it's the taxable event itself, but our clients may not be aware of that. That's why it's even more prudent to ask these questions on the front end of, did you transact in digital assets, to get a better understanding of what all needs to go into the return? I also think that self custody is something that's unique to this industry, if you will. We have the concept of you control your own assets means that there may not be a third party intermediary. There may not be a broker to keep track of your cost basis, and then that burden falls on the taxpayer. If the taxpayer is unable to provide records or proof of cost basis, the IRS is going to assume it's zero, which is the worst case scenario. But to go back to your question April and really answer it more directly, I think if you have a client that has more than 20 transactions in a single year, it's probably worth it to work through one of those softwares that I mentioned before to get them to sign up for that, connect their wallets, their exchanges, and hopefully bring in everything in one central location and automate a lot of it. Then I think there's some good resources out there too on how to stay up to date and understand maybe some changes that are going on in the industry. We have an AICPA web page that's dedicated to this topic. It's a very good resource. There's also a questionnaire on that web page that you can download. It goes through and is basically built for practitioners to know what questions to ask. We don't know what we don't know if you're not in the space. This is a great questionnaire to go out there and just cherry pick what you think would be beneficial to ask your clients. This is a resource for you. The IRS also has a website that is specifically dedicated to digital assets. If you just google IRS digital assets, I'm almost fairly certain it's going to be one of the first ones that pops up. It has all of the guidance that they've ever issued in this one single web page. Then of course, there's several people that are very vocal on LinkedIn and Twitter [X] that you can follow and good resources there as well. Walker: Perfect. Thank you for highlighting those resources. The questionnaire is what spurred wanting to have this discussion. Nik actually did a few videos for us on the website related to that questionnaire, and we wanted to dig a little deeper. In the show notes I'll put a link to our digital asset page and that's going to have that questionnaire as well as like you said, other resources, it also links to the IRS. One thing I wanted to note is the IRS does do I think a good job of [what] you might just be struggling with, hey, that question [on the tax return] — How do I answer it? Is there a way for me to answer no? There probably is an answer. I think we discussed this, but I wanted to say you have to answer that question. If we didn't say that specifically [earlier], I wanted to say that you have to say yes or no. The IRS provides ways that you must check the box yes, if they did this- received digital assets for payment or digital assets for this or that. Then it also tells you a couple scenarios for no. Again, I'll put link to those resources in the show notes linked to the questionnaire. Which is great, especially if you have clients who are really in this space. I wanted to share that Nik is on a Digital Asset Tax Task Force with the AICPA. That is a mouthful that I had to say very slowly. So thank you, Nik for doing that. I have a couple of other members of that task force and we're going to do some follow ups. Nik referenced that there is no 1099 for digital assets you may be aware about. There are some reporting requirements that are coming in future years that we're going to have somebody who's going to talk about that. We're also going to talk about what happens for digital assets if you've experienced a loss. There's some tricky tax rules related to that. Just wanted to give a little bit of a teaser for that coming up. Nik, you provided a lot of great information. I'd just like to give you an opportunity, is there any final thoughts as you're thinking about this topic or any good advice for our practitioners that are listening. Fahrer: I just want to say thanks again for having me, April. We have a saying at FORVIS, if you see risk seek help. I would just encourage our listeners. If you come across a client where there may be some complex situations with digital assets, don't hesitate to reach out to somebody in your network that may be able to help you. It's very ambiguous right now, we don't have a ton of guidance and I would just encourage you to reach out to those in your network that may be able to help. Walker: Perfect. In closing on these podcasts, I like to think about us taking a journey together towards a better profession. In doing that, I'd like to hear about my guest other journeys outside of the world of tax. Nik, I'd love to hear a page from your travel journey bucket list or a memorable trip that is on your mind. Fahrer: I'm actually really excited to travel to Alaska for the first time this upcoming May. Really excited about that trip. Walker: Nice. Are you doing a cruise or just exploring around in Alaska? Fahrer: Yeah. Just flying into Anchorage and then renting a car and trying to explore as much of it as possible as part of the shoulder season. Not everything will be necessarily open yet. I really want to make it to Denali, but we'll see. Walker: Okay. We'll have to follow back up on another podcast that will, sorry, probably be about digital assets, but I appreciate you being able to talk about it in such an understandable way. Thank you again, Nik. Again, this is April Walker from the AICPA tax section. This community is your go to source for technical guidance and resources designed especially for CPA tax practitioners like you and mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accounts. You can find us wherever you listen to your podcast. We encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share it with a like minded friend. You can also find us at aicpa-cima.com/tax and find other episodes as well as get access to all the resources that we mentioned a lot on this episode. Thank you so much for listening.

Daniel Moore, CPA, Owner — D.T. Moore and Company, LLC, discusses the recent Department of Labor rule on determining the classification of workers as either employees or independent contractors under the Fair Labor Standards Act. He also highlights the potential legal and financial risks associated with worker misclassification. The rule, effective on March 11, 2024, aims to align with judicial precedents, reduce misclassification risks and offer more flexibility for businesses engaging with independent contractors. Factors for worker classification under this rule are: Opportunity for profit or loss that a worker might have Investments of resources by the worker and potential employer Degree of permanence of the work relationship Nature and degree of control an employer has over the work Extent to which the work is integral to the employer's business Skill and initiative of the worker Dan highlights the importance of considering both IRS and Department of Labor rules when advising clients on worker classification and how to best communicate this change to clients.  AICPA resources   ·       Tax season resource center — Access the AICPA’s central hub for guidance, tools and developments throughout the tax filing season.   ·       Employee or independent contractor? DOL issues new guidance, Journal of Accountancy, Jan. 10, 2024   Other resources   ·       RIN 1235-AA43 published in the Federal Register — Department of Labor (DOL) rule   Transcript April Walker: On today's podcast, listen to hear more about a recent Department of Labor rule that talks about independent contractors and employees. Hello, everyone, and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, lead manager from the Tax Section, and I'm here today with Dan Moore. Dan is an owner of D. T. Moore and Company in Ohio, and he is another great volunteer friend of mine. And he's been on this podcast before, so welcome back, Dan. Dan Moore: Thank you. Walker: Today I thought we could spend a few minutes letting our listeners know about a new rule that the U.S. Department of Labor recently published in January. We're still in January when we're recording this, so very recent. It revises guidance on determining who is an employee and who is an independent contractor under the Fair Labor Standards [Act]. Just to set the stage a little bit, I'm not and Dan's not, an employment attorney, nor do we pretend to be one on TV or on this podcast. We're going to approach this discussion as CPA tax practitioners and communicating this change to your clients. Because I'm sure you'll know and I'm sure as you're listening, you have clients who have struggled with this issue. It's not a new issue. It’s just, it’s a hard one to wrap our heads around. So, we're going to talk a little bit about that. I will provide a link to the rule in the show notes. If you want to read more, it's very long, but we're not going to cover all the aspects and background about that rule. But just a quick little background on it. In January 2021, the Department of Labor released a rule that was subsequently rescinded. This recent rule that was announced on January the 9th of this year, 2024. It replaces that guidance. It maintains that it's doing is [being] is more consistent with the judicial precedent. The rules that have been challenged in court and how the courts have come down on it. It also will reduce the risk that employees are misclassified as independent contractors, but also more flexibility, for businesses that still do engage with people who are in business for themselves and consider themselves independent contractors. Let's start with an easy question, Dan. I'm sure it's easy. Maybe it's not easy. What's the definition of an independent contractor? Moore: Thank you, April. It's always great to do these podcasts with you and I always enjoy the topics that you pick for me. This one's a little bit challenging because independent contractor — it just depends to me where you're standing in the conversation. And although you can maybe reconcile and come to some conclusion under one aspect of the definition of an independent contractor, say, in the world of tax, when you step over to Department of Labor and you look at the Fair Labor Standards Act, you're standing in a different conversation. And so, I may have figured it out on the tax side, but now I'm looking at it from the Fair Labor Standards Act. And now I've got to re-reconcile this whole concept as to whether or not someone is an independent contractor. Independent contractors fall under a bunch of different names. You could call yourself an independent contractor. You could consider yourself to be self-employed. You could be doing freelance work. You could be involved in the much broader gig economy that is very popular and talked about frequently now. The tax aspect is going to be a little bit different about the Fair Labor Standards Act. And first, before I define an independent contractor to the best of my ability based on the new announcement, I do want to touch on what the Fair Labor Standards Act is. The Fair Labor Standards Act establishes a minimum wage for employees. It establishes the qualification or the right to pay overtime, record keeping. It discusses child labor law. It covers nursing mothers, 40-hour work weeks, breaks, how tips are to be paid to employees that are in an industry in which they receive tips as part of their compensation, and it prevents retaliation by an employer against an employee. There's a lot of things that the Fair Labor Standard Act covers, and the Fair Labor Standards Act covers employees, but it doesn't cover independent contractors. So now we have to define — what is an independent contractor? — to see whether or not these set of rules do apply to independent contractors? And what we'll see as we go through this conversation today is although someone may seem like they're an independent contractor, once you apply the rules, for Fair Labor Standard Act purposes, they may be considered an employee in which you now have to apply all the Fair Labor Standard Act rules — an overtime payment would be one big one…a time and a half paid over 40 hours worked in a work week. A lot of these things are now going to apply to someone who may be sitting in the seat as an independent contractor, but fair labor standards are going to still apply to them. So the easiest way — not necessarily easy — is we need to define what is an independent contractor. And that really isn't an easy question, and we have lots and lots of court cases to define it. [What] it really comes down to, is whether or not there is a matter of economic reality, and that the worker is economically dependent on the employer for work, thus an employee, or are they in business for himself and therefore potentially an independent contractor? Like I said, there's a lot of different names, but also think of this too on the employer side with the Fair Labor Standards Act. The Fair Labor Standards Act is also there to protect the employer. Because if all employers are playing on the same level playing ground, then —your competition — it creates fair competition. By establishing a 40-hour work week and overtime rules, that all plays a standard playing ground for all employers in which we're all going to play by the same rules in the sandbox. So now we have to look at who does this apply to? It implies to employees. But how do we handle independent contractors and are independent contractors considered to be an employee? And that's the big question of the day that this