October 16 is in the rearview mirror. Brandon Lagarde, CPA, JD, LLM, Partner — EisnerAmper, chats with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, to review what went well during the extension tax season and what to look forward to in 2024. What you’ll learn in this episode 2023 tax extension season highlights (0:58) Challenges and concerns to think about for 2024 (3:05) What’s keeping Brandon up at night (7:30) Sneak peek of the National Tax & Sophisticated Tax Conference (10:13) Final thoughts (14:24) A page from Brandon’s travel journal (15:35) Related resources AICPA & CIMA National Tax & Sophisticated Tax Conference 2023 — This premier conference provides tax experts with the latest updates and information on new regulations. Your team will hear from IRS executives on current challenges and opportunities. Use promo code NTA150 at checkout to save $150 (exclusions apply). Annual Tax Compliance Kit — Engagement letters, organizers, checklists and practice guides help you manage your tax season workflow and excel as a tax and financial planning adviser. Tax Season resource library — With constant changes to the tax landscape, being prepared for tax season is critical for success. Set yourself up for a smoother filing season by tapping into the wealth of AICPA and Tax Section resources. Transcript April Walker: On today's podcast, listen to hear more about a practitioner's extension season and learn about what you will hear about at National Tax. Hello everyone, and welcome to the AICPA Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a Lead Manager with the Tax Section, and I'm here today with Brandon Lagarde. Brandon is a partner at EisnerAmper in Baton Rouge, Louisiana. Welcome Brandon. Brandon Lagarde: Thanks for having me. April Walker: We're recording this today on October the 20th and earlier this week, Monday, October 16th, was the deadline for what we think of as the end of extended tax season. Brandon I thought we could talk a little bit about some lessons learned. Let's first start with a good; I like to do that. What are some things that went well for you during this extension season? Brandon Lagarde: This is always our busiest time of year — the extended busy season — largely because it involves more of our larger individual clients and even some of our larger pass-through clients. September 15th is a pretty busy day for us. September 30th is also a pretty busy day with fiduciaries and states being done, and then October 15th, again, of course, being, which is October 16th this year is a huge day for us. When we try to plan out our year, we'd certainly look at August as getting ramped back up. If I had anything good to to say about this year it is that we recently went through merger within the last few months — merged May 21st with EisnerAmper — and with that, we were able to get additional resources help. One of the good things that happened during this extension season was, again, the ability to have more people help us get returns done and get the work out. That's probably the biggest positive we had. I wish we would've started sooner. Seems like June and July was slow for us, and we're waiting and anticipating for the wave to occur. We tried to ride the wave as best we could, but I would say that it was still a pretty stressful time even with the additional help we could get. April Walker: I feel like when I think back to my days in public accounting, it's always hard to ramp back up, but the sooner that you can ramp back up after taking a little bit of a breath, that makes for a better September — October. That’s great that you had some additional staffing. Maybe we'll move to the lessons learned. What are some things that didn't go as wel,l and some things you'll try as you look towards the 2024 tax season? What are some things that you're going to implement and work on? Brandon Lagarde: One thing that we did during our regular tax season (and it never translates for us to extension tax season), and that is really trying to set some expectations with clients on when we expect them to get us information. When we get work done internally during regular busy season, that March–April timeframe, we're much more deliberate on getting that work in the door, telling clients we need your information by this date to get the work done. We are much more deliberate on scheduling that work during busy season because we are more focused on it. Then summertime comes and I think everyone, including our clients just get lazy when it comes to their taxes and getting work done. What we didn't do so well, and we've thought about this internally, is on the backend with the second busy season coming up in August, we really need to do a better job of pushing clients to get information and pushing ourselves to continue to work on stuff during the summertime. Just seeing that this year specifically, I don't know if it's still coming out of the COVID-19 pandemic work issues or just coming out of first summer where people did a lot of travel. Again, there definitely was a lull that we should have prepared for a little better. Certainly one big lesson learned is we really need to keep our foot on the gas through the extended busy season and really get started earlier because as I mentioned, one of the good things that happened to us this year was we did have additional help to get work done. Without that help, we would have been extremely backed up and not sure we would've gotten the job done. So really pushing that deliberateness that we took during the busy season in March and April. Really pushing that to the summer and staying on top of clients, staying on top of our people and just saying, “hey, we need to make sure that we're not pushing this back further than we need to,” that's a huge lesson that we'll take from this tax season. One of the challenges we face with our September 15th deadlines is when you have flow-through entities and we're getting K-1s on September 9th, 10th and 11th, that puts a huge strain on getting work done on the 15th. We try [for] clients that have that multi-tier, we at least try to back that up and try to get those out before [because] we know they're going to impact other clients we're dealing with. But that's just a huge backlog that happens. Again, I don't know how you incentivize clients because sometimes it's not in their hands. April Walker: Absolutely. But I think you can make sure you're communicating and make sure [maybe] it's getting the best draft information you can get [entered in the system] so that you're really truly just waiting on a few pieces of information and really pushing [clients]. I'm not trying to tell you what to do Brandon, but just some ideas like thrown out there and just making sure that your clients don't put you into a box where you're having to scramble. Brandon Lagarde: That's one big lesson is never too much communication with a client, especially if you're trying to get information from the client or really trying to push the client to get you the information. To some degree, it takes some deliberateness on everyone's part to say, let's sit down first week of June and go over what financial information we need from the client, get with the client and help them to put it together and even set up meetings with the client to make sure that they understand that we're waiting on them for something. I find that happens quite often is communication just falls apart and the client doesn’t realize we’re waiting on something or the client doesn't really understand what we're waiting on, even though we tell them waiting on something, so it certainly involves overcommunicating is going to be a huge solution for anything. April Walker: I think that sounds good. Just a final question as we're thinking about looking forward, what's keeping you up at night as you're thinking about its the middle of October tax season. Unfortunately, we will be here again. What's keeping you up at night thinking about that? Brandon Lagarde: We already had a meeting this morning with our partner group [and] our local group, and really starting to talk about what we need to be focused on [at] year-end and starting the process early on this communication with the clients and starting the process early on determining which clients we are going to continue to work with and which clients we may need to part ways with and getting engagement letters out and organizers. These things need to occur now and not wait [until] January — Is just getting those things done, just getting a process down to do that, that's what we've just taken off right now. Because I think it's going to be pretty quiet legislatively in the near term, but hopefully there's no major tax things we have to deal with. Again, it's a normal year. April Walker: But it's always thinking forward, thinking about 2024 presidential election [and] also thinking about sun- setting of TCJA — that's not until the end of 2025. But still just planning ahead, and again, you're talking about communication with clients is always a good thing. Brandon Lagarde: Making sure we're getting in front of the clients and remind them that bonus depreciation continues to go down and things that are changing and whether there's a fix to the R&D or not and keeping people abreast of whether employee retention credit claim is currently pending because we have a lot of those that we get calls every day from clients asking, “where's our money?” We tell them that it is sitting in Washington DC — so call their congressmen. But, as always, fun to talk to clients about and end of the year is at time and its extent that we can again have a full conversation with them, not just year-end planning, but also getting ready for the 2024 tax season, and go back to lessons learned from this year, just trying to get information earlier from clients. If we can get in front of them towards the end of the year and even beginning of the next year and help them clean up their books or help them with organizing their stuff before it gets too late into the tax season, that's a win for everybody. Really, that's going to be our focus in the next two months is really just some of the administrative stuff done. Let's refocus our efforts on those clients that we need to be focused on and work towards making sure over communication is integral to the process. April Walker: Brandon is a wonderful volunteer for the AICPA. He is the current chair of the Tax Practice Management Committee. He's also a first-year co-chair of the National Tax Conference, so I'd like to talk a little bit about that's upcoming really soon in the next couple of weeks. I heard yesterday, there is an additional promo code which I'll share in the show notes. Brandon, tell us, why should you come to the National Tax Conference besides getting to hang out with you and I? Brandon Lagarde: That would be the first thing, you get to hang out with April and myself, which is always a fun time. You could visit the O museum. This will be my sixth year attending and first year as a co-chair and I've been on the planning committee for the last couple of years. And it's always just a great conference I go to. It's in DC, you're around the IRS officials, the IRS Commissioner comes in and talks and this year we have a new Commissioner. So we get to hear from the new Commissioner and his vision for the IRS and with the $80 billion that they have to spend, what's their priorities? We hear from other IRS officials to get an idea of what their priorities are to in the coming year. It's a great place, not only just to learn from other practitioners, but also to learn from the IRS and the government officials that are there and again, you're in DC. This is a great conference this year and we're hoping to have some good discussions and good content around AI and how it's impacting the tax practice. The committee has spent a lot of time working through that issue and just trying to provide some good information and some good commentary. I heard just this morning that we're going to have a staffer from the Senate to also be a part of the AI discussion because Congress eventually is going to get involved with putting guardrails on artificial intelligence. I know they have a committee that they're working on, talking about what should their role be. And again, what better place to learn about all that in DC. It's a great conference and I think this year is by the [National] zoo, so we get to go to the zoo as well and go see the pandas. April Walker: Absolutely, the pandas are leaving. That's one thing I'm doing. If you'd like to join me, give me a shout out, I'm definitely going to the zoo on Sunday. But thank you for sharing about the [conference]. That's exciting. I always love the sessions and it's one of my favorite. It's one of my favorite times. You've talked about some of the sessions, but do you have any other specific sessions that you're looking forward to attending yourself? Or again, I like to always provide that there are some concurrent sessions happening. If there's a couple of things you would like to see at the same time, you can go back and watch them later. That's a definite benefit. But what are you looking forward to you the most? Brandon Lagarde: With this conference being at the end of the year, certainly you get the IRS officials and you get to hobnob with them and you get to meet them and get to hear from them. But also you get some really good year-end things to think about. Well, we're always, as I was saying earlier, the things that keep us up at night is making sure that we're talking to clients about things they need to be doing at the end of the year for tax planning. This conference gives a lot of tips, a lot of things to think about to bring back. We try to make it very practical — practical sessions that could be applicable to everybody. In this past year, we now are integrating the sophisticated tax planning conference as well, so again, you add a little more estate planning concepts and ideas in addition to just the income tax. It's a really well-rounded tax focused, and again, given time a year is perfect. You go to a conference, you hear a bunch of things and then two weeks later you forget about what you learned. Here, you can take what you learned and go bring it out to your clients immediately. Again, it was a very successful tax season for us. All returns are filed that needed to be filed. Everything went as smooth as it possibly could go. Definitely can go smoother, and every year you just have to look and see what went well, what didn't go well. One closing comment on that, we started doing this years ago was having a debriefing session for [the] tax group and for every level. Staff, managers, senior managers, partners get together and just have a debrief on what went well, what didn't go well. [We] get our admin team together, talk to them about what went well, what didn't go well, because what went well, in my mind, may have gone terribly for somebody else, but we just didn't see it at the time because people are just busy. Really sitting down with the team and just going through and [talking about] what we do here that went well, what went wrong and how can we improve and how can we fix? Because I'll say everyone can improve on something even if it's small. That's the good thing to do for the firm and good thing to do for your practice. April Walker: Absolutely. Thank you again so much, Brandon, and I appreciate you very much. You've been on this podcast before, so you know what's coming, but on these podcasts, I like to think about us taking a journey together. Like a journey towards a better profession. In doing that, I like to get a glimpse of my guess’ other journeys outside of tax, so what is a trip you'd like to share about? Either a trip you have planned or a trip you have recently been on? Brandon Lagarde: Yeah. I knew this was coming and I didn't have a thought until you asked this question. My wife and I are celebrating our 20th anniversary this year. April Walker: Wow, congrats. Brandon Lagarde: Yes. We were going to do a little bit longer of a trip, but we shortened it. We're going to Las Vegas in a couple of weeks, and been debating on this whole sphere thing and should we go to the U2 concert in it or not, but so far I think we're, we're not. But unless somebody convinces me, otherwise, we're not. But I think I'm just going to stand out in front of the sphere and take pictures of certain things, like everyone does. April Walker: Yes. I was hoping you were going to go check it out so we could possibly, when we're together in June, next June, we could see if whether it's worth it or not, I don't know. Think about it again. Brandon Lagarde: Yeah, we're definitely going to go check it out as don't know if we're going to go to anything inside of it. We may just go walk around outside. But Las Vegas is the fun place and we're going to hopefully have some fun, even though I don't gamble. April Walker: Lots of good shopping and lots of good food. Brandon Lagarde: Lots of eating. April Walker: Yes. Happy Anniversary. Brandon Lagarde: Thank you. April Walker: Again, this is April Walker from the AICPA Tax Section, this community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. 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The tax profession offers a myriad of potential paths to a successful, satisfying and rewarding career. On this episode, listen in as Will Weatherford, CPA, Managing Director — Transaction Advisory Services, Forvis, and Teri Hanson, Managing Director — Alvarez & Marsal Tax, LLC, share their perspectives of what it’s like to be in the mergers and acquisitions (M&A) tax niche from both a federal and state perspective. What you’ll learn in this episode A day in the life of an M&A tax professional (0:58) Steps when starting an engagement (4:20) Red flags and lessons learned (9:24) Saving the day (12:02) Reflections — past and future (16:31) Career drivers (17:14) Pages from Will and Teri’s travel journals (21:18) AICPA resources Salt Roadmap and Resource Center — Browse the reference library for the latest guidance and tools to address your state and local tax needs. Navigate to the interactive U.S. map to reference taxes imposed, tax rates, due dates, tax forms and more. View the SALT resources index for additional resources by topic. 2022 State Tax Nexus Guide — Learn about state tax nexus including the many types of nexus (affiliate, economic, click-through, cookie, etc.), the physical presence standard and more. 2022 State Tax Nexus Checklist — Access a comprehensive checklist about state tax nexus considerations involving income, franchise, sales and use taxes. 