The ERC Landscape with Hale Sheppard

This podcast episode features tax controversy expert Hale Sheppard discussing the latest developments and challenges surrounding Employee Retention Credit (ERC) claims. Sheppard provides insights into IRS audit processes, potential penalties for ERC promoters, and the complexities of defending ERC claims. The conversation covers recent IRS announcements, proposed legislation, and the long-term implications for taxpayers and tax professionals.

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• (00:00) - Welcome to Federal Tax Updates
• (01:30) - Discussing the Employee Retention Credit (ERC)
• (02:02) - Introducing Guest Expert Hale Shepard
• (03:06) - IRS Updates on ERC Claims Processing
• (06:09) - Challenges in Documentation and Audits
• (11:59) - Protest Letters and Legal Considerations
• (15:53) - Patterns and Trends in ERC Audits
• (21:13) - Impact of Delays and New Business Models
• (25:45) - Legal Authority and Future Implications
• (31:20) - The American Rescue Plan and Its Implications
• (32:17) - Legislation and ERC Claims Cutoff
• (36:23) - Promoter Penalty Investigations
• (45:29) - IRS Guidance and Retroactive Challenges
• (49:36) - Future of ERC and Beneficial Ownership
• (52:34) - Final Thoughts and Thanks for Listening

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Connect with Hale Sheppard
https://www.linkedin.com/in/halesheppard
https://www.chamberlainlaw.com/people-hale_sheppard.html

Connect with the Hosts on LinkedIn
https://www.linkedin.com/in/rogerharrispbs/
https://www.linkedin.com/in/annie-schwab-852418261/

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Creators & Guests

Host

Annie Schwab, CPA

Franchisee Operations Manager at Padgett Business Services

Host

Roger Harris, EA

President at Padgett Business Services

Guest

Hale Sheppard

Hale Sheppard is a partner in the Tax Controversy Section of Chamberlain Hrdlicka

What is Federal Tax Updates?

CPAs, Enrolled Agents, and Tax Preparers can keep up-to-date with the latest federal tax information while earning NASBA approved CPE credits and IRS approved CE credits by listening to the bi-weekly Federal Tax Updates podcast. The hosts Roger Harris and Annie Schwab have over 75 years of tax experience between them, which has been featured in various media outlets including Wall Street Journal, USA Today, The Morning Business Report, Bloomberg Business News, and Accounting Today.

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

Roger Harris: Hello everyone. This is another federal tax update podcast. I'm Roger Harris and I am joined again by Andy Schwab. Andy welcome.

Annie Schwab: Thank you Roger. I feel like we're getting the heat of the summer. I don't know about you.

Roger Harris: Oh, I'm definitely getting the heat of the summer. It's, uh. It feels like August already. And depending on when you're listening to this, it might actually be August. That's true. But, um, [00:00:30] we're going to go back to one of our old favorite topics with a little twist. We're going to talk about the employee retention credit. Um, because there has been a little bit of movement in it. And we are very, very fortunate to have a guest with us today. Who is I'll call him an expert. Uh, in employee retention credit, many of you may have heard him or read some of his writings before, but Annie, how about introducing our guest?

Annie Schwab: I'll be happy [00:01:00] to. Hale Shepherd is here. He is a partner in the tax controversy section at Chamberlain Law. He's actually in Atlanta, not far from the pageant home office in Athens, but he has years of experience where he's been defending clients at tax audits and appeals tax court litigation. And recently, he has been, well, recently, two years probably he's been inundated with his involvement with the IRC. So he is here today to give us some experiences from his end. And [00:01:30] it's a pleasure to have you. Welcome.

Hale Sheppard: Well thank you Annie. Roger, I appreciate you guys having me here today. And I'm excited to talk about the IRC.

Roger Harris: Well, we are really fortunate to have hail. You won't know this by listening, but he is joining us from Spain on vacation, so that is true.

Hale Sheppard: So, well, when you guys were talking about the heat, it certainly hot out here. It's where I am in particular. It is a literally it's a desert that feeds into the ocean. So it is it is sweltering here for sure. Right.

Roger Harris: So we can now state that the federal tax podcast has gone international. There you. [00:02:00]

Annie Schwab: Go.

Roger Harris: So thank you for that hail um many of you know, and we've probably, if you've listened to podcasts, may have heard us mention it on an earlier podcast. The IRS did come out with some new information about a week and a half, two weeks ago, from when we're recording this. That may not be true to when you're listening to it. And what they said was that they were going to open back up, uh, processing of claims received by, uh, I believe it was September 14th was the moratorium date. So that were filed before that date. [00:02:30] They they were going to start those. And we'll talk about the ones after that date when we get a chance. But they were going to open those up, but they were looking at them in really what I'd call three buckets. Um, these aren't exact numbers, but these are ballpark 15 to 20% of the claims that they were looking at. They've spent all the time since the moratorium to this announcement and going through and digitalizing the information, analyzing the information. And they came to the conclusion that somewhere between 15 [00:03:00] and 20% of the claims that were in their processing cycle were just fraudulent, and they were just going to be rejected. And we'll talk a little bit with Hale about what that means and what rights, if any, you have. At that point.

Hale Sheppard: I was I did find me interjecting consistently. You may recall that the Irish did this. You know, time seems to fly by, but it was probably a couple of months ago that big, a big announcement about the fact that they were disallowing 20,000 claims. Right? Right. As if they'd done a lot of scrutiny. And it turns out [00:03:30] it's just as you said, they actually looked at those types of claims and they had blatant, blatant, uh, impropriety on those. They were they were businesses that weren't in existence at the time. They weren't actually paying, paying people, etc.. So maybe I think I think what you're saying perhaps, is this falls into the same kind of category that they had announced before in the first 20,000, right?

Roger Harris: Yeah, these are pretty obvious. These are a one W2 business trying to claim $100,000 in employee credits. Or as you said, businesses that weren't even in existence on these dates. Then there's this is the good news. [00:04:00] Not that this is going to happen as fast as you would like it, but there's an equal number again, that 15 to 20% at the other end of the spectrum where they have determined these are eligible for the credit and those credits will be paid.

Annie Schwab: So when is the question the real question.

Roger Harris: Yeah. Will you you know, I don't know when they they never give they.

Annie Schwab: Never give a date.