announcement in January (lovely time for new announcements to come out) This new announcement sets into play of, okay, independent contractor, are they subject to the Fair Labor Standards Act? Walker: Gotcha. I was not trying to give you a trick question to start off with. I did know it was not a super easy question, but yeah, that's clear as mud for me. However, thank you for that — doing a good job of setting the stage for us. Now we know where we're going, how would one determine whether someone is an employee or an independent contractor under the Fair Labor Standards Act — once this rule is effective, which, noting that it is March 11th when the rule is effective. Moore: Yes. First, we have to determine if an employee is a worker or an independent contractor. The rule came out with these six factors that you need to consider in determining whether or not someone is going to fall under employee versus independent contractor. Now, this is not a true-false question. This is not, select A, B, C, or D as your answer. These are all subjective interpretations of these rules. And really, not one factor is weighted against the other. You have to just look at the rules [as a] stand alone. Try to apply them to your situation. In my opinion, it almost comes down to, we have six factors. Do we have four to two, yay or nay, in determining whether or not someone should be really considered an employee for purposes of the Fair Labor Standards Act? So, you have to analyze them all on their own. This is going to lead back to court cases and precedents that is from the past, but also looking at the future at all of these tests. So there's 6 factors I'm going to just go through real quick — each 1 of the 6 factors — and then I'm going to go back to each 1 and just add a little bit more detail to each one. So, as you're sitting there, and from my standpoint as a practitioner, when I'm sitting there talking to my client, I'm going to say, okay, let's look at the six factors. The first 1 being the opportunity for profit or loss depending on managerial skill. Factor 2 is the investments by the worker and the potential employer. Factor 3 is the degree of permanence of the work relationship. Factor 4 [is] the nature and degree of control. Factor 5 is the extent to which the work performed is an integral part of the potential employer's business. Factor 6 [is the] skill and initiative [of the employee]. Now, again, subjective and many factors. Subjective on both the independent contractor, employee side versus the employer side. To what level of skill or the ability to profit? It’s going to be dependent on a facts and circumstances test, and it’s going to be dependent for each employee. Lots to think about as I'm talking to someone, [to determine] whether or not they're an independent contractor for the Fair Labor Standards Act. Factor 1 — I have to look at, okay, rule number one, what is the opportunity for profit or loss depending on managerial skill? I almost think of this as, are you punching a time clock and getting paid based on the number of hours worked? That's probably going to be an employee situation. Or are you approached by a company to provide a service in which you, as the contractor, evaluate that project? You look at what, you think, the amount of time is going to be, the materials, the labor…do you determine what your profit margin is going to be on that job, what level of profit margin you're going to bid out that job for? There's a lot of factors in which you're looking at the actual profit and loss of that project, in which you probably would be sitting more in an independent contractor situation. The common industries — not to beat up on the construction industry — would be typical, whether or not someone is sitting as an independent contractor. In this case, if you're really just showing up and doing the job as you're instructed by the company that you’re doing the work for, you’re probably going to fall under the employee test. But if you're bidding out the job and you're determining how quickly you can [do] the job, determining how much profit you want to make on that job, you're using your managerial skill, then you would probably fall under independent contract. So again, that's just one of six tests that you're looking at. [Factor 2] Now you have to move on to the next test, which is investment by the worker and the potential employer. And in this scenario, if you're showing up and the employer is providing mostly all of the tools and materials that you need to do the job…You're showing up and they're providing you, say they're providing you software, they're providing you office space, computer equipment, supplies, all of that's provided. You're just showing up and doing the work. You're probably going to be sitting in the employee side of things. Whereas, on the flip side of it, you have your own equipment, you have your own tools, you're purchasing better equipment to make you more efficient as you're doing these jobs. In this scenario, you would be sitting more on the independent contractor side of the conversation. So again, the amount of investment and the type of investment you're making in that job would determine whether you're an [independent contractor] or an employee. [Factor 3] After investment of the worker and the potential employer, let's take a look at the degree of permanence of the work relationship. This is the third prong of the question. And you're looking at if you're going to the same work location day after day and it seems to be more permanent. That is almost as if you're going to work like anyone else, it's as you're looking at it as your job, and you're really not going out to work with another company. Your priority is given to this one company. You're going to have a degree of permanence with that relationship that's going to lean towards more of an employee relationship. The flip side would be, you know what, I'm going to work maybe Monday, Tuesday this week, and Wednesday. I'm going to go do some work for another contractor on another project. Thursday/Friday, I might go work for someone else on a different project. The following week the makeup of that work could be completely different. And so there isn't a degree of permanence. And so that would lead more towards an independent contractor relationship. Again, that's factor three. [Factor 4] Which then leads us into factor four, which is the nature and the degree of control. And when you're looking at the degree of control of the employer, the company that the individual is doing work for, are they setting the schedule? Are they, having the independent contractor/employee show up every day to the same location at which they are given their duties for the day…sent out to various projects? Throughout the day, they're being monitored. They're doing check-ins with the company to see where they are on the project. That level of control is really going to lead towards more of an employee status versus an independent contractor. Where an independent contractor may say, okay, I'm going to work on this project for you for the first part of the day. Then I'm going to go work on different projects for another contractor and switch it up. Or maybe they have their own project that they're working on. [Factor 5] Now we move into the fifth factor is the extent to which the work is an integral part of the employer's business. If the individual is showing up to work and the work that they are doing is very integrated into the overall process. Maybe it's manufacturing and they're coming in every day and they're doing a very integrated part of the overall product development or what they're creating. That integrated part really is part of that process in which that would lead to, in most cases, the individual being treated as an employee, unless it's a very skilled process that is very infrequently used. If someone's coming in and stepping in, integrated into the process, they're most likely going to step into an employee versus the independent contractor side of things where they're doing work for the company. Your accountant that is doing bookkeeping work for you that's not integrated into the overall process of what the business is in making money doing, then that individual would be sitting in an independent contractor standpoint because they're not integrated into the process of the overall product that the company is making. [Factor 6] Then finally, we're looking at that sixth factor, and that is the skill and initiative. So again, skill and initiative, that's very subjective. What level of skill is the individual providing for the job? If you have an independent contractor coming in to do something that is very technical, that very few people do…it's an integrated part of the job, but it's something very technical, and you may only need them on an infrequent basis to complete a project, that situation would generally lead to someone being independent contractor. However, if they're coming in, they don't require specialized skills in performing the work. They don't necessarily require training in doing the work. They're being supervised. They're being trained on the job. That really could lead to being an employee relationship. So again, very subjective to the level of skill that the individual is doing. And you have to look at it…and I think by industry. I'm just thinking, looking at my clients, I have some clients that are independent contractors. The work that they do is very specialized. And in some cases, there are very few, maybe in the region, individuals that are doing that type of work. They pick and choose who they're going to work for and they freelance, they go out, they do that job, it is an integrated part, but they're very specialized, and they're not frequently used. They sit in an independent contractor position versus an employee position. Somewhat clear as mud. Six factors that we're looking at, trying to say thumbs up, thumbs down. I don't think it's still an easy answer to that question. Really, at the end of the day, I'm looking at this [and saying] — do I need to apply these rules? Do I need to make sure that if someone comes in and bids a job for me, [do] I need to do some record keeping to see how many hours they're working for me? And if they go over 40 hours, I'm going to have to renegotiate maybe that bid or that contract or figure out what the hourly rate is for that job to determine whether or not you paid them a minimum wage and whether or not they've been paid time and a half for that project. If they're sitting in the independent contractor seat, but really when you look at the factors, they would be considered an employee for the Fair Labor Standards Act. And this is a very broad definition. Walker: Great. just to recap a little bit, for our listeners. You have to think about this from your perspective as you're hiring people. Obviously, we're going to talk more about why do you care about this? Why are you spending time talking about this? And we'll delve a little bit into that, in a second. Dan did a great job of going through all the six things, but it's each six things could be their own probably 30-minute conversations about what they mean, but that was great. Something I, as I was preparing for this, I'm not sure that I necessarily understood this, and I think we alluded to it a little bit, but I want to make sure we're clear. This six-factor test, this new rule that's effective March 11, does it override, or does it change the way the IRS determines worker classification, or other federal, state, or local laws that may provide standards for employee classification? How am I thinking about this? Moore: This is an answer that we don't [know] often in the world of tax. Our answer is usually — maybe, or it depends, we need more information. When the Department of Labor comes out to answer this question, the question of whether or not does this override, does this change IRS determination of worker classification, when the Department of Labor comes out and says no, that is a pretty stern answer. It's not an "it depends” situation. It doesn't override or change IRS classification because IRS uses its own classification. [It’s] own standalone set of standards, the Common Law Test, which is completely different than the Fair Labor Standards Act and the rule that just came out. When we're looking at the Common Law Test, and just real quick on the Common Law Test as IRS looks at it, you're looking at relationship considerations, behavioral considerations and financial consideration. We may determine that someone is an independent contractor from a tax standpoint, from an IRS standpoint, but that doesn't mean they're not considered an employee for Fair Labor Standards Act when we apply those six tests that we just went over. So, a hard no on the IRS standards. Does that make things any easier for us? Absolutely not. It does not. And then you have to look at federal law, there's state law, there's local law, and all these laws apply to employees. The best rule to follow and the rules that you should follow, again we're not labor law attorneys, but you want to apply the law that has the most protections for the employee. So certain laws may have higher standards than others, and you're going to follow the law that protects the employee the most in this situation. And so again, still confusing. We’ve got two bodies of law, when we’re looking at IRS and Department of Labor. There's so many other factors and other things to consider when you're looking at employee versus independent contractor, but this is not changing the IRS law. Walker: Okay, that's helpful. Let's talk about why as a tax practitioner, you care about this classification enough to spend time talking about it with your