6 reasons an S corporation wouldn’t need a PLR | Tax Section Odyssey — On this podcast episode, Tony Nitti, CPA, Partner — National Tax, EY discusses Rev. Proc. 2022-19, which provides procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a PLR. Wayfair Client Notification Letter — The U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. opens the door for possible economic nexus issues. Use this letter to initiate client planning. Transcript April Walker: On today's podcast, listen to hear more about a day in the life of M&A tax professionals. Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a Lead Manager from the Tax Section, and today I'm excited to share our guests. They are Will Weatherford. He is a Managing Director of Transaction Advisory Services with FORVIS, and Teri Hansen, who's also a Managing Director with Alvarez & Marsal Tax. Just to kick us off, we hear so much about the CPA pipeline and how students and professionals entering the CPA profession don't see the excitement and don't see — all we do as tax professionals is just crank out tax returns. It might be fun to explore a day in your life, a day in the life of Will and Teri. They're going to tell us…Will, we'll start out with you. Tell us a little bit about your background, and your role, and M&A tax due diligence in general and then once you're done, Teri, go right ahead. Will Weatherford: Sure. Thanks, April. I'm a Managing Director with FORVIS as you said, and my job is really to lead our M&A tax engagements. I have a team that works for me, but I'm the one leading it — the one signing off at the end of the day. From an M&A tax perspective our work really breaks down into what I call the diligence, which I think we're probably start off talking about tax diligence in that, and then the structuring which I think will also get to. But from a tax due diligence perspective, that is really about when one company is buying another part of the process of acquiring…is doing diligence. It's really no different than for people who bought a house where you hire an inspector to come in and look around and see if there's any problems. It's really a similar concept and there'll be various service providers. I come in, the lawyers come in and do legal due diligence, and maybe other insurance advisor will come in and do an insurance diligence. We are brought in to really review the company's historical tax filings and the positions they have taken and really just understand what the company has done historically from a tax perspective and really to understand if there's any tax liabilities both from a federal-international perspective, which is what I focus on. We're really looking at the federal income taxes and to the extent that there's any cross-border activity, the foreign taxes, and we have local teams that do that…then, what Teri focuses on, and she'll get into is, the state and local tax perspective, any state taxes — both income and non-income. The goal is really to go in and get an understanding of the company's tax posture and again, really looking to understand if there's any historical liabilities that would be inherited by a buyer in connection with the acquisition. It's a bit of a fine line to walk because the goal is not to find 9,000 things the company did wrong. Nobody is going to be — given the nature of our tax system — no one's going to be 100% compliant all the time. Just like auditors when we operate with materiality threshold, but we really want to find those material tax exposures that would influence, or impact a person's decision-making, and then we want to understand them. We want to ring fence what that is, and then also part of it is working to see if there's ways that we can mitigate them either. There may be something that the selling company can do pre-closing to mitigate the issue or if it's something that our client has to deal with post-acquisition. That's what my role from a federal and international perspective. Teri, I'd love to hear about what you do from a state perspective. Hanson: We actually do pretty similar things, it's just a slightly different focus. As you mentioned, I focused on the state and local taxes, that's any state income tax, any non-income tax, that's sales and use, gross receipts, property tax, payroll tax, excise taxes, unclaimed property, though that really technically isn't a tax. We're also going in, we're looking at companies to make sure we understand their business and their profile, and then we're trying to help our clients make sure they're appropriately protected in the purchase agreement to the extent we do find those material issues. Walker: Great. Definitely, I think it's pretty obvious why due diligence is so important to a buyer. But maybe we'll start with Teri, maybe talk about the process, the steps you actually go through as you're starting an engagement, and how you actually make this happen. Hanson: Yeah. The first thing we really do, anytime we kick off a deal, we want to understand as much as we can about the target. Whether it's understanding what kind of structured it is, I'm sure we'll get into that. There's really different tax implications. If we're working with a C Corporation, or an S Corporation, or a partnership. We need to understand what the income tax profile looks like. From a state and local perspective it's very important to understand exactly what the company buys and sells. We tried to get all the information that we can to make sure we're advising our clients on the best way to approach something. Once that process gets kicked off, the next step is really a fact-gathering phase where we're requesting information to review. We're having conversations with the management team — whether it's the CEO or the CFO, the various tax advisers, and understanding exactly what they do, where we think they should be filing, and again, picking that apart to see where we might have some problems. Walker: I would imagine, especially in the state and local area. I'm sure we'll find lots of problems too, but I feel like I hear so much about trying to figure out where you have nexus and — just from a compliance standpoint — that I would feel like in a due diligence process…I'm sure that is a very challenging adventure in trying to figure out every client is compliant or not. Hanson: That is an understatement. Yeah. It's especially for some of these smaller companies with very small tax departments or maybe even non-existent tax departments. It's really challenging to understand every tax and every single state. Unfortunately, the rules are constantly changing, so we find the taxpayers just have a really difficult time keeping up. Walker: Now Will, what would you like to add to that from a process standpoint and how might it be the same or how might it be different? Weatherford: I will say that for us from a federal perspective, understanding the transaction structure is really critical, and there's quite a lot of misinformation out there. People think, oh, I'm purchasing assets, no tax liabilities come over. That's not true. We spend a lot of time explaining that concept of people, but from my perspective, again, understanding what type of legal entity are we buying? Are we buying a C corporation, or are we buying a S corporation? If you're buying a C corporation, I have to look at everything, right. All the tax liabilities will come over. S corporations are very interesting just only because S corporations don't really pay taxes other than in very specific circumstances. But to be in that position, you have to have a valid S selection, and those S selection rules are very arcane, hyper-technical, and we have to spend most of our time really diligently seeing the validity of that election and that involves some candid, very uncomfortable conversations because there's very specific rules around the types of shareholders and things like that. We have to get on the phone candidly and ask people, hey, what was your marital status? What's your residency status? If they have trusts, we have to ask to see this trust agreements, and a lot of times you read these trust agreements and just all the skeletons. You just follow the closet because you're reading all this stuff and people obviously get very sensitive about that. I can tell you, I've been called about every possible name you can think of. Most of it I can’t repeat on the air unless this is that kind of podcast, but I didn't think it was. Walker: No, not today unfortunately! Weatherford: People obviously get very sensitive about this, but that's what we have to do. You have to definitely need a thick skin to work in M&A because you will run into people who…and candidly you're going in, you're oftentimes dealing with a tax preparer, and you're reviewing their work and they obviously don't want to look bad in front of their client. But sometimes you just find problems and you find things they've done wrong and you have to have the very uncomfortable conversation because nobody wants to admit they were wrong, particularly if it becomes like an economic point in the deal. Walker: And, probably professionals that did things wrong, potentially. Weatherford: Oh yeah. It happens where there's someone who had a big miss or something and we have to raise it and there's implications for them on terms of them having to deal with that on the backend — from a diligence perspective, understanding the entity. It's a very similar process to what Teri outlined. There was a fact-finding phase, gathering the documents, reviewing the tax returns. We're not performing an audit. Not going in and ticking and tying every single number, but we certainly do look at the material things and we do have to rely quite a bit on what management is telling us. Obviously, if they're telling us something that's just doesn't reconcile with what we're seeing we need to investigate that. But we do try to make it a collaborative process. I always tell the management teams that were working with — that we understand they have day jobs. Our intent is not to create a second job for them, and we try to ask for documents and things that are off the shelf, things that can be readily provided. If something is not readily available, we have different ways of working with things. I always tell them I'm like, look guys, if you're working, I'm working. If you're dealing with this 11:00 o'clock at night and you got a question, just text me or whatever because our goal is not to. Walker: Make things harder. Yeah. Weatherford: Exactly. Walker: You brought it up. People loved to hear horror stories, protecting the innocent, of course. Tell us about a big miss you've seen as a business went through this process. Weatherford: I would say a lot of the big misses, again, there's always the quotidian stuff, I'll say that, which is just very everyday things, it’s not very material. I would say the big misses are really around prior acquisitions when a company previously went through a transaction and then was held and then our client is acquiring it. And, we generally have to go back and look at that prior acquisition and maybe they structured it to get a step up. Depending on how that waas structure if they did a 338(h)(10) election, that could potentially be invalid. I run into anti-turning more often than I would like. Especially if some of these very old founder companies that are, maybe they're finally exiting or they're exiting to a sponsor. I've definitely seen some issues where a company thought they've taken these large amortization deductions may go in and we say, hey, this was all subject to anti-churning. It can't amortize any of it. I've dealt with that. Walker: You are the enemy. Except you can also be the hero. It's not all about that. Weatherford: It's hard, right. Because with what we do, the best thing that we can tell our client is, hey, the company was doing everything it was supposed to, was complying with the law and paying its taxes. It's not often that we can come in and find…and be like, hey, look, sometimes we can find an opportunity where we can say, hey, look, the company is not taking advantage of this tax benefit. That does come up occasionally, but more often than not, we're just delivering either basically no news or delivering some bad news. Diligence is…it's a necessary process, but we'll get into the structuring aspect, but I think the structuring is more where we I think deliver the real value. Not that diligence isn't important process, but I think the real value to a lot of our clients is really around the structuring aspect of it. Walker: Perfect. Teri, I'II love if you have a horror story you'd like to share. Hanson: I find on the state and local tax side, sales tax is almost an issue on every single deal. And it's after the Supreme Court, Wayfair Supreme Court back in 2018, the sales tax rules just changed so drastically and it didn't change consistently, unfortunately. Every single state has got some different type of qualification as far as when you need to file. What you're selling is potentially taxable or not taxable. We just find that it's really difficult for taxpayers to stay on top of that with the inconsistencies. Once you start adding on pretty significant amounts of revenue that are going into these various states, the exposures add up very quickly. As Will said, my favorite deal is when we don't find anything at all. But unfortunately, it's just not the case; sales tax seems to bear it's ugly head more often than not. Walker: Circling back to you something you said, Will. Let's talk about when you can be the hero. Let's talk about when you can play a really important role as an adviser in M&A deals. Weatherford: I think part of our goal is one with the diligence like we've discussed. But and again, that's just if we find issues, we have to raise them. I think part of where we can add value is really, I think Teri said this earlier, is that helping our clients understand any exposures and how that can be mitigated. Sometimes the target can do something prior to the closing to clean up an issue and then that way it's just not dealt with. Otherwise, it's just about framing issues and ring-fencing them and then being able to appropriately addressthat in the agreement in terms of just contractual protections. That's, I think, one way that we can add value there to our clients is just really helping them understand these issues and just making sure that they're protected and that there's not any surprises later. Then I think the other part is the structuring element, which I've alluded to a few times. That's really all the work we do outside of diligence. Again, I think that's more we're advising on the transaction structure and telling our clients, hey, if you structure it this way, you can get a step-up in the transaction and that's a real cash tax benefit to a lot of our clients. Part of it is working with the attorneys to put together the transaction structure and the steps. Lot of times we're putting together PowerPoint decks and laying out each step and a lot of circles and triangles and squares and things like that, and arrows and things are moving around. I think to a lot of non-tax people, it doesn't make a lot of sense, but it definitely makes sense to tax people and the lawyers and whatnot. I think that's one area, and we can do that and it's really all the things around that. We'll review the purchase agreement, and provide comments on that. We work really closely with a lot of tax attorneys and very collaboratively with them in terms of helping them understand. Because they're very obviously…their main focus is getting the purchase agreement drafted correctly, but they need our input in terms of the issues that we're seeing and whatnot. We work very closely with the attorneys. A lot of times there's a lot of modeling involved. This job is very…you need to be pretty decent with Excel, we do a lot of modeling. A lot of our clients really liked the modeling and that's I think, a big value driver for them in terms of helping them to understand what the go-forward tax rate is or what's going to be their step-up or what taxes are they going to pay in the future. That's another area where we can add a lot of values to help our clients see the projections and what this is going to look like going forward. Then really just everything around that structuring is just the all encompassing everything other than diligence and we just get called upon to do. Really a lot of things end up in taxes’ wheelhouse, even though it may not necessarily be tax-related, as Teri said. There's some things that are like unclaimed property is not really a tax, but we just end up having to deal with it. There's a lot of things that we just tell pile onto our basket that we have to help address and tax for whatever reason — always just seems to go down to the wire on some of these deals. We're working right until the very end to try to get these deals closed. And, tax often becomes, once they got through some of the other business-level issues, people become very focused on the taxes. Walker: You always hear or I feel like I always hear, “Don't let the tail wag the dog.” But it seems [tax] definitely is a huge part. You all play a really important role. Weatherford: I think that's actually a really important point that you raise. It's just that I know I've been told throughout my career that don't change the business deal and our job is really to take the business deal and implement it. However, what's been agreed to as commercial matter and make the tax framework work within that. I think one of the worst things you can do as an M&A professional is to have to change the business deal because of something tax-related, unless that was contemplated beforehand. You just don't want to change that, but everyone just this is the business deal, this is what was agreed to and then people would react very negatively if a tax issue was changing the business deal in some way that affects one party or the other. I think the difference between a very successful M&A professional and one who's maybe not so successful as one who really understands that you need to implement the business deal and needed to implement what was agreed to commercially. That needs to wag the tax tail and not the tax tail wagging the business deal, dog analogy makes any sense whatsoever? Walker: I was struggling with it, too! Teri, do you have anything to add on that, or what role you can play helping businesses? Tei Hanson: One of the other areas that we really add a lot of value is when our clients are selling companies. We're going to try to help them get the absolute best deal price that they can. Whether that's identifying issues in advance and helping them clean that up before the company goes to market, or making sure that we fully appreciate the issues that we uncover and we can put a positive spin on that before potential buyers come in and ask for some pretty big concessions on the exit strategy. Walker: I feel like 2022 was like a boom of M&A activity, not sure where we are in 2023 and what you guys are thinking going forward. Hanson: For us, it seems like the markets, but a little bit softer in the first half of the year. Health care has been pretty consistent since COVID, which obviously makes a little bit of sense. But we're seeing a very big uptick in our bankruptcy work right now. That said, based on conversations we've been having with our clients and what we're seeing as far as new deals pop up, it seems like the back half of the year is probably going to be pretty busy compared to the prior years. Weatherford: I would say it's pretty consistent. 