Roger Harris: Right. So the biggest group and that's the group that that we're going to spend some time talking with Halo about because he's got some experience here are that that middle group 60 to 70% [00:04:30] where they haven't determined they're fraudulent, they haven't determined that they're completely eligible. They think they need more information. And that information could lead to no claim, partial claim or a full claim. Again, they don't know. And that's where the majority of those people are. So I think and any you can ask Hale and we can clarify, but I think he's got a lot of experience in even before this, in dealing with people being asked for additional documents, which, while it may not be part [00:05:00] of this technical new program, I'm sure it's a it's a good indicator and precursor of what this one's going to look like. So. Well, if you.

Annie Schwab: Recall, filing these claims really didn't involve much support, documentation, background on calculations. I mean, it was an intense calculation, but the filing of the form was actually quite simple. And so I feel as though we're getting into the stage when they're looking into it. There's a I think it's a 16 point letter that comes with all these different things that [00:05:30] they want to know. And so, you know, people are in the situation. Where do you have the documentation, even if you were asked for it? And if you don't, could you even get it? If you went to a mill, the mill is probably gone. So I don't know. He'll tell us. What are you seeing?

Hale Sheppard: Well, absolutely. But, Annie, I think you're right that the entire thing is. And I make a comparison because we defend all types of cases. All right, let's make a comparison between a conservation easement where you have any familiarity with that. When you file that return with the IRS, it is voluminous, right. You've got the tax return [00:06:00] with the claim. You've got the you've got the, uh, an entire appraisal there. You have a form 8283. You have just gobs of information that you're providing to the IRS ahead of time that they can look at and make a decision. And yes, you are correct that the IRC was very, uh, scant amount of data. Um, as far as the scrutiny from the IRS thus far, you guys are absolutely right. We've seen it personally, again. And just to emphasize what you said, Andy, so everyone understands we're tax defense attorneys so we don't get involved on the front end whatsoever of the claims. [00:06:30] We don't, you know, do any opinion letters or calculations. I think it's purely on the defense side. So that's where we would see it. Right. But in that in that context or in that role, we've seen what three types of things. And I'll just hit with the first two. Uh, right away. As you probably recall, the IRS announced some time ago that it had trained like 300 revenue agents. Uh, they were going to focus. It seems like a lot on one hand, but when you look at the millions and millions of IRC claims that were filed, it's really.

Roger Harris: That's not a lot.

Hale Sheppard: Yeah. Anyway, they announced that there were several hundred [00:07:00] revenue agents claim for this. And we have seen audits conducted by, you know, the old traditional style, meaning you get the audit, you get the audit letter, there is a real human being with whom you're interacting, etc., etc.. So we've had, um, you know, I didn't get the statistics out for this presentation, but we've had, you know, I would have to say two, three, maybe four dozen of those cases with real revenue agents so far. Um, more recently and probably more abundantly, what we've had is what Annie mentioned was the correspondence audits. Right. The RCN rolls this out and says, hey, we [00:07:30] are going to do the traditional correspondence audit, and that's when you get the letter that says, right, hey, basically you've been selected for audit. Here are the quarters that we're asking about. And here are whether it be 16 things or you know what, the subsets, maybe 60 things, I don't know, but probably 3 or 4 pages usually on the idea of all the supporting documentation that you ever possibly think of. And they usually want it within 30 days. Of course, 30 days of the time the letter is dated, not 30 days from the time you actually receive that.

Annie Schwab: Or open the envelope. [00:08:00]

Hale Sheppard: Yeah. Which I mean easily a week later, even on the best of terms. And then and then as you all know, there is no human being listed there Or phone numbers. Just it's just a standard form. People hung themselves from the challenges you mentioned, which is going back and getting all the substantiation for themselves. It was a difficult time. Or if they don't have it, could they go back to the source? Right. The people that helped them make the claim and you pointed out exactly that, which is some stand behind them and have very good files and are ready to help others, and our experience are nowhere to be found. [00:08:30] So yes, that that is an interesting situation for taxpayers to be in.

Roger Harris: Hal, have you had any experience? Well, you had an experience. So let me rephrase my question. Um, given that this is new, this is not a historical program. It's new. And the training of the IRS agents, have you found them to be well trained when you interacted with them, or are they kind of struggling since it's new to them to, or how have you found your interaction with the agency?

Hale Sheppard: I mean, for those of you who know me, I don't like to be. Yes. I mean, on occasion I do. I do poke [00:09:00] at the IRS. That is my job as a tax attorney. Well, it's all.

Roger Harris: Of our job to some.

Hale Sheppard: Extent. Yeah. I mean, that's not the form that I will say they've got a very, very I mean, a difficult job. I mean, in all honesty, if you look at we're not talking on this particular program, I don't think. But you, I'm sure in the past have gone through that four pieces of major legislation, not to mention notices that were 50 pages long for those, and then all the other subsequent guidance from the IRS. So there's a lot of material for those agents to learn and to keep up with on the fly. So it's a difficult job. [00:09:30] With that said, my experience has been that they are they are learning as well, and a lot of it about, again, it's not being mean. Us as the tax defense attorney or the business as itself really has been more in the mode of trying to educate the IRS agent right about the relevant rules, how it applies to them, what the exceptions are, etc.. So it's been more of an educational process, and that's fine. One of the things I think has been a hindrance to us in really trying to get resolutions at the audit level, is [00:10:00] them having lacking the confidence in their discretion to settle right, to settle cases. And number two, as we go back to the numbers, if you say there's only 300 agents and again, that's probably on the high side, there's only several hundred agents, if you will, that are out there doing these audits. And they have a massive inventory of cases. I feel that what's always driving it is pressure to clear cases as quickly as they possibly can. So if they had given more time or opportunity to go back and forth or meet in person or business tours or whatever [00:10:30] it may be, I think a lot more would be resolved. But time just doesn't. The limited time doesn't allow it to kind of get those resolutions like we'd like at the audit level.

Roger Harris: Yeah. And we have to be fair. I mean, again, this is new and they're learning it for the for the first time. They it's not their they could have been with the service 20 years and never had to deal with something quite like this.

Hale Sheppard: Absolutely.

Roger Harris: And and that's not fair. I'm just saying it's not fair to be critical of them. They got to learn to.

Hale Sheppard: Yeah.

Annie Schwab: I was curious about protest letters. Have you written or seen clients who [00:11:00] who are literally been denied and now protesting the case?