clients. Moore: I get this question all the time. I work with a lot of startups, in particular. The startups that are like, I have this person, they're coming in, they're helping me out. They make their own schedule. I'm just, I'm scared. I'm not ready to put them on payroll. They're fine with being an independent contractor. But that doesn't work. And a lot of times I find, particularly small businesses that are starting out, I look at them and I say, the first thing is that person could change their mind when it comes time for them to file their tax return and you may have had this wonderful agreement that they're an independent contractor and they go to file their tax return, guess what? They may not think they're an independent contractor any longer when they realize the impact of the self-employment tax. I have that conversation [that] you need to put your individuals that are working for you on payroll. They need to be part of payroll. And then as the business grows, I have the discussion that, you know what, you started out, you had a friend helping you out. You have this independent contract relationship. That relationship has grown into something. more than what it originally was, and now it really seems to me like this independent contractor person is really an employee, and now you've hired more people, and you put them on payroll, but you have someone else doing really the same work that you're paying as an independent contractor, and I really think you can't have two people sitting in the same position doing the same work, treating one as an independent contractor and one as an employee. These are all challenges that startup businesses have. We particularly have these conversations with our clients that are in the construction industry. [There] really [are] no bright line test here on who should be an employee versus an independent contractor? And you have to look again, these six factors, you have to look at the IRS rules to determine whether or not they're considered an employee versus an independent contractor. Walker: Very good. When you get those red flags that arise as you're having those conversations, and you think that there's an issue, you talked about that — that you're having the conversation — but how do you put them on notice? What are your recommendations? Do you refer them somewhere? What are your next steps? Moore: You try not to scare your clients into compliance, but we have a lot of stories that we can tell that are very scary that have turned companies upside down. They have turned small family-owned businesses upside down. In a recent case, I had a construction company that had really what seems to be an independent contractor relationship with someone that was doing work for them. This individual had their own LLC — their own construction company. They came together to work on a job and that independent contractor fell, was severely injured and passed away. Now this construction company is having to deal with the fact that there were workers comp issues and are being sued over this issue from the family — the surviving family of the individual that passed away. Maybe at the end of the day they'll rule and say, you know what, you did have this, independent contractor relationship with this individual. They [won’t] fall under workers comp laws and there won't need to be a payout under workers comp, but it's cost tens of thousands of dollars. There's a lot of legal fees involved with that time and stress of this is massive. And so those are just the war stories. I say, you really need to sit down with someone that is skilled and understanding about labor law to find out what your real risk is in the worst-case scenario. Those are rare situations, but when they [happen], they affect your business. They affect your family and they affect your health. And you have to make a very hard decision, on making that relationship with an independent contractor. There's so many factors. There's fair labor. There's IRS rules when it comes to independent contractors. You have to look at unemployment laws, workers comp laws, the list goes on and on. And to make sure that you're properly protected, you have to really think. I think a lot of companies need to think very hard about that independent contractor relationship. And many will probably discover, you know what, I want to sleep at night. I'm going to flip this individual to an employee. Walker: Great. yeah, like you said, it's not about horror stories and it's not about scaring. But part of our job as trusted advisers are to let people know, hey, there's potential payroll tax obligations and liabilities, but then there could be also these [other consequences]. You don't want them to come back to you and say, hey, you never questioned this. You never said anything was wrong with this. I think that's important. And that's the point of why we're talking about this today. Any final thoughts as we're wrapping up, Dan. Moore: Yeah, so I'll remove the gloom and doom. The scenario could arise that you have someone doing work for you as independent contractor, under these rules, the individual would be able to go to the Department of Labor and say, okay, I really, truly believe that I fall under Fair Labor Standards Act, and I was not paid overtime by this company that I was doing work for. Department of Labor comes in, they do a ruling, you may have to hire an attorney to help you navigate this situation. Then you have to pay overtime, calculate that, look at your record keeping. That could be penalties assessed with it. So that's just a simple, someone said, you know what? I worked 45 hours, not 40 on that job and I didn't get paid time and a half. And so, a very minimal kind of situation that could eat up a lot of time within the company. Walker: Thank you so much for walking us through this conversation today. It was not an easy, breezy conversation, but it was one that I think we needed to have as hopefully our listeners will take something away. In closing on these podcasts, as you know, since you're a repeat guest, I like to think of us taking a journey together. An Odyssey, if you will, towards a better profession. In doing so, I like to hear about our guests other journeys outside of tax. So, please share a page from your travel journal or bucket list or something you've got on the horizon, Dan. Moore: So, I won’t do a travel, but I will say just on my own personal journey and pursuit to mindfulness and clear mind. I love to collect audio books that I'm going to find the time to listen to and I never find the time to listen to them. This morning I did a swim and this morning I was pretty excited I finally got my new headset to work. That I can now listen to books while I'm swimming. This morning I got a 40-minute workout in and also got to listen to 40 minutes of a book that I would not otherwise have made time. Walker: Tell us the name of the book. Moore: it's on NLP, Neuro Linguistic Programming. I should probably listen to that definition a little closer, but it's just really looking at our reactions, the words we use and also listening to how your employees and your clients are speaking and the way they're speaking really can help you to better understand their thought processes that are going through something. I think it's a great tool to have this time of year when we are face-to-face with all of our clients. Walker: Wonderful. You’re improving your body, you're improving your mind, all at the same time, that seems like a win-win for everyone. Thank you again so much, Dan. I'm sure we'll have you again. I'll try to pick an easier topic next time. This is April Walker from the AICPA Tax Section. This community is your go to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts, and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much, and feel free to share with a like-minded friend. You can also find us on aicpa-cima.com/tax to listen to our other episodes as well as get access to resources mentioned. Thank you so much. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

On this podcast, Mark Gallegos, a partner at Porte Brown, provides advice for getting ready for tax season. He discusses the importance of preparing staff, communicating with clients, managing workloads, taking care of yourself, and setting expectations. With the right preparation and mindset, the next few months leading up to April 15 don't have to be too difficult. AICPA resources   Tax season resource center — Access the AICPA’s central hub for guidance, tools and developments throughout the tax filing season.   Beneficial ownership information (BOI) reporting — Access resources to learn about the beneficial ownership information reporting requirement under FinCEN’s Corporate Transparency Act (CTA).   Transcript On today's podcast, listen to hear how to get a jump on your to-do list for tax season. April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast. Happy 2024. On this podcast we offered thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the Tax Section and I'm here today with Mark Gallegos. Mark is a partner at PorteBrown. He's on the Tax Practice Management Committee, which I'm the liaison for and he's quickly become one of my favorite volunteers. Don't tell any of the other volunteers, Mark, but I do mean that. Welcome. Mark Gallegos: Thank you for having me appreciate it. Walker: We're recording this today on January the 17th and as always, there's a lot of noise in the tax world. There's potential for tax legislation, there's an impending government shutdown, there is filing season is getting ready to start in a couple of weeks. I thought it would be nice to remind our listeners to take a deep breath, first of all. But, then I'd love to hear what's on the top of your mind as we're getting ready to take a leap into tax season. How does that sound Mark? Gallegos: Sounds great. I think there's a lot to unpack there. Walker: Absolutely. Start at the very beginning. What are the top couple of things on your to-do list today? What are the most urgent items that you're trying to get accomplished in the next couple of weeks. Gallegos: Yes. Right now, there's a number of things. One, from the firm's standpoint, making sure everyone's up to speed on everything we do to get ready for tax season. We're already in the flow of it as a firm from the audit department and accounting and consulting department. But for the tax side, really getting them up, ramped up and ready to go. As a firm, we are very processes- and procedure-driven. We break out into teams and trying to figure out what's the best practice for us as a firm to truly make sure everybody is prepared as we go into the preparing business returns, trust returns, individual returns, and everything else that goes with that. We spend a lot of time trying to meticulously make sure that our system is proper, so we're doing a lot in that area. Then you have making sure everyone's up to date on all tax law changes that are effective for this filing season. The good thing is headed into the beginning of this year, there's not a massive amount of tax law changes. However, yesterday there was an agreement between Senate Finance Committee and the House Ways Committee regarding a potential tax legislation. Again, just an agreement, not law. But as I look at that and I start to communicate with the firm, some of these things could create issues within our firm, in our planning. One, if these provisions are enacted, when would that happen? How does that impact our tax season? How does that impact the software provider we use to be able to roll out any changes so that we can be streamlining this process. You have that going on. At the same time as a firm, dealing with our clients. One of the things is communicating with your clients. So at the early part of this stage, letting clients know, there's potentially is a government shutdown that's looming. We've let them know in the fall, but here we are on January 17th and we still have this throughout tax season that we may have to deal with, which affects a lot of things, not only the client, but also us. If there was a shutdown of the IRS [could] furlough two-thirds of its employees and then you would have assistance centers closed. But the reality is if you have to paper file returns or if you have to call the IRS or if you [hear] I got this notice. We set the response in on behalf of the client. Clients say, Mark, what is the status of this and you can't talk to the IRS now. You can't get a response, but they keep getting a notice saying, you owe money, just automatically coming out. Those are the headaches that I always say could take your tax season as a preparer off track. It's the client is assuming you're handling something, you're relying on the IRS hopefully to resolve something and in the meantime, you're just that middle person trying to field the questions and resolve it. If they get shut down in some form or fashion, it really comes into play where we get hampered. Communicating with the clients, communicating with the staff, communicating with just everyone in general [that] this is looming out there. Let's do everything we can to get on top of it now, let's not wait on things, let's be proactive. I think that's one thing I believe that's very important. The other thing is that we can't file a tax return until I think January 29th…is when they opened the E-file system I thought I saw. We got time before we have to file returns, and even with having software completely ready, not every form is out of draft yet. But with that being said, small clients, rentals, and small businesses, get those books in. If they're using QuickBooks or whatever, get it in and let's get going on this stuff. Let's not all push it off [and then