2023 has been a little choppy so far, but we're extremely busy right now, which is a high-class problem to have, obviously. Walker: It is. In closing, both of you, I'd love for you to share what keeps you energized and motivated to stay in this business. I'm sure you have some hectic times when deals are wrapping up. Share what you love about your job. Hopefully, you're having a good day and it’s good day to share that. Weatherford: For me, what keeps me coming back to M&A tax is just that you have to have a very broad knowledge and in working in M&A tax, you just gain a very broad knowledge of tech because you work on enough deals. You've seen everything after awhile and it's just amazing the most obscure topic can suddenly rise to the forefront and you're called upon to be the expert on it. That to me is always very interesting and I always tell people that M&A tax, we're the tip of the spear because we're the ones who get in first for a company and we have to go through everything, we see everything and then if that company becomes a compliance client of our firm, we're having to explain it all to the compliance team later on. We really are the first people to get in and see what's going on and particularly in deligence for me, I think it's very interesting to go in and just look at what different companies have been doing and the positions they'd been taking and you really get a sense for what's going on in the market in terms of the overall tax. Then, like I said from the structuring perspective, to me, I think someone I used to work with said that with structuring you're making history basically, and I like that because you really are getting in there and getting to put together a transaction structure and it's really interesting just going through and seeing all the moving pieces to that. The last piece I really like is we work with a lot of different attorneys. For me, I work with our state and local team at FORVIS. We work very closely with them. We need their input. For example, in structuring, we need the state and local input. I think it was Peter Riley, the guy who writes for Forbes, he said that a plan that doesn't include state and local tax isn't much of a plan and that really is true and frankly with the way the state taxes are going, it's important to get that kind of input. Hanson: From my perspective, I can honestly say that I'm never bored. I think you've alluded to this at the very beginning, but tax compliance as tax compliance, it can really only be so exciting. With M&A, I feel challenged every single day. Target companies that just completely run the gamut as far as industries and types of businesses and it's really impossible to know everything about every kind of tax. I feel that I'm constantly learning new things. I never know exactly what my day is going to entail and for me that keeps it very interesting. My first month doing M&A, I worked on a crime scene cleanup company and a roof manufacturer and a healthcare clinic and a restaurant tour. You just see so many different things and I really don't see many other areas in tax or accounting in general where you get that broad range. But I think the second thing, I think that really keeps me coming back every day, it's my team. M&A really provides an opportunity to work very closely with a large number of individuals. Like we side, we work very closely with our federal colleagues and with our financial colleagues and the team of people who are doing the M&A itself and it's very collaborative and it just it makes it fun. Weatherford: I think Teri makes a good point. The people that we work with, I've worked with some very highly intelligent, very smart people over the years. To me, I really like working for people who can teach me a lot and so that's the opportunity I get within tax. You work with other people from different law firms and things and a lot of very smart people there. It's a very small community. I always tell the people working for you, I'm like, doesn't pay to be (unkind) in M&A tax because it's just such a small field, you're going to run into people after awhile. You got to be nice to everybody. Walker: I say that, in general, I think the profession is small and I've told people through my whole career — people will circle back in a way that you cannot even imagine, so it does not pay to blow the doors off. Weatherford: I'll tell you, it's even smaller in M&A tax. You'd be surprised how often you run into the same people over and over again and some of them are really fun to work with and very smart and they have great perspective on things and some of them you just got to find a way to work with them. Walker: There you go. That is like life lessons. I have a fun question as we're wrapping up. The title of this podcast is Tax Section Odyssey, so I like to think of us as taking a journey toward a better profession. When doing so, I like to get a glimpse of my guest's other journeys outside tax. Sometimes those journeys probably add to my bucket list. Teri, share a page from your travel journal or bucket list place you would like to go? Hanson: That is a good question. I would really like to go back to South Africa. I was there a long time ago and I absolutely love it. Walker: Nice. What about you, Will? Weatherford: Well, people know me, I really like wine and I really enjoy going to the Willamette Valley right outside Portland in Oregon and they have some fantastic pinot noir there and try to get out there at least once a year or so and to me, it's just like Napa Valley, but 25 years ago. So it's not quite as touristy and commercial. Walker: I've never been to Oregon and it's been on the list for so many years anyway. I almost always add something to my list when I'm doing these podcasts. Thank you so much, Will and Teri. This has been fun. I hope everybody enjoyed listening. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find our podcast at the aicpa-cima.com/tax, and check out all of our other Odyssey episodes and get access to the resources mentioned. Thank you so much for listening. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

On Sept. 14, 2023, in release IR-2023-169, the IRS suspended the processing of new ERC claims to combat the prevalent fraud occurring. These measures will help to protect small businesses and aim to stop fraud by promoters of ERC mills.  In this episode, Kris Esposito, Director — Tax Policy & Advocacy, AICPA & CIMA, joins April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, to discuss this important news development and break down the details of the announcement. What you’ll learn in this episode Highlights of the announcement (1:24) How to find if submitted claims have been processed (3:53) When will recently submitted claims be processed? (4:41) Number of claims currently in the audit process (5:45) Client talking points (6:22) Available resources (7:38) Kris’ final thoughts (9:07) AICPA resources ERC guidance and resources — The rules to be eligible to take this refundable payroll tax credit are complex. This AICPA resource library will help you understand both the retroactive 2020 credit and the 2021 credit. Employee Retention Credit (ERC): Fact or Fiction? — Use this guide to educate yourself and others on common misconceptions surrounding the ERC. Employee Retention Credit Decision Tree — Download the ERC decision tree to help you with various decision points when working with clients to protect yourself/your firm from significant risk. IRS resources IR-2023-169 — IRS news release on Sept. 14, 2023, ordering the immediate stop to new ERC claim processing. IRS ERC resource center — IRS hub for ERC information, including links to guidance, FAQs and the latest news. Employee Retention Credit Eligibility Checklist: Help understanding this complex credit — This IRS question-and-answer chart is used to help taxpayers figure out if they may be eligible for the credit. Use this chart if you are considering claiming the credit or have already submitted a claim to the IRS. Transcript April Walker: Hello everyone and welcome to this special edition collaboration between the JofA podcast and the AICPA's Tax Section Odyssey podcast. I'm April Walker, host of the Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing profession. Today I'm here with Kris Esposito. She's a Director on the AICPA's Tax Policy & Advocacy team. And we're recording this on Thursday, September the 14th. You have likely seen some breaking news from the IRS about the employee retention credit. We wanted to hop on here and record, tell you the information we know, and let you know what our next steps are. We've been really closely monitoring this evolving issue of third-party ERC promoters over the past couple of years. We definitely been advocating to Treasury and the IRS. We've also been providing resources throughout the whole time of ERC since its inception with the CARES Act in March of 2020 to assist tax practitioners as well as taxpayers. Today, the IRS announced its latest initiative to support small businesses. Kris, I thought maybe you could walk us through the highlights of that announcement. Kris Esposito: Sure. I'm happy to. Well, due to the big surge of ERC claims and concerns from tax professionals, including the AICPA, and the aggressive marketing tactics by third parties, the IRS announced today a multi-pronged approach to taper this ERC fraud. They're immediately pausing the processing of additional claims. They said that will go at least through the end of the year. After September 14th, today, there will be no more processing of new claims. They will be further scrutinizing your ERC claims that they already have received and not processed yet. Then they're also going to offer taxpayers an opportunity to withdraw claims that have not been paid out and that the taxpayer feels they may have done erroneously. So they're offering that to taxpayers. There have been about 600,000 new claims that the IRS has received, and are awaiting processing. That 600,000, those folks, they're going to have the opportunity to withdraw their claims if they feel that they have put them in erroneously. But for those folks who have actually willfully filed fraudulent claims or if they conspired to file a fraudulent claim, withdrawing your claim is not going to exempt you from potential criminal investigation and prosecution. But the IRS has actually finalizing details on this withdrawal option. We don't have all the details yet, but there will be this option, it's just the IRS needs to finalize the fine print. Then they're also going to offer taxpayers a settlement process to come forward for claims that have already been processed, but may have been erroneous, but the taxpayer has received the funds. Again, IRS is working out some details and they're going to come out with that program soon as well. Walker: I think they said later in the fall, so we'll be monitoring that obviously. The opportunity to withdraw should come out soon, very soon. They will provide the details there. I will share that as well as the settlement process. You might have the question that I had when I saw this and was thinking about this — "Okay. I know I just helped my client file a claim for ERC. It's probably within that 600,000. How do I know if the claim has been processed or not?" Probably as they have been slowing down, they've been saying that for the last couple of months that they've been slowing down processes. But our best advice is if you're in that gray area where maybe it's been processed, maybe it hasn't, the best advice we have is to call the IRS and ask [them the status] as you're walking through it with your clients on what your next steps are. Alright Kris, what information did they provide about the timing? We’ve talked about how they're going to be slower, but what did they provided about when you can expect those claims to be processed, those 600,000? Esposito: They did say the 600,000 that were recently received, they're going to be reviewed more intensely. They're going to be put under the microscope. They [IRS] target 90 days [to process ] new claims. I know they don't hit that target all the time. But they're now targeting 180 days. Because they're thinking that [most of] the 600,000 don't qualify for the credit. They are really going to be looking at them, very closely and taking a longer time to do that. They may even ask taxpayers for more information so it's going to be a different ballgame now. Walker: But that's good from a communication standpoint to your clients, if they are a part of that group that has filed a claim. In this announcement, did the IRS say anything about how many claims are in the process of audit or anything around that topic? Esposito: Yeah, they have been auditing ERC and keep ramping up the audits of ERC because of the fraud. They did say they have thousands of claims in the audit process. They also have hundreds of criminal cases going on. They are definitely auditing the ERC and if a lot of these 600,000 are not withdrawn, a lot of them are going to go through audit as well. Walker: As our listeners are trying to absorb this notice and thinking about [it] with their clients, about this announcement, let's talk through a few good talking points for them. Esposito: You've wanted to throughout this process, have been in contact with your clients about the ERC. Whether it's because they qualified for the credit or they've been contacted by a third party provider, trying to influence them to apply for the credit. As you're hearing about this announcement, you want to remind your clients of your past discussions and assure them that you're available for them, you can assist them. Whether that assistance is with support during an audit of an already processed claim, or help with the decision to withdraw their claim or to participate in a settlement agreement once those details emerge. If they have claims that were filed erroneously, and if they filed an ERC claim that hasn't been paid out and they believe it's legitimate, you just want to let them know that, "Hey, you're processing times could be a lot slower and it may take even more time for them to get the money." Walker: Just definitely another good opportunity to remind them that you're here to help advise them every step of the way. You are here and available. Were there any other resources that the IRS provided along with this announcement? Esposito: Yeah. They sent out a decision tree, which gives businesses a very broad overview of when a business qualifies. Then they also have red flags associated with third party providers. If you want to go through this decision tree to figure out, "Do I really qualify or not?" —that's what that resource is there for. Walker: I just wanted to highlight, we've talked about these on some other episodes, and we talked about them on Town Hall. We've talked about our resources the AICPA have been putting together throughout these years of ERC. We've actually opened up…it's called employee retention credit fact or fiction, which is another good companion piece to the IRS [resource]. I don't know if they call it a decision tree, but it is like a decision tree, where it's walking through the checklist of how you qualify. But I think the [ERC] fact or fiction is another nice resource that you can help a client go, "Oh, wait a minute. This is what they told me about how I qualify and there's this resource that tells me that I need to think again." We will definitely put links to those resources in the show notes. We have other podcasts on this topic and we'll put those in there. Take a look if that's something you're trying to find more about. We wanted to have a quick episode today, but I'd love for you if you wanted to share anything that's on your mind, Kris, as we wrap up episode. Esposito: Well, for years the AICPA has been warning CPAs and taxpayers, as well as the IRS and Treasury of these dishonest [ERC] credit mills, attempting to take advantage of the ERC and businesses. Because we wanted to put a stop to this or put a pause on this. We appreciate that the IRS is sending this strong message with this announcement, to these unethical credit promoters. The announcement by the IRS today, it's made clear that meaningful relief is also going to be made available to small businesses that have been acting in good faith. I think those are important messages from the IRS. I think they did a good job with their latest announcements. Walker: Thank you so much, Kris, for popping on here with me to record for this breaking news episode. We appreciate your expertise. This is definitely not the last you will hear of us on this issue. As we know more, we will definitely share more. Thank you for listening. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed specially for CPA tax practitioners like you in mind. This is a podcast from AICPA & CIMA, together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcast, and we encourage you to follow us, so you don't miss an episode. You can also find us at the aicpa-cima.com/tax and check out our other Odyssey episodes and get access to all the resources mentioned, during this episode. Thank you for listening. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