Hale Sheppard: Absolutely. Yeah, we're doing that. And we do two things when this occurs. Right. So everyone probably knows again, I'm studying what to me is obvious. Make sure maybe not to all the listeners is that there's there's a couple of things that we do at that time. If they do get a disallowance and sometimes we get hired at that stage, I mean, it makes a lot of sense. Some people say, I don't want to spend the money to pay defense people until right, I need it. Right, right. And they think, uh, and they think and it's again, if we were talking about a normal type of 183 [00:11:30] hobby loss case or a 162 deduction, often you can get those resolved and there's no need to get us involved. And heck, I wouldn't call me either. So we don't get called until until that period of time. So we are in the process of filing the protest letters. But when we do that, there's there's a couple of things that I always emphasize to everybody that may not be natural to them. First off, right when you get the disallowance letter, that two year time period to file a suit with the district court, right? The refund suit, not that not that the protest [00:12:00] is two years from the time that you get disallowed. And that time period doesn't stop simply because you're going to the appeals office.

Hale Sheppard: All right. So what clients don't want to do is get what I call whipsawed in there. And so what we do is, is we make sure one we file the protest letter. And number two, we make sure to put a tickler on the calendar. I call it a tickler. Let's yeah, that's the proper term. But I put a reminder. I put a reminder on the calendar, uh, well before the two year date. Right. [00:12:30] Like, uh, you know, a year and three quarter, something like that, saying, hey, we need if we haven't gotten any action yet from the IRS, we really need to think about filing the district court case just in case. Just just in case. And and to your point about the protest letter, I just wanted to add, again, a lot of people don't don't think about this in the context of, um, refund claims and protest letters. Is that to make a comparison on a regular audit? As you guys probably know, the beauty of our tax system is it's flexibility to a certain degree. Right. You can present your case during the audit [00:13:00] level. You can file a protest letter and go to appeal. This is on a pre-assessment not on not on IRC. But you can go to the the appeals office and you can present a more expansive protest letter with more arguments and supporting documents.

Hale Sheppard: And it's quite informal in the evidence. Then you can go to the tax court. You can file a petition with new or additional theories that you haven't raised before. And what gets people is you may not know after you have a trial, if you're able to get new evidence in the trial that you weren't expecting, you can [00:13:30] at the end, after trial has occurred, you can file a motion with the court asking it to, quote unquote, conform the pleadings from years ago to be consistent with the evidence you presented. In the end, what I'm saying is it's got great flexibility about what you can do and present to the IRS. I say you've got to juxtapose, compare that to what's going on with the IRC or any kind of refund claim. You guys probably know that it's critical that when when you write these, that the taxpayer has to provide all of their legal bases, all of their facts, everything [00:14:00] else in those documents to the IRS, because if you don't, when you later try to file your district court suit for refund, they'll claim. And I'm not trying to get too technical, but they'll claim that there was a variance, a change here that you didn't have before, and they'll try to kick it, kick it out based on the doctrine of variance. So it's critical in the IRC.

Annie Schwab: Interesting.

Hale Sheppard: Yeah. That people don't think about it. It's not hey, let's put some in and then we'll build it in fortify it and grow. No you must when you file those protest letters in the claims, make it as expansive [00:14:30] and complete as you possibly can, or you risk not being able to raise those arguments later.

Annie Schwab: Okay, listeners, everybody pay attention. If you want to make a protest, find somebody who knows what they're doing right. Don't just go at yourself.

Roger Harris: Yeah, yeah. Usually because if you're going to file a protest, there must be enough money involved to make it worth, uh, right. Your time in hiring someone like Hale. Is there any. And I know it's all probably all over the place. Is there any consistency that you're seeing in the people that are coming [00:15:00] to you that have been had their claim rejected? You know, is there any is it lack of documentation for a government order? Is it.

Hale Sheppard: No. And that's a and that's a great question because we always look, I mean, one of the biggest things in defense is you always want to figure out exactly what the you know, what's triggering these audits, what's called in New York City and everywhere else. And, you know, within the IRS, it's one of the things that they covet. If you ask for the documentation through a Freedom of Information Act request, they will never show you that, because if you knew it, you'd know their entire system. So they do go to great [00:15:30] lengths to hide that. But we have not seen any pattern. And in fact, it's a great question that you asked me. And for those listeners, we didn't even plan this, but we usually have kind of a spreadsheet where we actually we put all these down to keep track of this. And we thought at the beginning that we'd see certain things like, okay, they're only going to go after claims of X size, right? A certain monetary amount because, you know, it makes sense in terms of, uh, limited resources. Or they might say, I'm only going to go after businesses that make claims for more than two quarters, [00:16:00] right? I don't know, six quarters or something like that, or we're only going to go after those for that have gone through the governmental order, not the grocer, uh, significantly reduced gross receipts test. We thought there would be some patterns of that nature.

Hale Sheppard: No. So the answer is. Roger. We haven't seen it. We've seen we've seen him pick small ones. We've seen them pick big ones. We've seen them pick both. Both of the major eligibility criteria. There is one thing we've seen. And again, you know, I'm always careful when we're recording things and blasting these out. But [00:16:30] we have started to see what I would call kind of national office level decisions coming down to the revenue agents and one that has come up that I find quite interesting. So there was, again, I'm just doing an example here. Right. But there are some companies, um, that, that, you know, with which we work, we don't defend them, but you know, their, their, their clients and they worked in industries that they were certain were going to be the least controversial of all. For instance, they'd say, I want to work [00:17:00] in the health care industry because, look, when this happened, these were shut down. I mean, it was very they thought in terms of black and white. Yeah, it would be it would be very, very easy. And they would run, they would run clear of all controversy. So we had some that stayed right in that area, or others who would say, I only dealt with restaurants and X number of states because it was clear I could see the orders and what they had to do and how it affected.

Hale Sheppard: So they took a very, again, conservative approach. We have seen a number of cases now, and we've talked to others who have the same experience [00:17:30] in that the IRS is taking a position in a number of these cases that if if a, a business was a quote unquote essential business. Mhm. That they were not going to be eligible for the Ercs. Now it's frustrating because if you look at the actual notices from the IRS, even the first one notice 2021 Dash ten I think it was it specifically has it discusses the fact that you can be in a central business and still get ercs, and in it talks about the parameters for doing so. And so for the IRS to make kind of again, it's a [00:18:00] national office decision because we speak with the agent they won't reveal at all. But it becomes evident that they've been basically instructed that that's the position that they should take. And so they listen quite sympathetically. And they're not giving you grief. They're just saying, no, I'm not going to accept that. And we started to see that. We started to see that on appeals as well. So talking before about filing a protest and making sure you have enough time, I believe those will be some of the first cases that you'll see in, in court are the ones dealing with essential businesses and whether they can still qualify for ircs. [00:18:30]

Annie Schwab: Wow.