say] wow, it's February 28th and we got all these returns we want to try to get out the door. The more you can do up front, the more you are going to make your life easier as the season goes on. Again, we don't want anyone working so hard that they're all stressed out right now, we need their energy for later. On the other hand, it's not a sprint, it's a marathon, and we need people in the firm to really manage their time. Sometimes we have to, as partners and as managers, manage their time for them. We need them at the end when we're trying to get all these extensions done or filing returns. How do we do that? All these things come into play [and] that's on my mind right now. In addition to that, we got this new thing that's out there, beneficial ownership interest, part of the Corporate Transparency Act that started in January and we've dealt with as a firm. I'm sure every firm, every practitioner out there in some form or fashion is dealing with this right now. As a firm, we have taken the position that we're not going to prepare it, we're not going to advise on it. We're not going to do anything. What we've done is we're letting all our clients know that. There's plenty of people in where we are in Chicago land area that do this and we're happy to refer them to attorneys if they don't have one, to other groups that do this, but we're not taking that work on. We've come to that conclusion based on discussions internally with our outside counsel. But everyone needs to do that on their own to determine is this best fit for you and everything else going forward. If you are listen to this and you don't know anything about the beneficial ownership interests, recommend there's plenty of information out there on it. Walker: We'll point to a couple of podcasts; we'll point them to the resource center. Absolutely. ASAP, you need to get on board with what's going on with that. Gallegos: But it's an area that again, without getting into [the details of it], it doesn't really fall on the tax preparer side as far as the compliance aspect of it, from an IRS standpoint. However, what I have seen [with] questions coming from my client, is this part of FinCEN? You guys file my foreign bank account reporting the FinCEN [Form]114, so why wouldn't you do this? Having those conversations, educating your clients as to what you can do, what's in your purview as a preparer and what's not. I think the more you communicate, the more your clients will value your service but also know that you're still their trusted adviser and you're here to help them get to the right people to do so. That’s it. Walker: You gave me a lot to unpack there, Mark. Let's see. Let's start with you said you're getting your staff ready and you're communicating with your clients. There probably isn't a one-size-fits-all. But what's your best tips for communicating with clients if you're trying to do either mass communication or how do you wrap your head around that? Gallegos: We can do mass communication as easily as an email blast. We have our news blog that goes out every week and so from that standpoint, we sent out. You and I know not every client reads emails or ignore them and you know how it is. From that standpoint, it requires everybody in the firm to be on top of things. Meaning, we like to go out to the clients. We want to be in communication with the client. It's not like, April, you're my client. I'll talk to you next year. See you then. We're all year round. We do a lot of year-end tax planning for everybody. We really are heavily involved. [There are] a lot of touches throughout the year. With that being said, this time of year where you have clients, whether it's making sure they're getting their books in order or [they need] 1099s or whatever the case may be from a compliance standpoint in January. [We] reach out to them, not just on making sure you're getting things together, but here's some other things that I want to make you aware of based on the filing season, based on everything else. Because what I have seen, at least with our client base, is most clients want to get things rolling and get done with this aspect of it. Whether they ought to extend later or not, that's a different story, but they want to know where they sit. Like I said, so we have this system where we have not just the partner but managers and people that are in charge of clients and all the staff that are on those particular clients. It's all budgeted and all put together. And there's a team that literally is reaching out to all these clients. For example, my clients, there's no way I can sit around just talk to every client all day, I would never get off the phone. So I have to rely on people and delegate that work down so that people feel empowered to do that. In doing so, one, it gives them the ability to build that relationship with the client. But two, really shows that as a firm, it's just not me and a few partners — it's everybody…has a key role in making sure that the client is up-to-date on what's going on. Not only what we want to communicate, but vice versa — what's coming from the client and so we are aware of whatever concerns they have. Very important. Walker: Not everybody listening to this is going to be a big firm so they aren’t going to have a lot of people. But I feel as I talked to members and as I talk to CPAs, you hear so much about you doing everything. I think that's a good lesson learned. Maybe you can't change that in January for this year but try to figure out ways that you can delegate work and client responsibilities and it's okay to let it go. I feel like that's a message that a lot of people need to hear if you're proactive about it and you're still staying in the loop, of course. Gallegos: Very important there, April. One of the most important things, I don't care if you're a small firm or a large firm, I guess the bigger you are, you have more resources. But as a firm we even use, we have interns, we bring in. We have admin. We probably have more admin than most firms our size and we use the admin for all kinds of functions. The reason why is the more I can delegate down. I think sometimes as a partner we can get to these assumptions of how important we are. Oh, everyone needs me and I'm that important, blah, blah, blah and all this. Maybe it strokes our ego or whatever. But the reality is, if you stepped away for a few weeks, these clients will be taken care of. You really not as important as you think you are. I think the more you learn to delegate — I have learned in my career — the more free you are to say I'm working not in the business, I'm working on the business so I'm truly helping this place grow and I think that's important. Walker: Yeah, great point. You also talked about starting strong in January, like having a good January and that to me leads into hopefully a smoother tax season. Again, there are some out of your control. Is there going to be a tax law that's going to have retroactive changes? We don’t know right now yet again, Wednesday the 17th; we don’t know. Hopefully we'll know more soon. I liked you [saying] it's a marathon, not a sprint. How do you manage that increased workload? People like to control their own schedule. I certainly like to control my own schedule, but I also sometimes I need to understand what are my priorities. How do you make that balance work? Gallegos: One of the ways is we budget. Every client got a budget, whether if I'm using taxes for an example, tax prep, tax review, partner review, signer review to admin. Every step of the way, we’ve got a workstream step and we got to put some time to it. Again, it's not a perfect science, but the more you do it, the more you realize how much time [things take]. Then from that we have some amazing people in our firm that take all that and budget. Okay, April, you are one of my staff, I'm going to assign this client to you and it's for X amount of hours, it's going to fall in this week or this particular day, or I need you to be at this client. We're managing schedules that way. Workload management, the planning that is involved is all year round. Again, things happen, people get sick, people leave, people come in. It’s constantly changing — it's fluid. But understanding how we work and do the workload management that makes sure that if I have two staff and one person's working a crazy amount of hours and the other person's not. The person not working most likely is because they just don't have the work assigned to them. As a partner, I can get caught up [with] my own work and I know I need to get work [done] but I'm just not pushing to do that. When we have people managing this process, we know that it gets spread out more evenly. It helps the workload management so no one is truly working more than the other person. That's important, very important. We're a team and everyone needs to help out in some aspect of it. I think that is probably one of the best things we do as a firm to help our employees and keep that longevity. We don't work crazy hours and because of that, we get a lot of work done. I wouldn't say it's the easiest amount of hours, but a reasonable amount compared to what I’ve seen out there. Walker: Got you. Yeah, that's good. That's probably a whole another podcast episode where we can talk about and delve into that. Because that's not a 20-minute conversation, but great point. How are you personally handl[ing] the stress and long hours that come with tax season? I know because I've gotten to know you over the last little bit how much you love your job and tax and so you probably work a lot, but hopefully you also take some time for yourself. How do you manage that? Gallegos: Yeah, I do love my job. I love what I get to do. I find it a privilege. On the other hand, making sure that I'm healthy in the process because if I'm not healthy than all this is for naught. I wouldn't say I'm mechanical, robotic, I guess it could be viewed sometimes, but I get up early in the morning and go to the gym and workout. Again, depending on the day, the week and where it is in the season, I go and I feel great. Even if it's like just stretching and light or whatever, I feel great. It kicks my day off on a positive note. Then from there, you head into the office and you just manage your day properly. Whether you're going to clients or whether you're dealing with staff or whatever the case may be. Then making sure that eating somewhat properly. It's so easy to like, I don't have time to get lunch or I didn't bring anything so let's hit a vending machine and that can get ugly quickly. You could just be eating sugar and carbs and everything that's probably you're not supposed to do. The idea is to try to manage your eating. And then get some sleep There's no sense in work[ing] into two, three in the morning and then turning around and trying to do this again day after day. I know I talked to professionals that do this. I don't know how they do it and function. Get a solid night's sleep, whatever. If you need six hours, eight hours, whatever it is, you've got to figure out how to get that. At the same time while you're doing all this, whatever your hobbies are outside of work, you still got to do it. I've always had the habit of Monday through Thursday I work my hard, longer hours within my little schedule. Then Friday, I’m always done at five. I don't care what's going on. I don't care if the deadline is Monday. I'm done at 5:00 and I'm gonna enjoy Friday night, whatever that looks like. Saturday I'll work, but I'm out working past 3:00 or 4:00 in the afternoon. I've done that my entire career no matter whatever other pressure [there] is, and it's just my own way of keeping tax season in balance. So again, I always say everyone is different and everyone's got to figure out what works for them, but truly keeping things you like in your life. Just because it's tax season, it doesn't mean the rest of your world shuts down and it shouldn't. I think some of the stress that gets created in this is probably from our own doing. I'll give you a prime example. You're working and you're like, I'm going to get all this done this week, and then a client calls, no, I'm going on vacation, I need my return now. And then okay figure out how to get this done even though it's not scheduled. And oh, there's another issue. All these things pop up and we just let all that stress just get to us. Oh my gosh, how am I going to handle this. Instead of just, hey, it's fine. Take a deep breath and let's just put it into a process, and let's just get it done in the order, and communicate what expectations look like, etc. You feel so much better because everyone's on the same page. No one's putting the pressure on you, we're just doing it mostly internally and you feel better. So again, we sometimes just got to get out of our own way to make things happen. Walker: You're right. I probably needed to hear that today myself. Because even though I don't work in practice anymore, I still have like crazy things going on and deadlines, so I also need to hear that. Take a deep breath. Step-by-step. Wonderful. So I like to hear your best advice for our listeners to ensure a smooth and successful tax season. Gallegos: So number one, I think besides taking care of yourself, that would be number one, because if you can't take care of yourself, you're going to be no good to the rest of your team. That's number one, to manage your stress. Number two, make sure that people that work for you are valued. Make sure that they know they're valued. Whether you're providing mentoringship or coaching to them, giving feedback. If you're someone who reviews tax returns, and you find errors or you find things that need to be adjusted, make sure you let them know what those are. Not, “I'm so