In this episode, Rudy Rudolph, Executive AICPA Risk Advisor — AON, and April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, discuss how data breaches can cause acute and lasting issues to victims. Small businesses are often easy targets for cyber criminals because they typically have less security in place than larger companies. A customized cybersecurity insurance policy can help mitigate risks and provide coverage in an evolving market to protect your organization. What you’ll learn in this episode Questions companies need to ask about cyber security insurance (0:59) The most common types of cyber attacks (3:56) Usual misconceptions about cybersecurity (6:14) Types of costs that cyber insurance covers (8:37)  Items not generally covered by cybersecurity insurance (11:12) Insurance consequences of not following your own cybersecurity policies (13:27) Rudy’s final thoughts (15:35) A page from Rudy’s travel journal (17:23) AICPA resources Best practices for data security and cybersecurity incident mitigation — Learn about general, preventative and reactive data security tips to implement to keep data protected from identity theft. Cyber insurance solutions | AON — AON’s brokerage team understands the risks and how to arrange coverage in an evolving market. It’s not one-size-fits-all, so AON teams with you to create a custom cyber insurance policy fit for your organization.   Cybersecurity Lab — Building a nimble cybersecurity response plan | Tax Section Odyssey — In this podcast, Ashley Grover, Cybersecurity Threat Intelligence Analyst — Sylint, discusses how the cyber threat landscape continues to change rapidly. Keeping up with the latest cybersecurity trends is vital to not fall victim to attacks and data theft. Gramm-Leach-Bliley Act (GLBA) Written Information Security Plan Template — The GLBA Act requires financial institutions to have a written information security plan. Use this template to document your firm’s policies. Identity Theft Checklist | Tax Identity Theft Toolkit — Provide this checklist to clients to help them appropriately and efficiently address identity theft issues and access additional resources. Transcript April Walker: On today's podcast, listen to hear more about cybersecurity insurance for CPA firms. Hi everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all the things tax facing the profession. I am April Walker, a lead manager from the Tax Section and I'm here today with Rudy Rudolph. Rudy is an executive risk adviser with AON and his role is helping to educate CPA firms on insurance coverage available through AON's AICPA program. Since that's his role, that's what we're going to do today. Specifically, we're going to delve into cyber insurance. What you need to know if you or your firm don't have this type of coverage or if you have it and you really want to understand what kind of coverage you have or know what questions to ask to be able to get more information about that. Rudy, let's start off with a company or a CPA firm that doesn't have this type of insurance. What questions will they have to answer during the application process for cyber insurance? Rudy Rudolph: One of the things I've learned is one of the great parts of the cyber application process is as much as it's filling out an application, it's also almost like a little checklist of helping the firm think of things that they want to implement or should be implementing or even just to have in mind just in general with how they deal with their own internal networks and systems. That's a great thing to look at the cyber application as is. It's also a guide to help you consider what should be in place, almost like a little checklist. But a lot of the things that they can expect to be answering is mostly encryption and how things are protected within their network and system. I think most people sometimes tend to overthink the encryption word and think it’s some sort of involved process when really it's just, can someone off the street walking into your office and access information without providing any type of login credentials and password, especially with thumb drives and emails and even external hard drives. But having those protected with passwords and encryptions, and it's easy to do, that they can expect to see on a cyber application a lot of things making sure that there's backups done weekly or however many and then also if they're retaining any type of payment card information or PCI or personally identifiable information, or PII, as well as the types of transactions, estimate number of transactions in any given year are some of the big things to consider, have in mind, and that they'll see and/or be answering on those applications. April Walker: I like the way you say it's a checklist of things that you should already be thinking about. You have probably heard me talk on this podcast before and we'll probably talk about it again about security plans and what are the requirements are for CPA firms, and it would seem like that those would go hand in hand. There are requirements to have a written information security plan. Hopefully you know that, if you don't, that's a takeaway from listing today. But as you're going through that plan, I would think that would be important information you're going to have as you're going through that application. This is just more of a curiosity question, but I know that until you're hurt, you think it can't happen to you. But then what you do, it's a very traumatic event. Can you talk to us a little bit about what type of cyber attacks are the most common, specifically for CPA firms as that's our topic for today. Rudy Rudolph: Absolutely. Especially since the COVID pandemic, it seemed like computer or cyber criminals who had nothing better to do, but to sit around and think of different ways to get easy money or an access. The biggest thing since the pandemic that's been on the rise has been ransomware attacks, which are in part more broadly categorized and they fall under the malware umbrella, I guess if you would, for cyber attacks. Basically, just hacking into or getting into accounting firms, networks and data and basically holding that information ransom until they pay a specified amount. When I think a lot of accounting firms that are under the mindset that they're too small to be attacked or come under a cyber attack when really cybercriminals target smaller firms because they believe that they're under that mindset that [they] are too small to and maybe don't have the resources and the security measures in place to keep them out. It's actually reported that it's 30% of all cyber attacks are focused on attacking small businesses because of that lack of cybersecurity measures. Malware and more specifically ransomware have been the number one cyberattacks especially since the COVID pandemic. April Walker: I feel like I've heard some horror stories of those happening to firms and it always seems to happen March the 3rd or something like that, sometime that’s not very convenient for when they're very busy. It's definitely something to be concerned about. Let's talk about misconceptions. What do you hear that people do not have right about cybersecurity, either people who have coverage or people who don't think they need coverage? Rudy Rudolph: The two biggest things I always hear when talking to firms is either one, are not big enough, I'm just a smaller shop that wouldn't have to worry about this now and come after me. That's one of the biggest misconceptions and really they're probably one of the bigger targets, actually, because of the potential lower security measures they have in place. They have so much data and records or their clients that they're preparing tax returns for and someone could get that information and that's easy identity theft, right there. You can get X amount of people, however many clients you have, you can get all of their names, date of birth, social security numbers, addresses. Right then and there, that's a huge risk and misconception that some of the smallest firms have. The second is a lot of firms always come to me, we don't have anything, we don't house any data or have any storage software on-premises. Everything is done third-party by Cloud. They handle that, so I don't really need to worry about it, which is not the case. They may be hosting your information and everything, but if that company gets hacked, now what do you do? If you can't get into anything and they're down and running, what happens then? Even if you are having a third party post your information, you should always have some sort of business continuity and disaster recovery plan in place for that type of scenario. Keep coming back to COVID. No one saw that coming. Now, we have the hindsight of, if something like this were to happen, now what do we do? I think of it like that, having a plan in place if the unthinkable were to happen, what are you going to do? You can't just sit there like a sitting duck and wait for something. You should have or at least I think you would want to have some sort of plan in place for contingency. April Walker: Makes a lot of sense. To find out a little bit more about cyber insurance and how it works, I know there's no way to describe every policy. Every policy is different as you're working with a firm, but let's talk generally about what types of costs that cyber insurance does cover and then almost more importantly, I think for people to hear is what costs are not covered. Rudy Rudolph: The first and foremost, what the cyber policies and cyber insurance covers is identifying any potentially affected individuals that may be affected or impacted by the breach of your network or system, and also the notification to those affected and credit monitoring for them for the next year. Those are all required by every state. Each state has different regulations, but those are required by all states. If you don't have an insurance policy in place, you're going to have to pay those costs out-of-pocket regardless because it's a state mandate and requirement to provide for it in the event of a breach. I think that's the biggest thing that the policies cover for most firms. The second biggest is the forensic analysis and identifying that breach, how it occurred and identifying that and making sure that that doesn't happen again. It also provides coverage for data restoration, getting your network backup and running to the condition it was in prior to any type of breach or a hack. Then depending on the policy, you can opt in for this, sometimes it's generally in a policy right off the bat, but business income or business interruption, so loss of revenue. I think about 200-300 days on average to identify and contain a cyber breach. Hopefully, they don't get there, but in that time period without your network, you're not really able to operate as you normally would, as if you were able to access all those files, your internet, your emails, getting stuff out to clients and everything like that. That's costing you. The policies tend to cover the cost of that. I think most of them have some calculation to determine that number until you're back up and running. April Walker: Got you. Then can you think of anything that is specifically not covered that you can think of? Rudy Rudolph: The biggest thing that we've actually been dealing with for the past few years has been social engineering. More importantly, when someone, we always refer to them as bad actors, using email address that is made to look like either a bank or one of the accounting firms email, but it's really not. The easiest way to do this is sometimes they'll use an uppercase I to replace an L just as an example in an email address. Then if they're posing as a bank, they'll email the firm. If they're posing as the firm, they'll email client saying, “Hey, you didn't send this amount of money or payment for the services”, whatever it may be, and asks you to send payment to a specified account. A lot of the times these aren't covered by cyber policies unless you have the specific endorsement coverage that covers four types of social engineering, it not being a breach, there's no breach that took place and the bad actor was using a legitimate email address. Now, while it wasn't the firm's, it was still a legitimate email address because they changed a letter or something in there to look like the firm or the bank's email address. There was again, no breach, no wrongdoing, so some cyber policies may not be able to provide coverage in that type of scenario. One of the big things that has come out of this is specific endorsements to provide coverage for social engineering or having firms also consider looking into separate crime coverage policies to cover any of those gray areas where cyber policy may or may not provide coverage for. April Walker: What about this scenario? I'm a firm, I have a security policy, I mostly abide by it, but I don't follow it to the letter. Is that a scenario where you might have trouble having your insurance claim paid? Rudy Rudolph: It's definitely possible. I highly recommend when you're going through either the renewal process or if you're getting a policy, a quote for a policy for the first time, definitely talking with your agent, your underwriter carrier, whoever you're dealing with, and making sure that you understand the policy requirements in terms of what are some of the standard requirements that you require your insureds to have in place. Usually they have either guides or expected basic security measures that they can send over that they expect their firms they have in place and implement it to ensure that they can provide coverage. Sometimes if you don't meet or don't have any of those standards in place, they could potentially deny coverage saying, hey, we sent you these standards so that you needed to have in place to be insured by us, because of this, you don't have these in place. This claim can't be covered because there was a certain level of expectation where we insured you that you would have in place and by not abiding by that, you're essentially voiding the coverage. Again, it depends. Each coverage or each policy is different. I would definitely recommend talking that through with your agent, your carrier, your underwriter to make sure that you're one, aware of any type of certain standards that you're required to have in place or should have in place, and making sure that you're meeting those requirements on a regular basis and reviewing that with them to make sure you're in compliance. April Walker: Perfect. Rudy, can you think of anything we haven't covered that you would like to make sure our listeners are aware of as they are considering and evaluating cyber insurance? Rudy Rudolph: This day and age, again, I feel like I'm being a dead horse and they keep coming back to the post-COVID reference, but everything has gone remote. Everyone's being able to work remote now, businesses that we didn't think would be be able to operate remotely were forced to change the way the entire world views working and how we operate nowadays and everything to an extent is relying on computers technology, being able to access information through a computer. I think you'd be naive to, one, not consider having this coverage in places of business, and two, not going forward and having at least some cyber coverage in place. The amount of cyber attacks have gone up exponentially since the pandemic, because everything has been forced to move to some hybrid or a digital format. I think this is one of those policies that is almost standard requirement for businesses moving forward these days, and it's definitely one thing to keep in the back of your mind is everything is still continuing to transition more and more to the cyber world as we operate, communicate everything like that. I think it's naive to think that this coverage is unnecessary. April Walker: Those are great thoughts and great closing. But as we close on this podcasts, I like to think about us taking a journey together towards a better profession. As we're learning more, we can do better. But in doing that, I like to get a glimpse of my guest other journeys outside of the tax world. Really I'd love for you to share a page from your travel journal, maybe a bucket lists, trip, you have, what you got for me? Rudy Rudolph: I'm a big golf fan and every year with the Masters Tournament and the Open Championship, there's always a ticket lottery that you can enter to potentially get an opportunity to get tickets to one of them. They don't just sell them like a normal sporting event, they're so exclusive. Actually just got an email the other day that I won the ticket lotteries for the Open Championship in Scotland next July. April Walker: Wow, that's cool. Rudy Rudolph: Pretty excited, just to finalize the ticket purchase. So I'll be headed now to Scotland next year for the Open Championship, and it's to be about there. April Walker: I love it. The US Open has been here or near here, North Carolina. It's been in Pinehurst a couple of times and I was able to get tickets somehow, not through the lottery, but Scotland sounds like an amazing place to watch golf and just to visit. I'm looking forward to hearing more about that. Thank you so much Rudy for giving people some food for thought on this really important topic. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA, together as the Association of International Certified Professional Accountants. You can find this wherever you happen to listen to your podcasts and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and feel free to share with a like-minded friends. You can also find us at aicpa-cima.com/tax, and find our other episodes and also get access to the resources mentioned during the episode. Thank you so much for listening. This content is designed to provide institute of information, this respect to the subject matter covered and does not represent an official opinion or position of the AICPA, the Association or CIMA. It is provided with the understanding that they are not engaged in offering legal accounting or other professional services. If such advice or expert assistance is required, the services of a competent professional person should be sought. The AICPA, the Association and CIMA make no representations, warranties, or guarantees as to and assume no responsibility for the content or application of the material contained herein, and especially disclaim all liability for any damages arising out of the use of reference to or reliance on such material. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.  