Hale Sheppard: Yeah.

Roger Harris: So how long does it take? Is there a how long is a typical protest like this? I mean, not obviously. If you have to go to court, that's a different issue. But in terms of getting to the first resolution, is it quick. Is it.

Hale Sheppard: Yeah. Well first off it's going to take less. Let's be real clear. It's going to take less than two years. Right. Because again, if we don't we're going to have to file in district court. So it's going the good [00:19:00] and bad news is, is that it's going to there's going to be a deadline at which, uh, if you hadn't gotten a resolution from the IRS, it's going to it's going to go forward. Um, I they have been doing better going through and I think prioritizing the IRC cases and, and as you mentioned before, I'm here. Well, not today, but typically I'm in Atlanta. So I'm working out of that office. Maybe they vary office per office, but we have seen, uh, in good graces the last five years. Is that in order to go to the appeals office locally, they generally ask [00:19:30] for an extension on your assessment period. I know that doesn't apply here, but it only is an example. They ask for an extension on your assessment period of 18 months, and they do that because that's what they estimate. The time is in order for you to get an appeals conference. So that's what's been historically around here. So Roger, if we had to just make some kind of estimates about how long it takes, I that would be a good estimate. You know, on the, on the kind of the high end for me that it would take 18 months from the time you actually file the protest letter to sit down and get an audience with the appeals officers.

Roger Harris: Yeah, [00:20:00] that's, you.

Annie Schwab: Know, after waiting already so long, there's so many people, even legitimate claims that just are still waiting for their for their refunds. It's.

Hale Sheppard: Yeah. And this wasn't and this is great. I hope you don't mind just just chatting because these are great things to kind of come up, um, spontaneously. But Annie with with the. Wait. What I have seen, um. And you. I'm sure I'm not. It's not unique to me, but I've seen new business models pop up altogether because of the delays. And in particular, I've seen the companies that are financing. Right. The [00:20:30] ERC. So someone made the claim of the ERC and then other companies are basically giving them, I don't know the proper terminology well is treated as a short term loan, whether it's treated as, um, you know, some type of financing, irrespective, they are somehow advancing the money to these, uh, employers because it's taking so long. Of course, they're taking a I mean, a nice little chunk. Yeah. Yeah. I don't know how you'd say yes. A fee for their, for their. Well, it is a service for sure. And it's a risk to them. So yes, they're charging a fee for that. But I don't think that anyone would have anticipated [00:21:00] that this was going to be the the outcome of the delays by the government. Yeah.

Roger Harris: Well, I've heard, you know, some I've heard of people offering to buy your credits. I'm not sure how that works. Discounts of, uh, you know, if you haven't received them yet or waiting for them. I've also. And this one I guess I should have thought about, but I didn't, um, even for legitimate loans, I mean, legitimate credits. People had gone to the bank and secured bank financing in anticipation of [00:21:30] getting the ERC, and now they're hung up, even if their claim is legitimate and the banks wanting their money, but they don't have the ERC money yet. So now you've got small businesses with debt hanging over their head.

Hale Sheppard: And yeah, and if you know.

Roger Harris: No idea when they'll get the money.

Hale Sheppard: You all have talked with me quite a bit. So, you know, the level of nerdiness that I have and how much I love the research component. But of part of that is, and we're fortunate to have it seems like every electronic service under the sun, uh, at, you know, it's [00:22:00] accessible to us at the office. And I always set on my computer and I run it through a, you know, at least two different services. So I can see every case that's filed either in state court or federal court involving the ercs every single day. Right. Um, and it's not I'm not talking about the cases involving the IRS or Department of Justice. I'm talking about the disputes between all different types of parties, right? Service providers and the employers, whatever. But the point that that you were both making is in this delay. It's interesting. You see it a lot in the kind of the the mergers and acquisitions [00:22:30] and company purchases and whatever else about who was entitled to the ircs and how are they characterized. Oh, and is it going to hold up the deal now? Or do they have justification to stop the deal because they don't have the ercs? I just find it fascinating. All of the the corollaries to what's what's occurring because of the delays from the the ERC payments.

Roger Harris: It's another great example of when and again, we have to be reminded this all came in the middle of a pandemic when all of us were in in panic. But Congress passes something [00:23:00] that seems relatively simple to them, and in some cases to others, that once you and you're handing out trillions of dollars, I mean, a lot of money, that it's got so many twists and turns and impacts that no one could predict. Well, and it was.

Hale Sheppard: In.

Roger Harris: A rush to get it out.

Hale Sheppard: Yeah. Well, speaking of and again, I mean, we're only going to talk for what, 45 minutes an hour today? We could probably knowing the three of us, we could probably actually talk for a few hours and [00:23:30] enjoy doing it. Yeah. But one of the but I think one of the, the, you know, the unpredicted things by the air is not again was these new businesses we have coming out the new legislation that you have. Right. That's still pending what's going to happen there. All of these different topics I don't think they could have forecasted, you know, any of this stuff And I and I absolutely with you, Roger, I love to, you know, pick on the IRS both in writing and in my stuff. But here it's really difficult to do that because, I mean, that's a Herculean job, what they were trying [00:24:00] to do and I owe I guess and I my thought spun out there for a moment. But one of the things that that's still it is now currently in the courts, but it's going to come up, I think, in more frequent frequency in the future. Is did the IRS have the the legal authority to issue that guidance regarding the IRC in the form of notices? I don't know if you guys have been following that or it's simply a nerdy thing like this, but but you know, the whole argument I won't worry about with that. But the whole argument is, is that when the IRS issues [00:24:30] guidance, right, that passes the law, IRS administers that and executes it.