busy. I'll let you know after tax season”. Because you won’t, and everyone thinks they're doing a great job. The prime example of that — you could review a bunch of returns three weeks after a person prepared 20 returns, and they made the same error on all 20 of these returns. So the sooner you can get in and see, what little errors or what adjustments can be made and communicate that. Communicate it with some sort of grace of, it's okay, we all make mistakes. Because I know and I'm sure you did when you're a staff person, on the other end of these things, sometimes the feedback, especially if someone's in a hurry or maybe not in the greatest mood, can come across as the mistake I made is the worst thing in the world. Again, I want my people to understand, it's okay to make mistakes, that's why we have a review process, that's why we check things. Let's learn and grow from it together and have fun doing this. Making sure your people are taking care of. You see that they're struggling. Let them go home or wherever you need to do to make sure that this is a place that is not only trying to get a lot of work done, but it's a great place that they want to invest in for their career. Then beyond that, making sure you're managing your clients, they're not managing you. I know that's always a battle. The reality is they're paying you for a service because you have knowledge and you have the experience to provide them something that they can't get from someone else. Because of that, you have to let them know, based on my schedule that just because you called or emailed doesn't mean I have to drop everything now and turn to you and get it done. Then they have to understand expectations. But if you're always dropping everything to help them, then they're just always going to assume you're going to get it done. It's nothing against them, they're just like Mark responds to me. So why is he not now? So again, understanding that, setting clear expectations with your clients is great leadership for the rest of your firm too, so they see, if Mark's doing that, then maybe I can follow the same methodology. I think that's good. And learning from each other in the process. That to me if you can find a way, there's no perfect sauce to this, but if you can find a way to start working towards that, I tell you, this three-and-a-half months or whatever it is to April 15th, it's not that bad. Last week I was at Fort Lauderdale speaking, and then I flew back and then we had 14 inches of snow, and then it's been like -15 degrees here. I'm going to say tax season doesn't bother me when it's -15, but as it starts to warm, and the sun comes out and spring is in the year. Boy, it makes it harder, right? The more upfront we can manage some of this, we get to the end and everyone's going to be happy. Walker: Lovely. I think [that is all] great advice. If you are a listener of this podcast, you know what's coming next, which is in closing on the podcast, I like to think about all of us taking a journey together towards a better profession. Tax Section Odyssey — we're journeying. I like to get a glimpse of my guests other journeys outside of the world of tax. You said you were in Fort Lauderdale, but that doesn't count because that sounds like it was a work trip. Give me a page from your travel journal, or a bucket list, or something you've got planned for the horizon. Gallegos: For this year I have a beach house already reserved in July for the Outer Banks, North Carolina. Every year, I always go to the Outer Banks. I love the Outer Banks. Why? Because it's the ocean, the beach, and because I've gone there so much, I find it a place where I can relax. Where you could just sit back, relax, have a good food, spend time with your family, and just enjoy the water and the beach and the sand. Again, I look forward to that. I do other little things throughout the year, but that to me is like the one thing I look forward to more than anything. Walker: Wonderful. The Outer Banks is beautiful. I’ve been there many times being from North Carolina but highly recommended. Thank you so much, Mark. This was insightful, delightful. It was a great way to start off our podcast season for 2024. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to podcasts. We encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find this on the aicpa-cima.com/tax and check out our other Odyssey episodes, as well as find resources that are mentioned. Thank you so much and have a wonderful start to the tax season. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

The Corporate Transparency Act (CTA), enacted Jan. 1, 2021, requires many entities to file a beneficial ownership information (BOI) report with the Financial Crimes Enforcement Network (FinCEN) beginning in January 2024. Its goal is to increase transparency about who owns or controls an entity and deter money laundering activities. Tune in to this podcast episode to hear from Melanie Lauridsen, Vice President, Tax Policy & Advocacy — AICPA & CIMA, Roger Harris, President and COO — Padgett Business Services, and Larry Gray, Owner —Alfermann Gray & Co LLC, on the latest with regards to BOI reporting. What you’ll learn in this episode Background on BOI reporting (0:57) Professional risks associated with completing BOI reports for clients (1:50) Advice for CPAs considering an engagement (3:58) Roger’s take on the unauthorized practice of law (UPL) (5:32) Larry’s view on how he’s handling this UPL (7:33) How to communicate to clients about BOI reporting (11:00) Recommendations on managing risks (13:51) How to relay changes that would impact reports to clients (16:40) FAQ from fellow practitioners (19:02) Final thoughts (25:13)   AICPA resources Beneficial ownership information (BOI) reporting — Access resources to learn about the beneficial ownership information reporting requirement under CTA. Risk Alert: Navigating Corporate Transparency Act/Beneficial Ownership Reporting – Risk alert from AON, issued Oct. 17, 2023, and updated Nov. 30, 2023.   Other resources FinCEN's Beneficial Ownership Information — Access FinCEN’s comprehensive information on BOI reporting, including a reporting rule fact sheet, FAQ and newsroom. Transcript April Walker: On today's podcast, listen to hear more about the Corporate Transparency Act and beneficial ownership reporting. Hello everyone, and welcome to the AICPA's Tax Section Odyssey podcasts, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the AICPA Tax Section. Today I'm joined by Melanie Lauridsen, she's AICPA's VP of Tax Policy and Advocacy. I'm also delighted to be joined by Roger Harris. He is president of Padgett Business Services, who represents the interests of small businesses who are clearly impacted by this reporting regime that we're going to be talking about today. Larry Gray, Larry is a CPA who owns his own accounting practice and represents tax professionals and their considerations regarding BOI reporting. Just want to do a quick background before we delve into the questions today. As you likely know, the Financial Crimes Enforcement Network, which is also known as FinCEN, establish a beneficial ownership reporting requirement, which we will refer to today as BOI, under the Corporate Transparency Act and that requires many businesses to report information on their beneficial owners, and that starts January 1st of 2024. We're recording this today on December the 14th, and that January date is definitely rapidly approaching. We've actually done a podcast on this before, some other more details, but we wanted to provide some information based on what we know now around that reporting requirement, provide some clarity when we can on questions that we've been hearing. I'd love to start out with you, Melanie. Let's start off by talking about just general professional risks related to CTA that CPAs are facing right this minute. Melanie Lauridsen: Sure. As you know, a lot of people and firms, there's not a lot of information with BOI and they are debating is this something that they can or can't take on as an engagement for either themselves or the firms. There's a couple of things to know overarching and that there are risks, whether you choose not to or if you choose to take on this type of engagement and the first one is failure to advise the client that this reporting requirement even exists. You wouldn't want a client to come back to you and say, you knew about this. You didn't say anything to me and now I'm facing these fines and penalties and keep in mind, the fines and penalties are pretty steep, we’re talking up to $10,000, two years in jail time and you would never want somebody to come and point the finger at you if you knew that they had this filing requirement. The other overarching risk that people have is as we get closer and closer to the deadline, it's become more of a topic of conversation and people can just ask you for advice. There is hesitancy there that you should have because providing any off-the-cuff advice could lead to incorrect information if you don't have all the specifics and can also lead to violations because you don't know what is happening at that state level. There is something called unauthorized practice of law. I just need to be clear that no state bar has made this determination of whether it is unauthorized practice of law for non-attorneys to be providing advice or working within the BOI engagement. Well, I can also tell you is there is an AON members insurance program risk alert, and it really has outlined all the different risks and how to manage this engagement, so I highly encourage you to take a look at that. Walker: Yeah, that's great. We'll dig into some of those a little bit later and talk to Roger and Larry about them. But let's say that a firm is considering providing services related to BOI. What would you say to them, if they're asking you like Melanie, what should I do? Should I take on this engagement or not? Lauridsen: That's a common question that we get. But here's the thing about this engagement. There is no yes or no answer. It's not a blanket, yes, you should take it on, no, you shouldn't take it on. So we really encourage people to take a look at their scenario. The first thing that they need to know is they need to understand their own risk tolerance as to whether or not they want to take on this engagement. The second piece is they really need to understand their clients, and the needs of those clients and the level of service that you would be providing to that client. Then, of course, you would have to take a look at inventory. What are the realistic risks that I can mitigate to prevent unwanted outcomes? I need to say that with any engagement and I don't just mean BOI but every time we take on any engagement with a client, there are levels of risk associated. BOI is new. There's still a lot of guidance that needs to come and so I think a lot of people are a little bit panicked by it because they just don't know when we don't understand everything associated with it. I'll also say that different firms and different peoples can come to different conclusions and that's okay. It just depends as they take inventory within themselves. Again, I'm going to reference the risk of work that came out because that really does walk people through that. Walker: All right. Roger I'd like to bring you into the discussion now and just we'll start out with just a flat-out question. To lay your take on whether you believe engagements around BOI are considered unauthorized practice of law or UPL. Roger Harris: First of all, thank you for inviting me today. No, I don't think they are. I just recently had a discussion with our corporate attorney because the BOI, as you mentioned, it's right around the corner and people are questioning what should they do and what should they not do and I think we're going to find that our clients are going to fall in a couple of buckets. One is where it's pretty straightforward, it's a single member, corporate or LLC. There are no other owners out there that is remotely considered could fall under the bill, our rules. But then you get into a case where there may be this person lurking in the background that could have this substantial control or whatever the terms they use and we're trying to make a determination about how does this person's situation fit into the law. I think that's when we get into that case, that's when stretching over into whether it's practicing law or just giving advice that we're not qualified to give. I think we're going to find that the clients are going to fall in two basic buckets, ones that are pretty straightforward. We can probably assume into a lot of points Melanie made. We're willing to accept the risk because nothing is risk-free even if it's cut and dry. Those we can probably help and then there's going to be those others where we're going to have to defer to an attorney to make a determination because not only is it somewhat ambiguous, it's brand new, and we don't have any history or cases or guidance or anything to help us make a determination, so it's going to be in our best interests to let the attorneys take that risk. Walker: Even the form, we haven't seen the form, we will see it on New Year's day as we are recovering from New Year's eve, we all log in to FinCEN and look at the form. I don't know what I'm envisioning. Larry, I'd love to hear your take on this and how you're handling this issue with your clients. Larry Gray: Well, first, thank you for the invite, and just real quick, I think in parallels; I want to speak as a practitioner and a small community, but also I do Missouri Society of CPAs presentations. So, I presented this as late as of yesterday. They both come out the same way. I think first, we have to decide how we're