In this episode, Mike Whitmore, CPA, Shareholder — HMA CPA, a member of the AICPA Tax Practice Management Committee, chats with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, about a checklist of items to consider when in the market for acquiring a CPA firm. He highlights red flags to look out for and green lights that signal a firm is a “go” for acquisition, and what due diligence is needed to ensure the perfect fit. What you’ll learn in this episode The most crucial due diligence aspect when shopping for a CPA firm (2:08) Ideal time commitment you should dedicate to the due diligence stage (7:52) Red flags to watch out for (9:43) Green lights to follow (13:00) Lessons learned and a real-life example (16:07) A page from Mike’s travel journal (18:54) AICPA resources Practice Management & Professional Standards — The AICPA Tax Section provides the guidance and tools you need to manage a successful tax practice and maintain the highest level of ethical standards in tax. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

In this episode two members of the AICPA Virtual Currency and Digital Assets Tax Task Force (VCDATTF), Nik Fahrer, CPA, Senior Manager, National Tax Professional Standards Group — FORVIS, and Robert Tobey, CPA, Partner — REID CPAs, LLP, share their expertise with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, on how to vet potential clients with digital asset activities, including questions to ask, as well as how to gain more expertise in this evolving field. What you’ll learn in this episode Expertise tax practitioners need to be proficient in the digital asset field (0:55) Best places and ways to gain digital asset tax expertise (3:00) Examples of processes and procedures to set in place before accepting a client with digital asset activities (5:59) Record keeping responsibilities (14:05) Red flags (15:04) Highlights from Rev. Rul. 2023-14 (16:41) Current projects of the VCDATTF (18:36) Final thoughts (20:48) Related resources Frequently asked questions on virtual currency transactions — IRS webpage explaining virtual currency questions and answers. AICPA resources Digital assets and virtual currency tax guidance and resources — Sharpen your tax knowledge on digital assets and understand the tax complexities and strategies involved with virtual currency and cryptocurrency. This hub is your go-to library for AICPA guidance and resources as well as current legislative and IRS initiatives and projects the VCDATTF is monitoring. Crypto Loss Tax Reporting: Fact or Fiction — With the prevalence of recent virtual currency exchange bankruptcies and digital asset volatility, taxpayers may have misconceptions on reporting tax losses. Rev. Rul. 2023-14 — The ruling provides that cash-method taxpayers who stake cryptocurrency native to a proof-of-stake blockchain and receive additional units of cryptocurrency when validation occurs (i.e., validation rewards) must include the fair market value (FMV) of proof-of-stake validation rewards in their gross income for the tax year in which they gain dominion and control over the validation rewards. AICPA Comments on the IRS Draft 2023 Forms 1040, 1065, 1120, and 1120-S Digital Asset Question — The AICPA submitted comments on the digital asset question that is first appearing on the draft 2023 Forms 1065, U.S. Return of Partnership Income (version dated June 23, 2023); 1120, U.S. Corporation Income Tax Return (version dated June 2, 2023); and 1120-S, U.S. Income Tax Return for an S Corporation (version dated June 22, 2023). The AICPA also commented on the draft 2023 Form 1040, U.S. Individual Income Tax Return (version dated June 22, 2023), digital asset question. AICPA Comments on Non-Fungible Tokens – Notice 2023-27 — The AICPA submitted comments on Notice 2023-27 on the treatment of certain non-fungible tokens (NFTs) as collectibles. The AICPA is requesting that Treasury and the IRS provide further guidance on the issues suggested in our comments. Transcript April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a Lead Manager from the Tax Section, and I'm here today with Robert Tobey and Nik Fahrer to delve into how to interact with clients and potential clients that may have digital asset activity. Nik and Robert are on the AICPA's Virtual Currency and Digital Assets Tax Taskforce so I thought they would be perfect to share some thoughts with us today. Digital assets, virtual currency, there's so many different terms of art here. Cryptocurrency. It is such a unique and fast-moving field. Kick us off with what kind of expertise is needed to be able to be proficient in this area. Proficient is maybe a hard word, but at least to be able to practice in this area. Robert Tobey: First of all, you have to have a general understanding of the different types of digital assets that are out there. Right now, in particular, practitioners are probably dealing mostly with cryptocurrency, miners, traders, stakers, and non-fungible tokens which indicate a specific ownership interest (it's like a derivative of some type of underlying asset). You need to have an understanding of what each type of these assets are. Since the tax code treats them as property from each one of these activities. If you are a miner, that's generally self-employment income. If you're an investor, that is just buying and selling, that's long or short-term capital gains. If it's NFTs, that's treated generally as a collectible and that's taxed at 28% if it has a gain. That is ordinary income also, but the timing of recognizing that is still up for debate. Really unless you have an understanding, my feeling is if a client comes to you or if you have these types of assets, you should seek out council, an accountant, a lawyer that understands these types of assets. If you're a practitioner and a client comes to you and you're unsure, you should seek out help from the digital asset task force where we can answer some of your questions. But this is one of those areas because the rules are so different and the different types of assets have different attributes to them. If you're unsure, don't practice in this area unless you really know what you're doing. Walker: We're going to talk a little bit more about some of those questions a little bit later, but I like to think about it. It's a whole new vocabulary. It's a whole new vocabulary for understanding — what even is staking? You have to understand that stuff so that's a great way to kick us off. Nik, as you're trying to think about learning this, where have you found to be the best place to gain expertise in this area? Nik Fahrer: First of all, thank you April for having me on here today. Walker: Yes. Thank you for joining me. Fahrer: The first piece of advice that I would recommend is just dabble in this on your own. Find some insignificant amount of money, and just go out there and play around with it. I think the best way that you can learn something and the mechanics of how these things actually work is to sign up for an account on a centralized exchange, just to name a few in the US would be Coinbase, Kraken or Gemini. Put an insignificant amount of money in there. Buy, sell, but then take it even further. Don't just buy and sell on a decentralized exchange, send it to a non-custodial wallet and connect it to a decentralized application, like a decentralized exchange and play around with it on there. Stake some of your crypto to see how that works and just generally figure out the mechanics. I think that's generally the best way to understand what some of these words mean. It really feels like there's a entirely new vocabulary when you get into the space. When a client comes to you and they're like, “Hey, I just staked some Ethereum and earned X amount of dollars through staking.” You're probably wondering what the heck is staking? Doing it on your own with an insignificant amount of money is a really easy way to learn how this stuff works. But taking it a step further, if you want to learn how these applications within this new technology actually apply within the Internal Revenue Code, the AICPA has a really good webpage. IRS has an FAQ webpage. They also have a web page dedicated specifically to digital assets where you can go out and see all of their guidance that they've previously issued, both binding and unbinding guidance that they've issued out there. That's a really good resource as well. I would start there with those two things and then just be a critical thinker. Try to understand as you're working with your clients in this space, where are the risks and then also, what's the cost versus benefit analysis? If a client comes to you and says, “Hey, I did all these hundreds of thousands of transactions in crypto,” and they tried to turn over an Excel document to you to go through and calculate all of their basis and proceeds. That's going to be a huge time suck. Is that really worth the cost versus what may actually be captured on the client's tax return could end up being an overall net $1,000 gain? Use some common sense as well and just try to understand what are the risks, but also what's the cost versus benefit analysis here? Walker: I like that and thank you for bringing up the AICPA's page. We'll put a link to that in our show notes and as well as the IRS page. Robert, you are a partner at Reed Accountants and Advisers. Talk to us a little bit about is there any specific processes or procedures in place that you guys have before you either accept a client that has digital asset activities or how you're dealing with a client that might start dabbling in it? Also while you're at it, just talk to us a about advice you might have for those with smaller practices. Tobey: It's interesting if someone comes to us and is just a trader. Like they have a Merrill Lynch account for cryptocurrency. There's not a lot of risk in that type of account and it's easier for us to accept and understand because they're trading — it's like they’re trading stock. If they hold it, they can be a trader in the securities which allows them to deduct their expenses differently then if they're an investor. If they are an investor, they may be holding it for long-term gains, [but the trader is] going to have short-term capital gains and losses. That's easier to understand. If somebody comes to me and says, I'm a miner, and I'm working with a client right now, that's a miner. I go fine. What do you mean by you are a miner? What do you do? Where do you do it? What currencies are you working with? Where is your mining rig located? Because that has some state income tax implications with respect to it. This guy lives in Connecticut and his mining rig is in a facility that hosts it in Texas. When you mine, it's like you're self-employed and you're earning income. What do you do with that income once you earn it? You recognize it as ordinary income, you deduct your Sec. 162 ordinary necessary business expenses against this. But now you have cryptocurrency, that once you hold it in your hands, it is an investing type of asset. What do you do with it once you have it? Are you staking with it? Are you trading it? Are you holding it for investment? Because of the complexities of the subject matter, I go through a lot of questions. I have a checklist of questions I go through to ask people who were more than merely investors (like they hold stocks) in cryptocurrency before we choose to accept them. You [have] to make sure that there's not any risk with respect to this. Are they doing things offshore? Are they doing them in a manner where there's some subterfuge about what they're owning because they want to potentially hide their assets offshore? There's also firm risk that we have to take into consideration. Then once I talk to them, I determined what a fee might be because this is generally complicated stuff [more than for a] regular tax return. Our firm is really trying to get away from just doing standalone 1040, so we're talking to a lot of businesses. I'm talking to a cryptocurrency venture fund to figure out what they're doing and how I might be able to help them. That brings another level of complexity. I lived in Charlottesville, Virginia for 25 years and there are a lot of small practitioners down there that serve the community. They're more likely to see someone who's a trader. They really need to go to either the AICPA website or the IRS's website and become familiar with the rules regarding cryptocurrency of recognizing gains and losses and what types of gains and losses are there. Also they need to understand the fact that sometimes regular security rules don't come into play here because investing in cryptocurrency is not subject to the wash sale [rules]. There are some unique aspects to it that they really need to understand. Again if I'll go back and say what I said before. If you're unsure of it, don't put your toe in the water. If you're going to work in this area, at least get up to your knee, so you understand what's going on and you have some technical background with respect to it. Walker: I think that's great advice. Also, it's more than just asking the very simple question that you have to ask to be able to check the box on the 1040. I like that. You need to think about and ask what those different levels of deeper engagement questions are. Nik, what about you? You're at FORVIS, so a bigger firm. [Do you have] additional steps, or additional recommendations you have about when you're dealing with clients with digital asset activities? Fahrer: Absolutely. I can speak to that. The best piece of advice that I would say is, let's start with the basics first. Let's not complicate things before we get too far down the road, but let's first ask those basic questions of, one, do you have the competency to serve this client, or does someone in your firm have the competency to serve this client? Two, what is the reputation of the client and is this a client that you want to be connected with and work with? Maybe one that is not so obvious is can they pay your bill? Robert alluded to this a little bit earlier, but these are complex issues. Maybe the fees are a little bit higher than normal. Is this something where you need to be concerned about the volatility in the market and the client may be underwater in their investments and not as liquid in their cash position. Let's ask those basic questions first and then we can start to move into the more digital asset specific questions that need to be asked in that client acceptance. This isn't fully inclusive, but some of those could be how clean are their records? That's probably the biggest one that you want to ask is where are you keeping track of all your records, especially if the client gets off of a centralized exchange. I alluded to this earlier whenever I was talking about how to get expertise, or some experience and doing it on your own. Don't just stick to a centralized exchange. Send your crypto to a non-custodial wallet, play around with on-chain transactions, because more than likely that's what your clients are going to be doing that need your help. Then now that you have this experience on your own, you can relate to them and know what to look for when they come to you, and know what to expect in the recordkeeping as well. [For] on-chain transactions, there's a record of all of them on the blockchain, but there's no standard 1099 reporting, at least as of yet. We're waiting for some more guidance from the IRS here, or Treasury, one of the two, to understand what the standardized reporting is going to look like in the future. Because of that, there are software companies out there and I'll just name a few that can help automate the on-chain transaction reporting. [For example] CoinTracker, or Ledgible, or Cryptio, or a Bitwave are several of them out there. That's not all inclusive. There is more than just those. But they can basically connect their software to the clients wallets and exchanges and it will automate a vast majority of the transactions, and a lot of them will even raise red flags if they are unable to match cost basis, based on all of the wallets and exchanges that they've connected into that software. That's another thing that helps you as a practitioner know, hey, the client hasn't given me all their information. They say they've connected to all of their wallets, they say they connected all of their exchanges, but we're missing information for a lot of