Hale Sheppard: And they do, you know, do guidance. And there's a big law called the Administrative Procedures Act, the APA, which, you know, the IRS and frankly, a lot of tax lawyers ignored for as long as I can remember. And there's been a whole series of cases recently and many, many contexts, of course, the conservation easement context, but probably 2 or 3 different contexts in which the IRS is lost because they didn't comply with the APA. [00:25:00] And now there's a current, There's a I don't want to focus on that case, but I'm saying there is already one case out there that's challenging. Whether the IRS had the ability to issue this guidance was even valid guidance to begin with. And I think that's talking about ripped from the headlines. We're going to get a little bit more to the what the IRS said recently. But if you want to talk about ripped from the headlines, it was just what what day are we now? Are we. Tuesday. Maybe it was last week. Last week, um, the Supreme Court came out with another case. Um, talking about Chevron deference to regulations and some other stuff so [00:25:30] that that is even going to have an impact on what we're talking about here today. So talk about, um, who could have foreseen these types of things coming up, but they're all going to be interacted and they're all going to come up in the context of the ERC with time.

Roger Harris: Yeah, that Chevron case is going to impact a lot of things that we and again, without getting this is where I get nerdy because now courts have the right to to overrule what the bureaucrats in the agency thought was the proper interpretation of the law. And it will impact a lot of things. I forgot to ask [00:26:00] you this. And for for our listeners, these protests that you're you're responding to, are they all people who have already got the money? They want it back, they're waiting for the money. And it's been denied combination of both. What? What are they?

Hale Sheppard: Yes. Going back to the theme of that, we haven't seen a pattern by the IRS, whether it be big taxpayers, multi quarters. It's the same. It's some who are simply what I would call it's not really pre-assessment, but they haven't gotten their money yet. They simply made the claim. And the IRS said, well right before we they got wiser and [00:26:30] more cautious with time. Right. And so then some of those it's like, well let's review these. That's what do they call it, the enhanced compliance review. So I guess we've been we've been heavily involved without knowing any of these that are having the enhanced review. And in some of those they simply disallow it. And then others are the more traditional, uh, hey. Right. Uh, you've done it and some people haven't gotten money back. And so they're now they're trying to do district court claims. Um, and in interestingly, if we have the time, we'll talk about how the Department of Justice [00:27:00] might go after some of the people who already did get money, right, who get audited, and then they do erroneous refund suit. So yes, absolutely. We're writing about or having this case. It's going to be I don't think most and I don't know why, but I don't think most taxpayers or their frankly, some of their advisors understand the ways in which the government, whether it be the IRS or the Department of Justice, can come back and try to reclaim the Ircs or if we have time. Speaking of that, how much time the government really has. Everyone thinks, oh right, [00:27:30] they looked at the general rules and think that this general three year period is past and I can breathe easy. And again, if we do have the time, and either today or in another session, we can talk about just how much time the government has. And I think people would be very surprised that it's certainly not over for the government. They have many different methodologies to come back and try to to seize the seize, if you will.

Roger Harris: And in their recent announcement, they actually want more time, because that's one of the reasons that they've said they haven't opened up. The processing of the post [00:28:00] moratorium claim is they need a longer statute, you know, to be able to to go after some of the claims.

Hale Sheppard: Well, if you if you if, you know, speaking of that, and I actually just coincidentally, I have uh, pulled up to a I mean, we all have like five screens and he has like probably ten screens. Anyway, I have I have two screens right now and my other screen, just in preparation for this, I was going through a recent presentation that I had done, and I happen to have that slide up there about how much time, uh, the government has. So indulge [00:28:30] me just a moment and talk about that. If you look at, again, these are things that are normal to some of us and some of us it's not. So it's important to go over them. If you look at, let's say, the claims for 2021, by and large, let's let's put 2020 aside. But look at the claims for 2021 on the forms. 941 so the important rule is right. Under the law, those are deemed deemed to have been filed on April 15th of 2022. Right? Right. So right. [00:29:00] It's important I mean you people say why is that? And I say, well, we could talk all day about it. But the general notion is it's it was done to be an advantage to the taxpayer, to give you more time to file the refund claim. It wasn't done to hurt the taxpayer, but it works both ways. And if so, if you say, look, even under the general law for a 2021, you know, a 941 filed for any of those quarters in 2021, the IRS has three years from April 15th of 2022 to still come back and audit and reject those claims. [00:29:30]

Hale Sheppard: And that's what all the way till April of 2025. So the IRS still has a lot of time under that. If you look at the third R, the third law, which was the American, it was the AARP, the American Rescue Rescue Plan plan. I can't even I I'm proud of learning the acronyms. I think the American Rescue Plan. Right. I think that's when they actually put in the extra time. The five year statute of limitation. Uh, and it turned out, you know, we thought it was maybe for two quarters, but by and large, it really affects just the third quarter. So they got the extra time [00:30:00] there. Um, and just a couple more points I want to make. Uh, I think we were talking before the presentation and you alluded to the most recent announcement by the IRS, but it's consistent in the IRS has said that there's a there's a large percentage of what it thinks are improper claims are fraud. And I would anticipate, based on 25 years of experience, that the IRS will make lots of claims of fraud in the IRC context, right or wrong, and that will serve to keep the statute of limitations, keep it open endlessly, endlessly. And they get to your specific point, Roger, about what [00:30:30] the IRS is saying. You know, they're asking for more time. And if you go back and and I can't remember when the legislation came out, but it must have been at the start of 2024. That's the legislation, uh, that that, uh, was passed by one of the houses, but not by the other. Right.

Annie Schwab: It's proposed. It's still out there. Actually. It was proposed.

Hale Sheppard: Proposed. But what's interesting about that, I mean, it's got a number of different things. And I think a lot of us focus on the fact that if it passes, that it basically cut off the ERC claims at what was a January 30th, January [00:31:00] 31st. Yeah. So people focus on that. People are also focused on the fact that the law would make ERC claims listed transactions with, with all that entails. Also big stuff. It also contains that enormous penalty for quote ERC promoters, promoters very very, very broadly defined. But what what I find most interesting about the law is that it proposes a six year, six year statute of limitations. Right. And I think they even they even start that they even set the starting point. It's kind of late. So anyway they say six years statute of limitations [00:31:30] there. And if you go back and look at the, uh, what they call the Green book and again, sorry, you know, they have the purple book and the yellow book and the green book, but the green book for those. Now, I'm starting to see the nodding heads, like, I think we're at the same level of nerdiness about this stuff.