going to assist the client, which means we're in this game because where the client's going to go. As far as I look at it as two groups and I'll say what I said yesterday to about 500 practitioners. I think first thing is this coming year our clients we currently have in business, we have 12 months to find out what happens and Roger and I in earlier conversation, we both are on the same page there. We're going to wait toward later in the year to let it flush out. FinCEN day before yesterday, updated the frequently asked questions; almost weekly, they update it. I think in that light, we got to first know our client and then know their business. And then that's when we take the risk assessment and I can say as a small practitioner, there’s going to be the majority of my clients, I'm going to be able to say, here's what you need. I don't really feel it’s unauthorized practice of law if you say put in your name, your address, and your driver's license number or your name, address and your company's ID number. It's when it's that section of the law that says substantial control. At that point in time, we got to pull the attorney in to do that. But again, I think every practitioner has a responsibility to service the client. I think first thing, and Melanie, I’m going to steal part of what you said. Speaking, I follow three different malpractice companies, I talk to attorneys, we had one law firm at every of the five locations, and they were talking about this same BOI. And, the fact is, the two biggest mistakes we can do is not advise it at all to make them aware, and then off-the-cuff advice. But in between that, we are a value resource, we want to keep our clients, we want to give them a professional service and I think part of that professional service is to keep them compliant without practicing law. And again, I will go back and summarize it. As long as we're not over there, and this is a lay person, I'm not an attorney. But as long as we stay away from what is substantial control and it is that sole proprietor. If it's a husband and wife — they're the company, they’re the beneficial owner. So, when I look at my clientele, the majority of my clients, I want to be able to say, here's a fact sheet, this is real facts. You can do this. Here's where you go. But if we have a question at that point in time, then I think risk starts to set in. Who is your attorney? That's the group we have now. The group that starts January 1st is the newbies and they have a time period 30, 90 days in order to get right. When they come in and say I'm a new client or I'm setting up a new entity, I'm going to say who is your attorney and I'm going to coordinate that and I have to do that starting January 1st. I think we have two types of clients, know your client, know their business, and you're going to be able to do this. Walker: Great. Thanks. And Roger, I'd like for you, we talked a little bit about this. There's such a lack of awareness about this issue with the businesses, with attorneys, and we're trying to do our best to really get information out there to make sure our CPAs and tax practitioners aware of this issue. What do you see as ways that you're reaching out to clients? Or what ways would you recommend reaching out to clients about this issue and thinking about that, the knowledge and awareness piece? Harris: I think that's probably…I've said this many times for something that impacts this many people, this is the most misunderstood law that I've seen in years. There's such a lack of understanding. Again, we're a couple of weeks away from the new year, there's, as you mentioned, attorneys that don’t know anything about it. I bet the awareness, and the small business community is minimal unless an adviser has actually come to them and make them aware of it. Within our community, I'm not sure that the awareness is where it needs to be, so we have a huge lack of awareness. One of the things that we're telling our people, I’ll refer to something that Larry references. He and I talked about…we're not in a hurry to fill out forms, but we are really in a hurry to inform that we're going to take this filing season. We will interact with almost all of our small businesses to make them aware of this requirement because most small businesses think most law exempt small businesses where this one targets. They probably, if they heard about it, felt like that doesn’t apply to me. I'm a small business; it doesn’t apply to me. We're going to spend the filing season to really inform people. Ask for their patience while we dissect liabilities and rules and ever-changing landscape, and take advantage of the fact that we have the entire year. But I know we worked early on with AICPA on developing some communication that has gone out because I think you guys recognized early on the lack of awareness and you’re to be congratulated, we're happy we could have helped with that. But I think everybody in our industry needs to really focus over the next few months on informing people about the law, the seriousness of it, the penalties that are available if you fail to comply and ask for their patience while we try to figure it out how to administer something that while well intended doesn't really fit well in anybody's business model. Not just the initial filing, but the potential for updated filings when subtle things, little things that have never been important to us change like somebody's driver's license changes. None of us, I don't think it probably ever been concerned about the exploration of our clients’ driver's license. But in the world of BOI, it might be pretty important. Walker: I want to talk about something, that is, if firms have decided, made the decision to evaluate the risk and decided to provide these services, what recommendations would you say on managing their risks, Melanie? You take that one to start with? Lauridsen: Absolutely. Just like any engagement, you need to have very thorough documentation. Documentation is a key. With BOI, I would recommend people to talk to legal counsel right off the bat to understand the nature of the work, particularly in their jurisdiction. Again, I can't stress enough that this isn't a yes or no, whether or not you should take on the engagement. There's a lot of factors that come into play, including your jurisdiction laws and also your insurance carrier. What are they saying? How are they handling this perspective? Again, have thorough documentation, acceptance procedures, make sure that you talk that through with the client if you are going to take it. I would say provide a distinct and separate engagement letter if you are going to do BOI to address specificity of BOI. And, if you're not going to take on this engagement, make sure you have very clear language and all your other engagement letters saying you are not doing BOI work with it. Then of course, you have to keep up-to-date, Larry. Gray: Just to follow up on the last two questions. One, Melanie, I think you had a very important point. The thing I stress is the engagement letter. This year we're putting in a paragraph in all of our engagement letters saying this engagement is not part of BOI. But I think it's so important even in our engagement letters for BOI. we’re very specific because, at this point in time where we're at, we're going to determine what we're going to look at with the client, look at their business and say, yes, we can help you and here's what we're going to do. Now we haven't gotten to the point of we're going to do a frequency update to keep compliant. If the client says we had to change, we want to educate them. But I think the engagement letter is so critical to be very clear to where it starts and where it stops. And, then Roger, back on the communications. We're putting it in our newsletter. We have a trifold out front. I'm doing a YouTube on it. I'm reaching out to do some local speaking engagements — free. Things like the real…we're offering it to banks because it is so critical. But one of the most important training elements and communication is our staff. The staff needs to know where we're at on this because my biggest concern with a staff of about 10 is the off-the-cuff advice. We have there inside the building, there's going to be three-point people to take care of that situation. I think communications and training. Walker: Roger, you mentioned about the change. We worry about change in somebody's driver's license or what have you.? How are you thinking about letting the client know that they need to let you know or how are you tracking that information or how are you not tracking it? I guess is a better part of that question. Harris: Yeah. That's something we're actually looking into right now because I think all of us have the desire to want to help our small business clients. Because, know they're coming to us to help them with this, and so we're trying to balance a client's desire and protecting ourselves. I think we're all going to settle in and find the right mixture of what we do, whether we just do advice, we do advice and initial filings, we do advise the initial filings and updates. Whatever we settled in, we have to be very clear in our communication what we will do, what we will not do.We can't leave anything for interpretation. Then we need proper engagement letters and whatever. We all start with the same goal; we want to help our clients. We know we are a resource that they want to call them. We're trying to find a way to help them, but also protect ourselves and we'll settle in on that. We don't have the answer yet. The only answer we were told about updates is be clear. Be clear that you're either doing it or not doing it. Don't leave it up to interpretation, so that when something doesn't get done, the excuse is I thought you were doing it. We're clear in that. Now we're trying to figure out how to be clear and whether or not we can do it or be clear and tell him we're not going to do it. Lauridsen: I'm going to chime in here and I'm going to add onto what Larry said and then what you said, Roger, about clarity. Also, with engagement letters and in communications with the client, be clear as to what your scope is. For example, you guys have talked about this straightforward entity arrangement where you know who the beneficial owner is. When they provide you that information, it's clear that you're not providing advice to them. They're giving you that information and you're handling it from an administrative perspective to help them out. It has to be made crystal-clear that you're not providing advice on that. Walker: Roger, I am on various webcasts doing Q&A and I get the same questions over and over again. I'd love if I could pick your brain on a few of the frequently asked questions that I get. Let's start with schedule C, disregarded entity LLCs, are they required to file? Harris: Probably the best way I can answer that is because it's like everything in the world we live in — it depends. That's the answer that we all give. Think about it this way. Did you register that entity with your state? I can't speak for all 50 states. I know here in Georgia, if you're a sole proprietor or single, you don't do anything, you just become one. But if you have any registration with the state and you meet the other qualifications about number of employees in size, then, I think it would apply to you. Again, it may be dependent on where you are, and do you need to register your entity? Again, this is part of the problem. We have no history of court cases, nothing to look back. I'm falling back on the broad rule. If you register with your state, this applies if you're within the size and others. Walker: I'm in North Carolina and if you create an LLC, you have a yearly LLC report requirement, which to me says you registered with the state. If you're having to continually file an annual report that feels like registering to me. But like you said, we're going to have to flush some of this out. Another question I get…because on one of the exemptions it says accounting firms, just very brief accounting firms. But then if you dig into the FAQs, it says something more specific. Are accounting firms which are people listening today for the most part, do they need to file? Harris: All the exemptions that are listed, be careful and read what they really mean. They're not as broad as we would like to think they are, there are very specific examples in there. I would say that most of the people listening to this podcast are not covered by that exemption, though there clearly are some. But Melanie, I'll let you speak from the AICPA standpoint, but it's like anything. When it's taxes or something we read until we get where we want, then we stop reading. Don't stop here. Keep reading because you're not going to be as happy. Lauridsen: So Roger, I think you'd make a good point. The FAQs within FinCEN’s FAQs, they have the list of the 23 exemptions and one of them says accounting firms. But that's just the title because when you actually read and dig into what that means, it's the accounting firms that are registered under Sarbanes-Oxley to be able to do public audits for public companies. There aren't too many of those companies that are registered to be able to do these audits, I would say, like Roger said, the majority of those listening to this most likely don't qualify for the exemption and do need to file. Walker: Another question I see a lot, what about inactive entities. There is an exemption. But again, like you said, you've got to follow through the whole thing. I think it's six things that have to be met. But what is your thoughts on things to consider for active entities? Then I'll add on, if you dissolved or terminated during the year, is there a requirement to report