the cost basis of these transactions. It's a tool that you can have in your tool belt that'll really help you take this to the next level. Walker: I'm glad you brought up recordkeeping. That was actually one of my questions, but that's great. Thank you for the recommendations. I'll ask Robert if he has any also, because I feel like this could become a fire drill situation. When you got somebody coming in and they have all these crypto transactions, and then you have to go back and try to figure it out. Hopefully this is a proactive conversation. What do you recommend to your clients to help with recordkeeping, Robert? Tobey: I'm not recordkeeping for [them]. Walker: Absolutely. Tobey: Here's the deal. This isn't looking at a [Form] 1099-B where the column 15 [has all the information]. Most of the people that I deal with that are investing in, or dealing with crypto, have thousands of transactions. Unless they use Coinbase or some other [tracking software]. Fahrer: [Some options are] Ledgible, CoinTracker, Cryptio, Bitwave. Those are all just a few, just to name some. Tobey: Unless they use those and they bring us the records and we can tie them out, or they have a spreadsheet that they've done themselves. Our firm will not do that. We're running out of people just to do regular work and to sit there and to try to keep track of somebody's 10,000 crypto transactions in any one year that are not large dollar amounts in and of themselves. We just can't do that. It's a client responsibility and they wouldn't want to pay me to do it frankly. Walker: Absolutely. That's a red flag if you've got somebody coming in and they are just like, I got crypto transactions and I haven't done [anything with] it. That's a red flag. What are some other red flags that should send a signal up that this is may be not the best client for you? Fahrer: One question that we generally like to ask is, how did you acquire your digital assets? If they don't have a good answer to that question, that's generally a red flag. Tobey: And where are you holding it? Are you holding it in the U.S., outside of the U.S.? I'm really interested in the risk I'm going to have with somebody that's dealing with exchanges that are not U.S. exchanges and they should be reporting it, but they shouldn't necessarily be transacting on the exchange. I agree that if they can explain where they got it, if they can explain ins and outs of the transactions and they tell me that they're doing stuff offshore. The offshore ones have stopped me dead in the water. Fahrer: I think one thing that you can do as a practitioner to protect yourself and your firm is to get some sort of representation from your client that says, hey, I've provided you with all of my wallets, exchanges and transactions, and that there are no other ones out there that I haven't already provided to you. That protects you that the client is saying that they've given you everything. Tobey: We have that in general in our engagement letters. That we've told you everything, we've provided you everything you needed to prepare our tax return. Now that you say that, I actually might put an extra sentence in there about cryptocurrencies. Walker: We're all learning. We're going switch gears just a little bit and I want to talk about guidance the IRS recently released. Revenue Ruling 2023-14, talking about cryptocurrency, staking, and rewards. Robert, you want to give us a very high-level overview of that. I know that it can get really complicated, really fast. Just tell us what we need to know about that guidance. Tobey: This is a timing is everything revenue ruling. It was issued while a couple named the Jarretts are in the Sixth Circuit Court of Appeals, having their case heard with respect to a refund and that the IRS gave them with respect to how they reported their staking activities. The long and the short of it is the Jarretts take the position that staking activity is nothing more than a baker putting ingredients together, baking a cake and doesn't recognize the income from baking the cake until he sells the cake. That's the simple discussion of it. The IRS says okay if you stake, once you earn the income or have dominion and control over the rewards from staking, you need to recognize it as income. It's a very big deal. The IRS came out with this to put the stake in the sand with their position regarding the Jarretts. You got to follow it because it's a revenue ruling. If people have a feeling that they want to take the position that the Jarretts do, you're going to have to file a disclosure form with the IRS stating that you've taken a position contrary to the law. You can do that, but it'll give you the free pass to the IRS audit auditors. Walker: Yes, it will, okay, that's great. We'll link that in there so you can read it, and learn more and make sure that you're following that guidance. I mentioned that both of you were on the Virtual Currency Digital Asset Task Force. I want to say thank you for that. Thank you for your volunteer service. Nik, could you give us a quick rundown on just a few of your top priorities for the group or that the group is working on? Fahrer: Yeah, absolutely. Maybe I'll touch on a few that we just completed too. We actually just released a resource that is basically questions to ask your clients if they invest in crypto. We also recently released an FAQ on taxpayers taking losses. Specifically, taxpayers that may have had crypto tied up in a centralized exchange like FTX. Can they capture those losses in 2022 tax year? If not, how did they capture those in the future? We also, recently sent a letter on the new virtual currency question that's being added to our 1120-S, 1120-C corp, and then also, 1065 partnership returns. It's very similar to the 1040 question. We sent a letter to the IRS about that. Also sent a recent letter to the IRS about Notice 2023-27, which is guidance on NFTs as collectibles. As you can tell, we've been really busy, this year sending a lot of letters and working a lot of resources for you all. Upcoming, we're looking at responding to the Senate Finance Committee letter, that asks basically nine or ten different questions of, how does the ambiguity in the tax law apply to digital assets? Senators Lummis and Gillibrand also recently proposed a bill in the Senate [Lummis-Gillibrand Responsible Financial Innovation Act to create a comprehensive regulatory framework for crypto assets], and we're going to respond to that as well. Then this [ruling], 2023-[14], which talks about the timing of when to pick up staking income in gross income. Walker: Perfect. Yes, as you said, you've been very busy, and I'm sure will continue to be as there's seems like to me, as we learn more about virtual currency and digital assets, there's more to learn, is the way I feel about it. Thanks for helping get that guidance out there. Robert, as we're wrapping up just any final thoughts you want to share on this topic, or with our listeners about digital assets? Tobey: The loss issue with respect to FTX and some of the other digital exchanges is really problematic. It's a timing issue. A lot of times losses can only be taken as miscellaneous itemized deductions which are no longer allowed after the Tax Cuts and Jobs Act. It could be interesting to see what the IRS comes out or whether they come out with guidance that will allow some of these losses. There's a vibrant market today in the bankruptcy claims from FTX. How were those treated for tax purposes? Are there two different property rights there? Is there a bankruptcy claim property and there's a claim, but the underlying cryptocurrency? Even though you sell your bankruptcy claim, do you still own the underlying right to the cryptocurrency? I don't know. Neither does the IRS. We've asked for guidance from the IRS on this. Can you take a bad debt deduction with respect to cryptocurrency and I don't believe that's allowed because bad debts are only allowed with respect to cash. That's another area that we need some guidance from. When it [comes] from bankrupt exchanges and other things, it's unclear of when you can and whether you can claim any loss at all. The IRS is going to have to deal with this because, I read that there was another exchange that was near bankruptcy this week. This isn't going away. I will tell any practitioner that's listening to this. If you have someone who comes to you and says, here's the facts and circumstances of my losses with things. You need to stop and really look at several things. What was the underlying investment? What was the underlying cryptocurrency? When did the event occur? Claiming it currently in 2022, I think in a lot of cases would be problematic. Walker: That's super helpful. Thanks for bringing that really important topic. What about you, Nik, what [are] some final thoughts you have as we're wrapping up. Fahrer: One thing that I'll say is that I think this technology is really polarizing. We seem to have people on both sides of the aisle. We have people that just really love this new technology. We have people that, just haven't really bought into it and they don't see the benefit to it. The question I would pose though is, given the IRS is issuing a lot of new guidance on this new technology, given that it is a hot topic in DC, why would they regulate it if it's something that's going to go away? My personal opinion is, they probably wouldn't. I think it's going to be here to stay. It's probably going to be around for awhile and to just completely brush it off and ignore it completely is maybe a mistake as this continues to grow in adoption. Tobey: I'll tell you that they'll be some upheaval in it this year. The recent administrative law judgement decision that cryptocurrency that was bought by individuals on an exchange, is not a security where crypto assets bought by institutional investors are securities. That it'll be interesting and that's going to go, if it was by administrative law judge, I can see that going to the regular court system now because, I don't see how you can say it's a security for one type of investor and not for another. There's another court case, that the Supreme Court is going to hear next term. Similarly, about rulemaking by the SEC in general, that will have an effect on this. Because one thing, when you're dealing with crypto and dealing with all these other assets — for the IRS, its property. For the SEC, it's a security. For the CFTC, it's a commodity and in some countries, it's a currency. We're dealing with US tax law. We know what property is, but you've got to take into consideration,what it is in other jurisdictions and what it is to other rule-making bodies within the United States. Walker: Thank you so much, Robert and Nik. This is definitely not be the last time we talk on this podcast about virtual currency. But I think this gave our listeners, a lot of good topics to dig into and think about as you're dealing with your clients. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find this wherever you listen to your podcast and please follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with other like-minded friends. You can also find this in aicpa-cima.com/tax to check out our other Odyssey episodes and also to get access to all the resources that were mentioned during this episode. Thank you so much for listening. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

In this episode, Tim O'Neill, CPA, Senior Tax Manager — Wipfli LLP, joins April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, live from ENGAGE 2023 to discuss the current environment for recruitment and retention of employees in tax and how to build deeper connections with staff to help them feel more invested in their organizations. What you’ll learn in this episode Strategies for employee retention and engagement (1:01) Differences between a “manager” and a “leader” (2:48) What it means to prioritize outcomes vs. outputs (5:04) The notion of no more timesheets (7:20) Final thoughts (8:05) A page from Tim’s travel journal (9:31) Related resources Practice Management & Professional Standards — The AICPA Tax Section provides the guidance and tools you need to manage a successful tax practice and maintain the highest level of ethical standards in tax. Reimagining your tax practice — Tackle today’s top practice management issues with insights and tips from pioneers in the tax community. The Reimagining Your Tax Practice webcast series will tackle these issues and more in a Q&A roundtable series with tax pioneers from the profession. Transcript April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, Lead Manager from the Tax Section, and I'm here today with Tim O'Neill. He is a Senior Tax Manager with Wipli in St. Louis. Welcome, Tim. Tim O’Neill: Thank you. Thank you for having me. Walker: Yeah. We're here together today recording at the ENGAGE conference. O’Neill: That's all right live in person. Walker: Yeah and yesterday I attended Tim's session which was titled, “Recruit, Retain, Repeat.” Welcome Tim. I thought we could share some of your insights with our listeners from your session. O’Neill: I'd love to. Walker: I don't think it is a new concept for people listening today that recruitment and retention are a huge problem in tax and accounting profession, that sort of thing. I thought maybe from your perspective, you could share a few strategies that you have found that worked for you for employee retention and engagement. O’Neill: Yeah, absolutely. Like you mentioned, this is the million or $2 million question. Walker: Yeah, for sure. O’Neill: What can we do as leaders to try and increase our retention increase overall employee experience? Really there's no right or wrong answers — it's all very individualized. But what I found through my experience with AICPA committees, my experience within Wipfli, prior firms or organizations that I've worked with is being an effective leader and authentic is the best way to build these deeper connections with staff and employees that really makes them feel invested in the overall organization. I'm trying to think of some of the more important things that we've done, but it's just so individualized. It's difficult to an extent, but if you can get across the idea that we don’t need to put together these formal programs to help retention. It really doesn't come down to that. It's just about being transparent, authentic and empathetic is a big one that we've seen. With sessions here there is a lot of talk about being an empathetic leader. We've had tons of sessions on ideas about what can we do internally and externally to help retain employees. Obviously outside of maybe the psychology of the retention, recruiting and rewarding employees, maybe look at some of the action items, some low-cost solutions, mid cost solutions, high cost solutions, I'm happy to talk more about any of those. Walker: You mentioned some of these characteristics, but one thing you talked about yesterday that really resonated with me was talking about differences between a manager and a leader. I think we can all agree that there is a difference. O’Neill: There is a huge difference. Walker: Maybe talk about some of those differences and for those people who see themselves as a leader — How do they figure out like where they land on that spectrum? O’Neill: Yeah, and it's funny, you said — “some individuals see themselves as a leader” — we like to call those the heroes of their own stories. Is that a great leadership quality? Probably not. They might think that they're fantastic leaders, but they're not necessarily connected on that personal level with a lot of their employees or direct reports. Honestly, to me, the difference between a manager and a leader, it's mainly…we think about a manager is very work centric. They're more about how and when are we going to get the work done? They're very much more process focused than people focused. A leader on the other hand, they're more what and why? What are we doing? What can we do? Why are we doing this? Being transparent and showing the thought process behind all of it, and being able to communicate that to the individuals within their organization. That is, by far the largest difference between the two. As we have been talking about pipeline challenges, the leaders within organizations — and this is not just specific to accounting, but really every industry. We've had to evolve over