Hale Sheppard: Yeah, may not be, but the Green Book is what are the what are they, the presidential revenue proposals basically saying, hey, Congress, I'd like you to do this and here's how I'm going to raise money, etc. if you look at the green book for this year as well, it's consistent with the pending legislation, [00:32:00] which is it's asking for a six year statute of limitation. So just going back and kind of summarizing it under the normal rules for 2021, they still have until April of 2025. That's not to mention the special five year rule that the possible potential six year rule, or if they are supposed to go to the tried and true civil fraud. So yeah, I don't think taxpayers should be resting easy for literally years if they have questionable ERC claims. [00:32:30] And so, you know, people always say, how long will you be doing this? And the answer is, honestly, I we anticipate we'll be embroiled in these kind of cases for at least the next five years. If not, oh, easily. Easily. But what are they going to?

Annie Schwab: Are they going to get the ERC mills? Are they going to, you know, find these fraudulent promoters? I just hope as they slow down the program that they gather the information to identify some of these mills and hold them accountable. Yeah.

Hale Sheppard: Well so well, well, generally in [00:33:00] again in what we do, the IRS, if they see a behavior that the IRS doesn't like, there's a few ways that they try to stop the behavior. And a big one is they go out and they file an injunction. They call it an injunction suit. Right. I don't know why we have to use fancy words like that in law. I mean, let's just call it a stop, like a cease and desist. I mean, enjoying means to stop doing it. And so the Department of Justice goes to the court and says, hey, right, look, this is too important. Too much money is going out. We're losing too much revenue. We don't have time to do it the old fashioned way. Courts stop [00:33:30] them from doing this. Now that's an injunction suit. So sometimes they do that. I haven't seen any injunction suits in in the IRC. And to be quite honest, it's I think it's probably a few things. Yeah. They didn't they didn't have the resources and frankly now. Right. They can only claim it for, you know, doing amended returns for 2021. But it's you're right. And summarize it in two words. It's, you know, too late. Um, that's one of the methodologies. But Roger was asking me and again, I can't recall whether it was before we started recording or at [00:34:00] the beginning of the presentation. Uh, but I did mention that we are although primarily we're representing the, the, uh, employers themselves, right against the, the government. We do have a, we do represent a few companies that have been um, alleged or and being investigated for being quote unquote, promoters of the ERC.

Hale Sheppard: So what you're saying any. Yeah. What's happened in those. Again, timing is important so people can appreciate it. So what they're looking at, at least [00:34:30] in the ones I know, that the IRS denounces a lot of criminal investigations. We're not handling any of those. Um, so I can't speak speak to that. Uh, I can say as far as the investigations, everyone's probably familiar with the concept of the promoter penalty investigation. That's 6700 of the code. So it's always confusing to people because they use the term investigation, which means a crime. But this isn't a crime. It's just a it's an economic penalty. Um, anyway, that's what the IRS is looking at in terms of the supposed promoters at the moment. And [00:35:00] what they have done is very, very typical. And I want to hit timing for you is they come out when they when they believe that the companies have a promoter. And by the way, many of these companies advertise at such a rapid and expansive clip. Right. It's not hard for the IRS to identify who the. Oh, right. Right. It was or or. Yeah. Or and again I just get excited talking about it. We're not going to get to the comment about the educational sessions that the government had some months ago. As you recall, they sent out 220 letters to companies and ask them to [00:35:30] come in for an educational session. And then they admitted that they sent those letters out based on filing volume. So it's pretty clear that the IRS knows exactly who's filing large. Sneaky.

Annie Schwab: That's kind of sneaky.

Hale Sheppard: Anyway, to the question of why it's not happening sooner and is because, um, the IRS comes out and typically does all kinds of information gathering to do a potential promoter penalty claim. Okay. And then after they do that of the promoter itself, right. What [00:36:00] they like to add to it is, well, wait a minute, how is this company's claims really coming out? If they're successful, that undermines a promoter penalty, right. Because actually did it correctly. So they have to have some time to watch the actual things work out. And importantly, and this is again what people forget about the the statute of limitations for imposing a promoter penalty is forever. There is no statute. I don't know it. Yeah. So so when people thinks right, you think, oh okay, why aren't they doing anything? Oh they're doing something, [00:36:30] but they don't need to do it now. They're doing their initial information gathering. They're going to watch, I would assume based on experience in a lot of different areas. Watch how the cases play out, whether it be in audits and district court, etc. and later, and it could be significantly later. They will dust those back off and come back and try to impose penalties at that time. So it's really the fact that they're not required to impose the penalties under any specific time frame. And it behooves the IRS to wait and gather more and more data.

Roger Harris: Right. And I want to clarify something that I'm pretty [00:37:00] sure I'm going to say this correctly, but please correct me if I'm wrong. That's an important distinction that I think you made, but I want to make sure our listeners heard it. When we hear a promoter, we assume it's criminal and they're going after the big guys we see on TV. And you know, that's Sid doing their work. But you can be deemed a promoter and not be criminal. Absolutely.

Hale Sheppard: Yes I did. If I didn't clarify that, no. I'm glad you gave me the opportunity to clarify. Absolutely. So the IRS has broken it down listening [00:37:30] to what they've announced. And I agree, in the three kind of major thrusts of enforcement right now, they're doing some criminal investigations and they haven't been clear. They've said some numbers, but they haven't been clear whether these criminal investigations are against quote unquote, promoters or some of the taxpayers themselves, or let's say, I don't even know lawyers who put together. I have no idea. They didn't specify who the criminal investigations were against. But that's number one. Number two, it's the audits, what we call examinations or audits. Those are simply about money, [00:38:00] right? We're the the ERC claims proper. And if not, you know, taxpayers give them back and perhaps penalties and interest. But what I was discussing and what you emphasized, Roger, was, yes, they have what's called a promoter investigation. Right. So it's confusing because investigation generally denotes a criminal activity. But promoter investigations are simply a civil a civil thing with the IRS. And they're trying to come back and get, um, penalty amounts from the promoters. But if I find [00:38:30] this and normally I don't want to say that people just do as a calculation say it's a risk of doing the business. I mean, I think some organizers conceive of it that way. If we talk about the new legislation a little bit, and I think Annie had a better name than I did. It's the taxpayer relief. Some such, I don't know, I could look at my last slide, but it was the thing that came out in early 2024, in that new IRC promoter.