that? Do you have to say I'm done reporting? Harris: I'm going to be honest, I certainly hope so that you can take yourself out of this mess at some point if you're out of it. But those are some of the challenges. There's reporting agent requirements. If you become a reporting agent, you're there forever if you've set it up. But if you are a preparer or whatever they call it and you want to change, there's all of these things about how you change this or how you change that, what you do that I don’t think are crystal clear and I think we have some guidance that says if your entity has done that, you mentioned these six things, you're inactive, and a $500 a day penalty when you don't really know the answer, what's the safest thing to do? Hunt through an attorney or do it because it's cheaper to do it than to put yourself out there for penalty because again, we have no history of how a situation will be looked at by FinCEN and determine whether you complied or not complied. And that's why we find ourselves in a, listen, for all the criticism people give the IRS, at least they've got guidance, we've got history, we've got things to fall back on. For most of us, this is the biggest interaction with FinCEN. Walker: Only with FBARs and I think that's what trips a lot of people up is FBARs are reported on or can be reported with a tax return and so people are just so confused. Just to clarify, is there a report, is there something that can be filed with your accounting software? How do we think this is going to do? Melanie. Lauridsen: With regards to how you can file. When you start FinCEN, there is no form out there. They have not released it. There will be software on FinCEN's website, supposedly January 1st. We haven't seen it, it's not live, it's not out there. What FinCEN has also said is they are working to be able to provide third-party software similar to what they did with the FBAR, where third parties or third parties on behalf of, in this case, small businesses will be able to file for them, but that is coming down the road for right now. According to FinCEN, you have to go to their website and be able to file there. Again, this goes back to the whole point of there's just a lot of information…a lot of unknowns right now. Walker: Absolutely. I think that's maybe the theme of this. The theme of this podcast is the questions we can answer, the questions we can't, which seems to be more can't than can, but hopefully it's providing some information. Those are my main, I'll say, frequently asked questions for me. What to do now is, Roger, just think about any final thoughts you'd like to share with our listeners as we are evolving through this requirement. This is definitely not the last you'll hear from us. We are continuing to monitor and provide resources as we know more but just as here we are middle of December getting ready to approach this requirement, what would you like to share? Harris: I think the advice I would give to the listeners is the same thing I'd give to our people is, first of all, over-advise in terms of the requirement to make sure that everyone is aware of it. That we're aware of it more importantly, but we're going to take advantage of the time that we've been given to find out some of the details that we've discussed here. So be very aggressive in telling people about the requirement. Be a little hesitant in doing anything until some of these questions that we can answer, we hopefully get answers to and then make sure that you have all the bases covered when you decide how you want to offer this service. Make sure you have the engagement letters in place, make sure you have the errors and omissions insurance in place, make sure you have the attorney relationships that you need. We will help our clients. I think at the end of the day, this will settle to somewhere where we'll find our role, we'll find the attorney's role, we'll find the roles that we can all fit and we will help our small businesses comply. But let's take advantage of the fact that we have time to do it, let's be cautious. But I think, as I said earlier, we all want to help our clients. That's what they come to us for, that's what we want to do. But we have to do it in a right way. The thing that scares me the most is I had a practitioner tell me, how hard is this. It's a form. We fill in forms all the time and I thought this a like all the forms we fill out all the time, so be a little careful. Let's be careful, but let's try to help our clients. We'll find our role. I think we're just never land right now where we're still trying to let it settle, but we'll find our role and we'll do a good job and we have the best interests of our clients at heart and I think as long as we're cautious, that will serve as well. Walker: Wonderful. Thank you, Roger and thank you so much for joining us today. Larry, can you give me some final thoughts as we're thinking about this requirement? Gray: Yeah. The final plot would be as Roger and Melanie and I have said, you've got to decide what you're gonna do. You have to at least make the client aware, that's a given. I think beyond that, what you have to realize is be clear in the engagement letter. I think also, you have to stay current. As I said, FinCEN is updating the frequently asked questions. They updated eight of them, two days scope, but it's almost weekly. Now what I have to do is look at the small engagement guide that they have, which is very good. But there's frequently asked questions. That guide hasn't been updated yet. I would say clear communications including your engagement letter and I think the other thing is stay current on the FinCEN website. You can go online and ask to be sent out notifications. We will work through this and your current clients, you probably want to wait till later in the year. Melanie, April, I so thank you for including me. Walker: Thank you so much, Larry. Melanie, I'd love for you to give some final thoughts. Just as I'm thinking before you go, just there’s…and hopefully you'll hear today, there's a variety of approaches to this. There's a variety of ways that you can approach it and you don't have to know right now, but it would be helpful if you have thought about it and thought about the risk so that when you are dealing with your clients during tax season, you are able to say, here's the requirements. I'm not going to do it, but he can hear some alternatives, or I am going to do it, but you will have to provide me the information and I can help you with the reporting. If there's any advice that needs to happen. It cannot come from me, it has to come from an attorney. That's my final thoughts. What about you, Melanie? Lauridsen: I agree. This is new and it seems scary, but keep in mind back in the day, even the practice of tax was considered unauthorized practice of law. So things evolve and things change. I think once we get more clarity, it will settle and ultimately, Roger can talk about those too. When he's approached lawyers, a lot of the lawyers don't even know what they are. We've found that they don't want to take on this engagement and who does that leave the small businesses to turn to? I also know that CPAs and tax professionals, it is in their nature to want to provide services to their clients. Larry and Roger, and I echo the sentiment have said over and over again, we'll figure this out. We just need a little bit more time, a little bit more information, and I think we're going to get there to be able to help the client. I do think it's our responsibility to be able to provide a service and I'm not saying it has to be a why, but it did provide a level of service to our clients. Walker: Wonderful, thanks. Alright, thanks everyone. Again, this is April Walker from the AICPA Tax Section. This community source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find this wherever you listen to your podcasts and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a life founded friend. 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Marna Ricker, Global Vice Chair, Tax — EY, has held various leadership roles including most recently the EY Americas Vice Chair – Tax. She engages and inspires her team to provide unique client experiences and create digitally enabled services. On this podcast episode, Marna shares her insights on how to blend and balance soft skills with technical skills — touching on how to develop each set and how emerging technologies influence future accounting professionals. What you’ll learn in this episode How the tax industry has evolved over the years and advice Marna would give to her younger self (1:15) Key skills leaders are looking for in employees today (4:15) Can soft skills be learned? (6:18) Balancing technical changes while also developing leadership skills (8:23) How artificial intelligence (AI) is set to influence tax professionals’ skills (10:52) Final thoughts (16:00) A page from Marna’s travel journal (17:15) AICPA resources Reimagining your tax practice — Tackle today’s top practice management issues with insights and tips from pioneers in the tax community. The Reimagining Your Tax Practice webcast series will tackle these issues and more in a Q&A roundtable series with tax pioneers from the profession. Transcript April Walker: On today's podcast, listen to hear the importance of balancing soft and technical skills in a digital first world. Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the Tax Section. I'm here today with Marna Ricker, she's EY’s Global Vice Chair of Tax. Marna, I just listened to a podcast you did with Tax Notes where you really delved into some heavy-hitting international tax topics. But thankfully, today, our discussion is going to be a little bit softer. We're recording on a Friday so we're a little more relaxed. Your technical skills are definitely honed. Spent 28 years at EY and I think as I was doing some digging into your background, I think we're just about the same age or we’ve been in the career the same time. I was just at a conference earlier this week and telling my story about starting off in Big Four. Except it was Big Six at that time. Welcome and I'd love to hear your thoughts on how the tax industry has evolved over this time in your career and what you would tell that fresh-face, eager tax staff that you were, if you could give her advice knowing what you know now. Marna Ricker: First of all, thank you for having me and I agree it is a great Friday and we're in the holiday season, so it's really nice to be with you. Yes, 28 years of doing this and obviously similar tenure to you. It’s changed a lot and so let's just get into that. I really on this precipice of a once in a generation, maybe once in a century change. We're rewriting old tax codes and we're moving from a bricks-and-mortar world to a digital world and a multi-jurisdiction landscape and so we have government scrabbling with a poly-crisis stemming from COVID, a war climate crisis and many disasters. We have rising inflation, although maybe that's coming into control. I'll leave that to the economists. We have the geopolitical conflicts and all of that obviously is created really significant global economic impact. When you see that the administration's evaluating the role of tax plays in supporting fair and equitable recovery of economies and all while incentivizing green behaviors and decarbonization. Walker: That's a lot, right? Ricker: It's a lot. Exactly. Whenever you see that tax at the heart of that new global tax regulations such as BEPS. Finally, in all of that, a little bit more cloud and platforms and adoption of new technologies such as generative AI and you see the transformation of businesses around that. Tax and finance functions really end up at the heart of driving that. So, careers in tax are changing things. That's what technology and automation and no job looks and feels the same. That was the context of all of that. To answer your exact question, is that tax policy ultimately what I wish I knew was tax policy ultimately plays a big role in driving the outcomes for governments. What do they want to see? What is its place in economic, fiscal, and monetary policy? It's really a force for good. It plays a significant role in important invaluable role in the whole ecosystem. It's one that I love. It's one that I'm very proud of and really helping our teams, helping my younger self find a place inside our tagline at EY is, building a better working world. Finding that purpose is really fun and that's what I wish I knew when I was in my early twenties and bright eyed about going into tax. Walker: I feel exactly the same way. I really was never that involved in politics or really cared about legislation, honestly, until I came to the AICPA about eight years ago and I really was like, knowing this makes such a difference in knowing how the sausage is made just makes a huge difference. I think that's really cool. Marna, definitely you're a leader in tax. As we're talking about this evolving profession, what are the key skills you're looking for in employee's today? We hear so much about the pipeline issues and getting people excited about accounting. You've still got to do your job as like hiring the best people for your place. Where do you look for in skills in your employees as you're hiring them? Ricker: It's a great question and it's such a good career. April, you and I have loved our careers and so I'm passionate about this issue, and so attracting people into the profession, and I'd say there are three big things that I think we're always looking for and tax technical and tax accounting are table stakes. There just a price of entry into the profession and yet the industry and the way we're living our lives consuming, working at the technology advances, the