the last, let's say, three years with COVID and everything that was fallout from that. We've had to evolve and say we need to be much more hands-on and personalized with our approach. Walker: You mentioned this, but I really liked when you talking about prioritizing outcome versus output. As I work with firms and members trying to help them with some of these issues and we've worked with a lot of small firms. You're from a bigger firm, but you may have experience with or some ideas and thinking about how that can work like shifting with limited resources. How or what does it mean? What does it mean to be prioritized outcome versus output? O’Neill: Sure. Even Wipfli, we're a top 20 CPA firm, but we do a very good job of operating as a collaborative group of smaller firms. We're in quite a few markets. But we do a very good job of still having that small firm feeling. The firm that I was with previously, we merged in with Wipfli. We're about 100 person firm in St. Louis. I have a little bit of experience at a, we'll call it a smaller firm and culturally we aligned really well. Both firms are obviously based out of the Midwest and so on a cultural level, we had the same identity. Again, it gets into the hands-on personalized leadership approach, outcome versus output. Billable hours — that's the driving force in public accounting. Let's get our billable hours up because this is where we make our money. But is that really where we make all of our money? Or do we have value in some of these hours that individuals are working? We like to call them impact hours. Is there value in these hours that maybe we can't charge the client for it, but we're definitely [either the staff or the client even to an extent] getting value from it. Think of CPE, performance coaching, mentoring, client relations. Those are all impact hours. What we've tried to do in both of my previous firm and Wipfli is we don't want to emphasize the billable hour as long as we're getting the outcome that we need and we're getting the client is first and foremost, served. At what point are we punishing efficiency? There are a lot of individuals that can get done in 20 hours while somebody else can get done in 40 hours. At what point are we punishing their efficiency and it's defeating to those individuals. Walker: You talked about and it's so true. How they're punished as they get more work, like they can do 20 hours. Thank you so much. Sir may I have some more? O’Neill: There was one brave lady in the audience, but that's exactly what I asked. I said what happens when you're good at your job and it was silent and she said, you get more work. Walker: It's true. Something else you've made me think about, have you gone to any sessions that we've have talked about the no time sheets thing? O’Neill: That's the rumbling. I've got a couple of people ask me, “Have you heard this idea of no more time sheets?” I said I haven't heard this idea. Walker: Yeah, I've known some people that have been able to do it, but it's fascinating. O’Neill: It's funny. We all know people that have been in public accounting and they've left, and I've got close friends that have moved into a new career paths within the CPA realm, but new career paths. I said, What do you enjoy the most? No time sheets. I don't have to keep track of every six minutes of my day. Walker: True, you never know, we're always evolving. O’Neill: Yeah, that's right. Walker: As we're wrapping up, do you have any other thoughts on whether there's a magic bullet to solve this problem? You've actually already answered that question. There's not a magic bullet, but do you have some closing thoughts for us as we're thinking about this important topic about recruiting and retaining good employees. O’Neill: Yeah, there really is no magic bullet. One of the slides that I had in my presentation talked about the employee value proposition. As an organization, we have to be competitive in some of the basic stuff. So think benefits, compensation, some of the well-being programs that we offer and flexibility. But really what it comes down to is there's no one-size-fits-all. There is no silver bullet because everybody is their own individual person and what I feel to be the most effective is taking this idea of being a human-centered leader and having the employee experience driven by the associate themselves. I want them to come to me and tell me what they want do. I need to be, again, genuine and saying, I'm here to help you. I want to help you. We've heard the old saying, people don't quit jobs, they quit people. Now they're not staying for jobs. They're staying for people who have evolved into that human centered leader. That's where we're going to build the strongest relationships and where we are going to see higher retention. Walker: Awesome. Tim, thanks for joining me. In closing, I'd like to do a little fun thing where we're taking a journey together towards a better profession. I like to get a glimpse of my guests other travel journeys. Tell us about a bucket list travel location you have on the books or something fun to share. O’Neill: Bucket lists and travel. I tell you June has been the traveling month for me. I was in Nashville for the Craft Brewers Conference, I have a lot of craft brewery clients. Walker: We will have to talk about that later. O’Neill: Then Vegas and then I'm shipping off with my family here in about three days to go to Key Biscane for a week or so. Then I'm in Dallas for another conference and so all over. But bucket list — I'm a big rugby fan. I'll preference this with saying huge Ireland rugby fan. That's all in the last name O'Neill. Walker: Got it. O’Neill: Definitely make it out to the Six Nations tournament over in Ireland for one of the home matches. That's a bucket list trip for me for sure. Walker: Very good. I'm actually headed to London on Sunday. Fun stuff. No rugby or anything. O’Neill: No, that's okay. From the desert to the rain. Walker: There you go. Thank you again. So again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

In this episode Tony Nitti, CPA, Partner — National Tax, EY, joins April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, live from ENGAGE 2023 to discuss S corporations and Rev. Rul. 2008-18, delving into S corporation reorganizations. What you’ll learn in this episode Overview and applicability (1:56) Hypothetical example (3:14) Review of Rev. Proc. 2022-19 and fixes to prevent invalid S elections (8:58) The extra step when an S Corp owns 100% of a QSub (15:33) Relevant articles from The Tax Adviser (24:40) A page from Tony’s travel journal (24:56) Related resources Rev. Rul. 2008-18 — Postulates two situations in which an S corporation becomes a qualified subchapter S subsidiary (QSub) of a newly formed corporation that will qualify as an F reorganization. The ruling also provides new guidance on the proper employer identification number (EIN) to be used by the entities in each situation. Private equity and F reorganizations involving S corporations — The Tax Adviser, Sept. 1, 2020 6 reasons an S corporation wouldn’t need a PLR | Tax Section Odyssey —  Rev. Proc. 2022-19 provides procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a PLR. April Walker: Listen today to learn more about S corps and Revenue Ruling 2008-18 F-Reorgs with Tony Nitti. Hi everyone and welcome to this collaboration between the JOA podcast, and the AICPA's Tax Section Odyssey podcast. I'm April Walker, a Lead Manager from the Tax Section. On the AICPA's Tax Section Odyssey podcast, we offer thought leadership on all things tax facing the profession. Today I'm here with Tony Nitti. Tony is a partner at EY National Tax. He is a frequent guest of the show. I'm even more excited to be recording this today because we are recording together in person at the ENGAGE conference. I asked Tony what he thought was important to talk about today. He brought up the topic that he is hearing a lot about, a lot of confusion about, a lot of misunderstandings about and that is an F reorg structure used in acquiring an S corporation in Revenue Ruling 2008-18. First of all, for those who might be listening, who went like me, help, I need an overview of what you're even, talking about Tony. Talk to us about how this might apply, when it might apply if you have clients who either might be the acquirer or the target. What are we talking about here? Tony Nitti: First things first, yes, it's good to be back together. It's become a bit of an annual tradition. Walker: It has. Nitti: Then, just before I came in here, I was surprised to learn that there's a trivia question where I was the first guest on an AICPA Town Hall. Is that right? I had no idea. Everything from 2020-2022 is a blur. What we're going to talk about today, when we call it either these F reorg or 2008-18 transactions, it is the most popular way in the current climate for someone to acquire an S corporation. We know that private equity is getting involved with acquiring everything and so oftentimes it is private equity that wants to acquire an S corporation. Obviously if they were to go out and acquire shares directly, the S election is going to terminate, and then you've got a C corp on your hands, there's whole bunch of other things going on. This has become the go-to transaction, and we'll talk through it step-by-step from both the buyer and seller perspective. But the reason I thought it was worth talking about today is just because something in the tax law has become very popular, does not mean that it's necessarily well understood. We've experienced that thing before, where the more you stop and actually think about this stuff, the more you go, why are we doing these steps that we're doing, or why is it a transaction that we use and sometimes we just follow what everyone else is doing and don't really think about what are we accomplishing, what are we not accomplishing and other things. I just thought it would be fun to come in, talk for about 30 minutes or maybe less about what this transaction does? What it does’'t do? When we want to consider it? When we do’'t then, that whole thing? Walker: Sounds great. Nitti: Let's start with the hypothetical. It’s going to be the best way to explain all this. Let’s keep it simple. We've got private equity, setup as a partnership, and they would like to acquire the business operated by a current S corp. Here at AICPA ENGAGE, anybody that's here on the tax side, they've got S corp clients. A lot of times we will be the ones representing the seller. It's important to understand what this transaction holds for the seller, but there's also going to be plenty of times where we represent a client that wants to buy an S corporation, so we got to think about those buyer considerations as well. Let's just say we've got this private equity partnership that wants to buy this S corporation, 99 times out of 100, and this is something I'll talk about tomorrow in my M&A class, a buyer is going to want to buy assets. They're going to want to buy assets because they're going to want to get a stepped up basis in those assets for depreciation and amortization purposes. But sometimes the buyer can't buy assets. Because maybe those assets are not transferable, maybe for a particular business reason they need to acquire the legal interests in an entity, so that the EIN stays alive. You know how M&A works — like something's going to force your hand. From a buyer's perspective here it's how can I accomplish both of these things? How can I acquire the legal interests in this S corp target, but yet get this stepped up basis and the underlying assets? For years, the way we tried to accomplish that is by having the buyer and the selling shareholders of S corporation jointly make an election under 338(h)(10) or more recently 336(e). That election was a magic bullet, but only for the buyer, and I'll explain that. Like for the buyer, you make that election and for legal purposes, you're treated as buying the stock because that's what you bought. But for tax purposes, this fiction is created where the target S corporation is deemed to have sold all of its assets to a newly formed corporation owned by the buyer, and that gives them the step-up in basis and assets that they want. It's win-win for the buyer. It's not win-win for the seller. The seller is giving something away because had they simply sold stock and not made a 338(h)(10) election, they get straight capital gains rates. But by making this election, they have to live with the deemed consequences of the S corp selling its assets, which means some of that gain may be converted to ordinary income if they have cash basis receivables or inventory or whatever it may be. This really is more of a fix from a buyer perspective than anything else. Now, there's something in it for the seller in the sense that the buyer is going to have to pay them for that incremental tax cost. But that's where we looked for a buyer to be able to get this best of both worlds — a step-up in basis, but keep the legal entity alive. It was always 338(h)(10), always 336(e). But there are limitations to those two types of transactions. For example, you have to acquire 80% of the stock of an S corp to make an 338(h)(10) or 336(e) and so if private equity only wants 50% of this business, that's off the table. Another thing is let's say you're not going to buy all of it, but you are going to buy more than 80%. It's not like the 10% interest that the shareholders of the target retain is going to be tax-free. The way a 338(h)(10) or 336(e) election works is if private equity comes in and buys 90%, the other 10% is still treated as if they sold their interests as well. They still have to deal with the consequences of the asset gains. You can't have any tax-free deferrals, there are limited types of entities that can be a purchaser in a 338(h)(10), and so private equity as a partnership cannot do it. It would have to set up a corporation. You get the idea. There's a bunch of potential limitations there. But the biggest limiting factor and really what's caused this change in this transaction type is the fact that there are a limited type of targets in a 338(h)(10). One is a subsidiary in a consolidated group. One is a subsidiary in an affiliated group that could file a consolidated but doesn't and the other is an S corporation. What you don't hear in those three types of eligible targets is a standalone C corporation. What that means is if someone is looking to buy, an S corporation and make a 338(h)(10) election or 336(e) election, they have to be sure that [the] S election is valid. Because if it's not valid, that's not an S corp you're buying, it's a C corp. If you buy the stock [of] a C corp, it's a standalone C Corp and the 338(h)(10)or 336(e)election isn't valid either. You just spent 30, 40, 50 million on something anticipating a step-up in basis in assets and if it turns out that S election was invalid and you just bought C corp stock, you don't have that step-up in basis. There's this disconnect I feel some times where 90% of the tax industry thinks that if somebody says [they’re] an S corp, they're an S corp but there's not going to be any problems there. Then the other 20% works enough in due diligence or it's just been around long enough to realize that there's some real truth to this saying that permeates what I do, chairing sub S for EY, and it said in jest, but like I said, there's some truth. You show me an S corp, I'll show you an invalid S corp. If you do enough due diligence, there's going to be things that arise that make you say, I don't think this is valid or I'm worried that it's not. The point is the second a buyer who's looking to spend significant cash on a business realizes that there could be a skeleton in the closet for that S election, you don't want to go forward with an (h)(10) or 336(e) because the risk is to you as the buyer. The risk is that you lose all of that step-up. Walker: Does that tie back to our previous time we were together and ways to cure an S election? Nitti: It does. You’re referencing Rev Proc 2022-19, which gives us an avenue in some respects to fix some of these problems that would cause an S election from being valid. But practically speaking, when the numbers are big enough and a buyer is looking to acquire company, the second they get an inkling that something is wrong with that S election, even if you tell them it can