Hale Sheppard: If you look at it, what they're what Congress was trying to do. And if it passes, it was a relatively small penalty before [00:39:00] because it wasn't considered. They call it a promoter penalty, but it's really now this is getting really technical. They're not really calling it a promoter penalty. They're really putting it under the aiding and abetting section of 6701. Um, but you'll appreciate this. Under the old law, if you ate it in the bed, it was $1,000 per per instance of the aiding and abetting, right. Which is, frankly, based on some of the fees that are out there. Not not a. Yeah, that's that is a not so scary Congress. Now Congress has changed it. And listen to this. [00:39:30] Congress has wants to change it and the proposed legislation, they want to change it to either $200,000 or 75% of the gross, not not net gross income received for assisting with something improper, whichever is higher. And so when Congress looks at that, they say, wait, some of the and there's nothing wrong with contingent fees. Be clear about that. But the Congress saw some of the enormous contingency fees. And if they frame the law as such, that it's either a minimum of $200,000 per instance or [00:40:00] 75% of the fees received, that is a massive penalty. To go from $1,000 to that is massive. And again, it's just proposed at this time. But that's that's what's out there.

Roger Harris: Well, and that's why not that any of the listeners to this podcast would be deemed a promoter. But it's you know, you can't just operate on the assumption that, well, I'm not doing anything criminal. I'm just being aggressive or being right. Uh, a little bit on the side of my clients versus [00:40:30] the IRS. This if this law, which it's kind of hard, I don't think this law in its current state will be enacted because first of all, January going back to January 31st seems a little unfair when we're in July, but right? Who knows?

Hale Sheppard: Uh, wait a minute. Are you using the concept of fairness here and tax legislation?

Roger Harris: Well, no, I still dream. You know, I'm still dreaming that something would be there. I did ask the service in, you know, in their push when they made this announcement. They want to end [00:41:00] it. I said, well, do you have a date in mind? You know, do you want to go back to January 31st? Do you want to just pick a date more in the future? And basically they said, we'll leave that up to to Congress. You know, we don't we just want it over.

Hale Sheppard: We just want I think in the in the listeners know better than you know as well or better than than I do. But I think you're being quite humble. I mean, I had an understanding that you have you have much Intel and insight and connections in DC. So you probably know a lot more than, than, than your, [00:41:30] than you're letting on or you're able to.

Roger Harris: Know I think I think I know more than I do, you know, uh, and I'm reminded of that quite often by by people.

Hale Sheppard: I, I say it in all sincerity, which is, I mean, you are because I get the full impression. I mean, you've been doing it for a long time. You're involved in some of the committees. You are actually face to face with some of the big decision makers. So you probably do have some insight that that, you know, we wouldn't have because we fulfill, you know, a different role.

Roger Harris: Well, I mean, [00:42:00] it is nice to be able to sit down and have face to face discussions. That doesn't mean that they tell me any anything close to everything. And what I appreciate about the current administration is they are listening and wanting to hear. That doesn't always mean that their decisions are are ones that we are happy with, but I can say they are listening more than others and they're trying to understand, I think. I think we all realize that, you know, what I find really frustrating about the IRC is when it first came out, Congress [00:42:30] says, get the money out, get the money out, get the money out. Now it's like, why'd you get the money out so fast? We got, we got we got crooks out there. So they were dealt a tough hand.

Hale Sheppard: Yeah. And if and if that is a theme that anyone's interested in listening to this pot. That this pot, I call it the podcast, whatever this is this called that there, there's there's a really good kind of, I would say, discussion of the evolution and decision making process and all of that in, in a number of reports by the Government Accountability Office as well as by the, the Tigta, the Treasury Inspector General for [00:43:00] Tax Administration, they put out a number of great reports on all of this, talking exactly about that, that they just made a decision that said, look, we understand it and we know a lot of money is going to go out the door that at first, right, probably shouldn't have gone out the door, but they simply had to decide the urgency of getting money in the hands of struggling businesses and help the economy or or nitpick them. And it was a yeah, it was tough for sure. So it has gone. I don't say full circle, but it's sure changed. Yeah, I did want to. I don't know how much time we have, but I did want to address a point that, you know, I mean, I kind [00:43:30] of say that tongue in cheek, but you were talking about retroactivity. And I think that's something that's been a huge challenge, right? For for everyone.

Hale Sheppard: I think people I'm talking about, not only the people that were trying to do claims and say do them legitimately. Also for people now who are trying to defend them, right? We're talking about the legislation now introduced in the early part of 2024, which, if passed, could have this retroactive effect on when you can file claims. But I was just kind of looking at the slides here that I had pulled up in [00:44:00] all kinds of we had talked about the guidance from the IRS. Right. The chronology being Congress passes one law, then the IRS has a very large notice and pretty short order, and it goes on four different times. But you're talking about claims that were filed in 2020, 2021. And if you look at some of the major guidance that's come out from the IRS, it's come out two, two and a half, three, three and a half years after the time that people could have filed their original line 41. And again, we don't have a lot of time to dwell on it, but I'm looking here that they issued the, the, [00:44:30] the, the first memo about supply chain issues. Right. That didn't come out until July of 2023, long after people had already filed a lot of.

Roger Harris: There were a lot of people taking claiming.

Hale Sheppard: That yes, yes.

Annie Schwab: Yes.

Hale Sheppard: And then and then which I even think, I think that's somewhat, you know, controversial people can say. But the one I thought was less controversial was, you know, people relying on OSHA communications or orders or whatever you want to call that. Right. And the IRS didn't come out with that memo until October of 2023. Right. Which is [00:45:00] even further down. And then let me see if there was one more. I was trying to make sure we're complete on this. Let me see if there's another one out there. Oh, and I guess the the last one that I saw wasn't as, as controversial, but that came out just a few months ago, in February of 2024. That's the memo that talked about, uh, the liability when a company used a third party payer payer. Right. Like a professional employer organization. Right. That again, that came out in February of 2024. So I do find it again, no criticism to the IRS. They were trying to react [00:45:30] to these things, and they do it as soon as they process. But a lot of this guidance was was really issued months, if not years after the relevant time, which makes it, I think, really challenging. And I've written about it challenging for the people who are trying to do it right with no guidance and certainly, on the other hand, challenging for the IRS to say, even if the IRS takes the position now that they were incorrect. Right. I say, well, well, how are you going to penalize? Right. How do you penalize a taxpayer who didn't get guidance until 2 or 3 or whatever years after the fact? So all [00:46:00] very entertaining issue.

Annie Schwab: It's frustrating to tax preparers. It's frustrating to the taxpayers. It's frustrating for small business owners across the board. I mean it's it's a huge unanticipated chaos. It's like chaos that just keeps churning. And there's going to have to be an end to it.