conversation we're having today, we're seeing a lot on technology skills and so we're hiring cross STEM, mathematics as well. Because again, it's really high critical thinking skills and so a lot around technology, digital, math, STEM, skills as well. At the same time, we're certainly seeing the soft skills, leadership skills, communication skills, high collaboration skills, ability to work with others, are really important in communicating really complex topics. Tax technical topics are really important as well. Those three really critical thinking, tax technical, tax accounting, technology, STEM, math, and then obviously the soft skills around communication and collaboration ability to work with others. Empathy type skills are really important in this profession. Those were the top three I'd say that we're looking for in the hiring and development and successful professionals. Walker: I agree. I feel like I'm really primed to have this conversation because like I said, I was just at a conference that was talking about all of this stuff. I'd love to know what you think about, we are talking about balancing soft skills, technical skills, different skills like technology. Do you think soft skills can be learned? Or how do you find that person that maybe they have the start of it, but how do you develop that, what's your preference? If you have somebody who is like really strong technically and they had a glimpse of soft empathy. I don't know. I feel like it's like the spectrum and balanced. Ricker: I do. I think maybe only so far. That might be the way I'd say that and so I think we're a human centric organization and we've done a lot of work with Oxford. We really believe humans at the center if that's the right way to say it. You take your technical skill, and we add technology to that. We really understanding real human emotions and the way to drive the organization forward. Again, you are who you are ultimately, but I absolutely think you can round that out and you can deepen trust and you can deepen your skills around that. We spent a lot of time training around that. Anyway, so we really do spend a lot of time on that and your ability as a leader to foster diverse and inclusive environment where you can come and bring your whole self to work. You and I just even in our earlier conversations, you can just show up as who you are. You can be who you are and then you perform at your highest level as well. We spent a lot of time around that in investing in inclusive leadership skills and becoming better leaders, transformative leaders who bring their best selves to work every day. That's probably what I care the most about and certainly what I've had the opportunity to do for almost 30 years here at EY. That's the way I'd say. You're only going to go so far to rounding that out. But I think the environment and the culture is really what is most important and allowing that to come forward. Walker: Just quick follow-up on that for yourself personally, how do you balance, or do you have any tips on how to balance, like keeping up with all the technical changes, but then also making sure you're continuing to develop your leadership skills. Ricker: It's a great question. I'm highly focused on time management, which might be my superpower tip, but I'm going to jump on a truly like you have a certain amount of time every single day, every single week, every single month, every single year. I'm really focused on what is it I need to get done and how am I going to balance my time accordingly? You're only as good as the team around you as well and allowing them to have opportunities to grow and to learn. Maybe one thing I learned really early is if it's something you already know exactly how to do, don't do it twice. Pass that opportunity, that learning and growth opportunity on to somebody else who hasn't had that experience and that is something I think a lot about. If an opportunity comes to me that I've already done it already know how to do. I'm going to pass that on. Walker: I'll appreciate that too. Everybody wins. Ricker: Yes, exactly. I have an amazing team around me and I get to be on amazing teams too. I think that's building high-performing teams is I think the heart of it, that balancing, might be the right way to say it. The other thing I would jump into April that is I am a passionate person around technology, around generative AI in particular, that is obviously about a year old now. We're just passing that moment around gen AI. When we learned on ChatGPT-4, and in particular, and all that now that we're seeing out of other organizations. That is one where you think about the opportunity to have a second brain, a co-pilot next to you. I'm sure we'll jump into that topic a little bit. Like when you think about balancing and you think about being uber productive and the ability to really accelerate where we're headed. I'm really excited about that. Walker: I think it's funny. I was at breakfast with some friends this morning and they're like triathlete friends that I hadn't caught out whether awhile and somehow we got on this topic of AI and all the cool things it can do for you personally and professionally. I feel like it's such a booming every day, something new happens. But as you think about it, since you brought it up, I'd love to know what you think. How do you see AI and all of these emerging technologies that are happening? How do you see it changing the tax function? Ricker: I am so with you, I'm going to give up personal on really quick April since you said that this morning. Similarly, I set aside 30 minutes really early this morning to write a letter, a personal lawyer recommendation to somebody. I ended up just using Bing chat to do it and I just kept prompting and prompting to make it better. It took me seven minutes. I mean, to your point. Walker: No, that's amazing. Ricker: I had 23 minutes to drink my coffee.Anyway, so you got your question was how is it changing the tax function. To just to jump into that so I really feel like AI’s moment is now this is something that's here to stay it's making all of our lives. Like I said, I just gave a personal example it's making all of our lives better. It's a transformative technology it is really changing the tax world now and it's changing both obviously in our business, how are we going to deliver our services? It's changing obviously how tax departments ultimately will get their jobs done and then it's obviously changing governments and tax administrations and how they'll get done. We're seeing it, really seeing it everywhere. Maybe I'll just, here are some examples. I think that's I think about it, keeping up with ensuring compliance with laws and regulations as well. That's transfer pricing policies, ESG policies detecting discrepancies and real-time data using predictive analytics to spot challenges before those problems or risks. Think about it streamlining compliance processes and enabling real-time data sharing between taxpayers and tax administrators making that process even easier for both. Think about it lowering tax controversy. Because again, you're predicting ahead of time what we're going to see and able to make real-time adjustments. Then think about inside of an organization, a new era of forecasting and optimizing decision-making is because again, it's going to automate complex calculations and allowing tax departments in your organization so real-time adapt to changing regulations and market conditions. Because again, it's going to be predicting and analyzing and prompting you about what's coming. I could go on and on with examples, but really powerful and it's when its ability to predict and analyze as opposed to needing to be told. Again, we're seeing multiple applications of that already inside of our own organization. It's been really fun to do we have invested almost $1.4 billion. This will continue with a unifying platform that brings all that together called EY.AI, clever naming there, they're focused on obviously education, learning, and development our own professionals through what we call EY Tax Copilot and that's really where we're focused on getting our own people educated as quickly as possible so we can continue to take advantage of all the rapidly evolving technology that's out there so very fun for us moving forward. Walker: That's cool. We are advocates for all members of all firms sizes at our organization, of course. But we have a lot of small firm solve for our listeners and you guys have, like you said, you have money to put into a policy, but definitely, I think for smaller firms they'll eventually be able to benefit from some of that knowledge that you guys are working on now. I think our message is, don't be afraid to play around and figure things out and make sure that you're obviously using security measures and not putting personal information in there, but just because you're a small firm, your AI is not going to take away the role of a very important tax adviser. That there's still a role for or at least that's my opinion. But if you are shying away from this completely, saying, no, this is not good, then I feel like you're just really losing out on some of these really cool things that technology can do. Ricker: It's the opposite. I look, eat what I would say is think about the intellect, the tax technical in the judgment that comes with the work that we do. Tax work that we do, that will be even more in demand. Because that ultimately is what are the clients and what obviously individuals and companies value. The ability to have something that makes you even more productive and able to do that type of work, which is what gen AI does, it helps us be far more productive and being able to spend our time in that type of work is really powerful. When you were asking me about what would I tell my 30-year younger self that having that with me alongside me for this last 30 years, it makes you even better at that type of work. I can't wait to see what our young professionals, how smart they are going to be in, how experience they're going to be, and what their careers will look like. Having had the benefit of a copilot, a second brain right next to you for 30 years. They're going to be extraordinary professionals. Walker: Yes, I love that perspective. It's not one you always hear, but I'm an optimist and I look for the bright sunshine all the time. I appreciate that perspective. Marna, this has been great. I'd love for you, given a ton of advice, but one more piece of advice that you'd like to give to our next generation of tax leaders who are looking to build those soft skill, build the technical skills, lean into technology. What do you have for them. Ricker: Maybe it's again, this will be you and I as optimum optimism, maybe my number one would be reach for the stars. Just go for it. Whatever you want your career to look like as a tax professional, I would absolutely be that, but it's hard for me to do one. If I can just add one more, would be that would be one because I think it's an extraordinary career and I think it's so dynamic and interests and so that would be one. My second would be take good care of yourself. I take great care of yourself, take care of your family, and then take care of your fellow colleagues. I just think this whole concept of being great builders, a teams and great builders of your colleagues is the most important thing you could do because it'll continue to give you and it'll give those around you extraordinary opportunities. That would probably be my biggest piece of advice. Walker: Love that, yes, self-care and then just being kind and considerate to others. It always circles back. All right, I don't know if you've listened to this podcast before, but if you haven't, or even if you have, in closing, I liked the name of our podcasts is Tax Section Odyssey so I like to think about as taking a journey together towards a better profession. I love to hear a glimpse of my guests other journeys outside of tax. Share a page from your travel journal somewhere you recently been that was amazing or memorable trip you have planned. Ricker: I love that. So I just was in India, April, and talk about an amazing country truly. It is so on the rise from Old World to the New World and its blend of all of that together is one of my favorite countries in the world for that reason. The culture is so rich and it's, it's kind and it has such high ambition and where it wants to go and such work ethic to get there and so anyway, it's just a beautiful country and so anyway. I just got to spend, I was lucky enough to get to spend almost 10 days there and so I just it was just a joy. Walker: I assume it was a work trip, but hopefully you had some ability to do some fun things. Ricker: I always carve out time for fun and my family is my two great boys and amazing husband. But I also have a great work family and so it was just a joyous time and it's a very special country. Walker: I've never been. I keep a list as I'm doing this, I keep adding things to my travel bucket list. I'm going to have to add India there, awesome. Marna, this was so fun. I didn't even feel like work, so I hope you feel the same. Enjoyed it. Thanks again for listening. Again this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts and please follow us so you don't miss an episode if you already follow us thank you so much. Please feel free to share with other like-minded friend. You can also find us at aicpa-cima.com/tax. We find our other Odyssey episodes, as well as getting access to resources that we mentioned. Thank you so much for listening and hope you have a wonderful holiday season. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. 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