be cured, they say, I want to pivot to something else to make sure I get what I came after. What I came after is the step up. That's where this transaction came into vogue. Because how else if we're not going to do an (h)(10), if we're not going to do a 336(e), how else for example, can private equity go out and acquire some or all of the business of an S corp while one, keeping the legal entity alive and retaining the EIN. Two, getting a step-up in basis of the assets. Three, getting to continue to operate this business in flow through form. Because that wasn't available via an (h)(10) or something like that because, it would become a corporation because it'd be owned by another corporation. Four, being able to offer potential tax-free rollover to some of the sellers. Like where else can you get all those things and not having to acquire 80%? It really was a wasteland of options until this Rev Ruling 2008-18, came around and said, okay, there is a path forward here now to accomplish all of these things. Most importantly, is to still get our step-up as the buyer, even if this S election is invalid. It's not a complicated transaction at all. The reason I thought it was worth talking about today is that it's amazing- I've talked to some people who've done dozens of these but it's almost just because it's a formula they follow and they don't actually understand what each step does, or maybe more importantly doesn't accomplish. It would work like this. You would say to the seller, hey, we've got concerns about your S selection being valid, so I’m not buying your stock because I'm the one that gets stuck holding the bag if I just bought a C corporation and not an S corporation. I paid you for the step-up and I didn't get the step-up. I want you as the seller to undergo this pre-transaction restructuring. It's all on the seller side and it's not complicated at all. Step one, the sellers, and let's just say you and I are 50/50 shareholders at this S corp. I always like using you in my example. You and I are sellers of this S corporation. We form a brand new holding Corporation and we transfer our 50/50 interests in what I'll refer to now as the target S corporation into this new corporation. Then we immediately elect to treat that target as a qualified subchapter S subsidiary or a QSub. When an election is made to treat a subsidiary of an S corp as a QSub, it's treated as having liquidated into its parent S corporation, and it's just disregarded from any separate existence. Now, what you didn't hear there, which you may be curious about is, I said we formed a new corporation, transferred an S corp into it, made it QSub election for it. I didn't say that new corporation was formed as an S corporation. You can be like, how are you making a QSub election when the parent is not yet an S? But what this Rev Rule 2008-18 tells us, it builds off earlier principles from Rev Rule 64-250 and says that the combination of those steps, the formation of a new corporation, transfer of an S corp to that corporation, and then immediate QSub election for that former S corp, it all combines into what we call a tax-free reorganization under Sec. 368(a)(1)(f). What that means is it's a big fat tax zero. Nothing happens. Because nothing happened, that newco that we set up is just considered to be a continuation of the target. The reason we didn't have to make an S election for it is because the S election of the target carried over to this newco. If you are certain that the S election of the target is valid, and if you are, we're probably not doing this whole thing. But if you were certain, it's funny you'll find that there's no requirement to file a new S election for the parent. Instead, when you make the QSub election on the 8869, there's actually a box that was added that says this QSub election is being made in accordance with a Rev Ruling 2008-18 transaction, and that just notifies the IRS that the S election of this company now carries over to the new company. If we stop right there, like we haven't really accomplished anything. We’ve got a new company, a newco that's an S corp that owns a disregarded entity as a QSub. Now, if you're worried that the S election was bad and usually you are, you would probably make a protective new 2553 filing for the newco. But what this does, and I just want to point this out now, is eventually this newco S corp is going to be selling this business, selling this disregarded entity. What this doesn't do with this transaction and this is where a lot of confusion comes in, it doesn't do anything to cure the bad S election. If we think about it, if the company had been bad and sold its assets as a C Corp, there would have been corporate level tax. Going through these steps doesn't change that at all. Because if we form a new S and transfer the stock of what was a bad S to that new S and make it QSub election for it, effectively what we've just done is liquidate a C corp into an S. Without getting too into the weeds here, when you do that, the S corp just inherits what we call the built-in gains taint of that sub under Sec. 1374. When it turns around two or three days later, like it's going to in this transaction, sells those assets, 1374 is going to kick in anyway and make the seller pay corporate level tax. It's not doing anything to avoid a corporate level tax for these sellers and I think people should definitely understand that this doesn't fix a bad S election. You and I talked at great length about how you could fix a bad S election. This does not accomplish that. Because a bad S being contributed to a new S and made a QSub election for it simply means you liquidated a C into an S and you inherit all that built-in gains exposure. If we stop there for a moment, we're left with a structure where the S corp owns 100% of a QSub, which is a disregarded entity. But these transactions are almost always going to have an extra step. That extra step is you're then going to take that QSub and convert it under state law, typically, from a corporate entity to a single-member LLC. Once again, you're just going from disregarded entity to disregarded entity. It's meaningless. It doesn't cause any tax consequences at all. People have asked, why that? What's the point there? The point there is if you screwed up something in steps one and two, so that your QSub election is not respected, we have the same problem we would have had originally when the buyer comes in is you're going to see in the next step and purchases the interests in the disregarded entity. If we think we're buying the stock of a QSub and it's not really a QSub, we just bought the stock of a C corp again. The only way to really purge that corporate past is to do this extra step and after we've made the QSub election, convert that QSub under state law into a single member LLC. Because now, when those steps are all complete, we have an S corporation holdco owning a single member LLC. Just to keep things simple, if private equity wants to come in and buy 100% of that single member LLC, they get the best of both worlds. Because legally they're buying the entity, so the EIN stays alive. But from a tax perspective, when you buy the 100% interests of a single member LLC, you're treated as purchasing each underlying asset of that LLC. They're going to get that step-up in basis. By flipping it from a QSub to a single member LLC, all you're really accomplishing is fully guaranteeing that even if everything else goes to hell, the buyer is going to get their step-up, which is what they're paying me to do, if you represent the buyer. There's just been a lot of confusion about these steps and what they can accomplish and the order in which they have to be done. Order in this stuff matters. We have a letter ruling 200542013 that says, okay, if we contribute the stock of this S corp to the new S corp and then the next day convert it to an LLC, but then a month later, retroactively file the QSub election to be effective on the day of contribution, that QSub election is actually invalid because at the time you filed it, even though it was going to be effective earlier, at the time you filed it, it wasn't a corporate entity anymore. You'd already switched it over to an LLC. There's just these little nuances like that that are a pain in the butt. Then one of the things we at the AICPA asked the IRS to consider is maybe we don't need the intermediate step of making the QSub election. Like why can't we just contribute the S corp to the newco and then immediately convert that Sub into an LLC. The only reason right now we go through that intermediate step of making the QSub election is because that's what Rev Rule 2008-18 says will allow you to retain the EIN. There's enough there that worries us that we want to make sure we get the consequences the IRS says we get so we follow it to every step letter of the law. It just creates confusion. Sometimes it appears unnecessary. What will happen is the buyer will come in, and let's just say for starters, they buy 100% of a single member LLC interest. As we said, they'll get a step up. From the newco S corp perspective we set up, they're treated as selling each underlying asset of the single-member LLC. Just like with an 338(h)(10) they will be treated as if they sold the assets. There might be a mix of ordinary income, capital gain, and they should get compensated for that. As I mentioned to you before, if the S election truly were bad, then that corporate level tax may still be levied on the sale because you might have built-in gains issues. It's not really a magic potion for the seller, it's more for the buyer. Now the nice thing for the seller though, is let's say private equity only wants to buy 80%. If private equity buys 80% of the single member LLC interests, then we have a deemed partnership formation under [IRS Revenue Ruling] 99-5 where private equity is treated as buying 80% of the assets. They get their step-up, they're happy, and then private equity contributes their 80% up to a new partnership and the S corp contributes to the remaining 20% tax-free. There's an option here for seller to get tax-free rollover equity that doesn't exist in your typical 338(h)(10) or 336(e). There is something in it potentially for the seller. Particularly like I said, if you're going to retain some rollover equity, but the buyer still gets their step up and everybody's happy. There's still some unanswered questions. I think one of the most interesting unanswered questions is okay, wait a minute, you're telling me we're doing all this because we have concerns the target was a C corp for the last few years? We know we might pay C corp level tax on the sale of the assets if the IRS comes knocking and finds out the S election was invalid, but what about the three open years where it should have been a C and instead it was an S, who is on the hook for that? There's really no wonderful answer because remember, the buyer in this situation, private equity has acquired that legal entity. That legal entity changed from an S corp to a Q sub to a single member LLC, but all along, it kept its own EIN. If the tax liability for those previous open years attaches to that EIN, there's no guarantee the buyer is not potentially on the hook for that. That can make for some interesting negotiations, because if there's significant exposure for those open years, the buyer is going to want to build that into any type of agreement that they make in terms of an indemnity or hold back or something to make sure that they're not going to get called upon by the IRS to pay tax for the open years. But what makes the debate fascinating as we went through this F reorg and in an F reorg we said that this new holdco S corporation is truly treated as a continuation of the oldest corporation. From a practical perspective, if you're the IRS and you want to collect tax from prior open years, why would you necessarily go to the buyer when there's still this historical entity alive with its historical shareholders, and you can say — you're the ones who pocketed all the cash from those years so we're going to come looking for you? But that's something that I have that conversation maybe five times a week with people that are negotiating deals. Who's on the hook here for any corporate level taxes that weren't paid? No one's certain. I would plan as if the buyer is because you got the EIN, you've got the legal entity. That's it, that's all there really is to it. That's how it unfolds. But you can see why it's so advantageous because you can still get the step-up for the buyer even when the S selection is bad. Whereas if you try to do that being 338(h)(10) or 336(e), you're dead in the water and you just spent, who knows, it could be $200 or $300 million that you spent on a company and you paid for that step-up and then you don't get it. But there's confusion that sticks around with all of this. You can imagine the tax return filings get pretty confusing because with an S corp going through and F reorg — when I say an F reorg is treated as a tax nothing in the continuation, it truly is. Even though you might form your newco midway through the year, it's treated as stepping in the shoes of oldco, so you still file a full year return; one return, and that return is going to show the activity of the target for the beginning part of the year, and then it's going to have the activity for holdco for the last half of the year, which will include the sale of the target. Then if you're not selling 100% of the target, but only say 80%, then you're still going to get a K-1 from a new partnership now for the remaining 20%. People often get confused there as well, but it's just become an unbelievably powerful and popular method for selling an S corporation. For every one 338(h)(10) election, I see 49 of these. I'm just like why not talk about this? Walker: I'm glad you brought it up. Nitti: It's because like I said, if you dig deep enough, every S corp is going to cause you some concern. Everyone is going to make you go, hey, there's something here that makes me wonder if this is an S. It's usually not just one thing. You reference why can't we fix it with 2022-19? Sometimes you can fix one aspect — like the bad LLC operating agreement you and I talked about. But there could be other things out there. Half of my job April is explaining to people, I don't think this causes the S selection determinee, but I'm not the one spending $100 million to buy the company, you are, and so if you're worried about it, let's get out of this 338(h)(10) and let's pivot to this F reorg transaction that we just talked through. Walker: There's a couple of Tax Adviser articles that also go into some of this detail. If you maybe have to listen to this a couple of times to get some of the details. Nitti: I'm also going to be teaching that tomorrow. Walker: You can listen to the replay. We will wrap up. I like to take us on a journey together to the profession, but I'm going to ask you a very specific question. I want to hear about new adventures with your puppy, Ms. Maggie, and specifically whether she's going to New Jersey with you this summer. Nitti: Well, that's a big point of contention. Maggie, we adopted a new golden retriever pup about four or five weeks ago and my main responsibility is to remind her every morning and every night that she will never be what Macy was to me. That's my primary responsibilities. Tell her she'll never be the dog my previous dog was. But I'm kidding, she's growing on me quickly. The New Jersey thing, it's really tricky because traveling 30 hours with a pup and back is a lot. I'm also not going back to New Jersey for the whole summer because my son's playing travel baseball and basketball and so if I'm only going to be back there two, three weeks, do I want to spend six days in a car? I don't know, we're hoping she'd be small enough to fly, she's not small enough to fly. You can take her if you can come live in Aspen for the summer instead of the house. Walker: That sounds awesome. Thank you so much Tony. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA & CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts. Please follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax to check out our other Odyssey episodes, as well as get access to the resources mentioned during the episode. Thank you for listening. 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