Hale Sheppard: But maybe yes, it's maybe it's Roger saying, going back to the more recent announcement. Okay. The I think it's I think there's been very little disagreement over the fact that the IRS [00:46:30] is going to disallow in mass claims that really had no. Sure. Absolutely. For those people who received the disallowance, weren't complaining because they knew they weren't entitled to that. Right, exactly. Uh, by the way, they're not hiring us because they know that. So those are not clients. That's not fertile ground for the defense. Yeah, but but you know, I am still I remain optimistic with the fact that they say one, they are starting to do some more processing. They are planning to pay some claims, which is going to be great to break the [00:47:00] kind of the logjam. And then more importantly, I mean, you can look at the audience and say, okay, that's going to be it's going to cost some people some money. It's going to take time. That's absolutely true. But through that process, right a lot of these issues are going to be resolved. Right. Either the IRS is going to come to some kind of policy at the national level and pass it down and say, let's just accept this or not and move on, or some of these cases are going to, you know, eventually go to court. And as you know, there's I mean, yes, there's lots of issues, but one major decision could dispense [00:47:30] with thousands and thousands of pending cases. So I think it's great that we're actually going to have an you have to you have to process in order to let you know the disputes work their way through to get answers. So I think it's all positive. Oh, yeah.

Roger Harris: No getting some guidance and getting some definitive rulings that we can all look at and say, all right, this fits your fact pattern or this doesn't or that sort of thing. I think you're I think you're probably safe for more than five years. Hale with the IRC. Um, I'll give you something you may want to. I heard this when I was in DC [00:48:00] last week. The first I've heard of this. Uh, but it might be a second area you want to start preparing for. Um, some of these big promoters of the ERC claim that are still out there have added at the bottom of their website, call us about beneficial ownership report.

Annie Schwab: Oh, I knew you were going to say that. Well, I knew it, I knew it.

Hale Sheppard: Well, well, look, look, do you want to talk about. From a purely a business perspective, we have to say, I mean, they had a nice Rolodex based on the IRC world, [00:48:30] and a lot of people need this service, right? That that is interesting. And again, I knew we weren't going to talk about I talked about the financing and how that came. I didn't realize that this was this was, you know, derived from that as well. So that is interesting.

Roger Harris: Yeah. So you need to get somebody in your firm up to speed on all the people who are going to try to make money off of the beneficial ownership.

Hale Sheppard: I will tell you this. We we made a decision. We made a decision that it's like it's I saw a number of accountants years ago when they stopped, uh, and picked some [00:49:00] big accounting firms, by the way, that they stopped preparing f bars for people with foreign accounts. And they made a decision. And again, I saw this. I don't want to name anybody personally, but we're here in Atlanta and we see lots of expats coming in and out for some major companies. And generally it's part of their their job. One of their perks is they get tax preparation services. And it can be very complicated because they've lived in many different countries and have accounts and pensions and properties and what have you. And there was a time at which when they switched over in these major firms said, I'm not doing fbars anymore [00:49:30] because frankly, I don't get paid enough and my liability is way too high, way.

Annie Schwab: High, way.

Hale Sheppard: High. And so all of a sudden, you know, the poor taxpayers believe that the firms were handling everything soup to nuts. And then they get these enormous f bar penalties and we'd have to defend them. But I say that only to bring the same idea to the beneficial ownership, which we decided ourselves some time ago. Yeah, that that's a that's a that's a complicated matter. Uh, I don't know how much people would appreciate how complicated [00:50:00] it is. Uh, and have you do that and have the exposure. So, Roger, on this, I'm going to say, well, well, good for them because we are not we're not we're not involved in that.

Annie Schwab: I think that's a smart decision. I do kudos. Uh, that's exactly what I wanted you to say.

Roger Harris: I just I would like to record that and play it to fence in your comment about how complicated it is, because all they keep saying is, how hard can this be? It's one page, just fill it in. And so, uh, yes.

Hale Sheppard: Well, I know that's I would say that's the, the, the [00:50:30] understatement of the year. If how about this, if you haven't seen me write three articles about it already or five, or maybe it's because it's so dense, right, that I look at it myself and say, no, no, this is too much. The readers aren't going to want to understand this kind of complexity. Nancy, I'm not doing it. So no, it is. It is terribly. It is terribly complicated. Yes.

Roger Harris: Well, hey, we need to get you back. Um, we could talk for hours, and I think this hour is almost up, and. And first of all, you probably got things you'd rather be doing while you're in Spain [00:51:00] than talking to us about the. Well.

Hale Sheppard: For me, it's it's 10:00 at night now, so I it's it's it's fine, but. No, this is this. No, this is great. I have, you know, putting aside the recording component, this has been great. I've really enjoyed it. I think the dialog is going great. And I mean, I have not that we want to hit this topic again. We certainly can because it will evolve. So six months from now.

Roger Harris: Yeah. It's not going anywhere. There's plenty there's plenty of things you can talk five years.

Hale Sheppard: I mean, maybe we'll look a little, you know, maybe Andy won't, but you and I will look a little grayer [00:51:30] or have less.

Roger Harris: I can't if I don't think I can get any grayer. So I think I'm maxed out on the gray.

Hale Sheppard: But but let it be this or something else. We can talk another time, and I'd love to come. Oh.

Roger Harris: We'll definitely get you back on and we'll find something, you know, IRC or other related, you know, maybe then we'll talk beneficial owners and all the people that you're representing, that accountants that tried to practice law and didn't know it.

Annie Schwab: Right.

Annie Schwab: It'll come your way. But this has been fantastic. I hope [00:52:00] our listeners have enjoyed it. Thank you, Hale, so much for coming. Um, enjoy your time in Spain. And Roger.

Roger Harris: Go enjoy the rest of your trip.

Annie Schwab: Take it away, Roger.

Roger Harris: All right. Again, Hale, thank you so much for doing this. Thank you for particularly for taking time out of your vacation, Andy. Thank you for doing that. I hope you enjoyed this. I'm sure you did. And we'll definitely get Hale back and we'll dig into some more topics irk related or whatever. So thank you for listening. If you enjoyed this podcast, please tell your friends and, [00:52:30] uh, have them join us for a future episode of the Federal Tax Update podcast. Thanks for listening. Goodbye, everybody.