Semple, Marchal & Cooper LLP, a Phoenix-based firm that took over the audits of Trump Media & Technology Group last year, has filed suit against the BDO Alliance and its chairman after it was ejected from the alliance following an angry phone call.

The firm’s lawsuit alleges it was kicked out of the alliance because it took on Trump Media as a client, a contention the BDO Alliance denies.

Trump Media, the parent company of the Truth Social network founded by Donald Trump, replaced its auditor last May after the Securities and Exchange Commission shut down its former auditing firm, BF Borgers, accusing it of massive fraud and fining it $14 million. Trump Media named Semple, Marchal & Cooper as its new auditing firm, even though the firm was relatively small, only had seven people listed on its website and did just a handful of public audits.

SM&C has been a member of the BDO Alliance for 30-plus years and was a founding member in 1994, according to a lawsuit it filed in March in an Arizona court, and over that time has paid more than $2 million in fees. There was only a brief hiatus in the firm’s membership in the alliance during that time due to a conflict of interest that the firm says has since been resolved. One of its founding partners, Robert Semple, has also been a member of the Alliance Partners’ Advisory Council for approximately 10 years. The firm has remained in good standing, at least until June of last year.

The firm’s lawsuit claims that after news reports began to circulate last May that Semple, Marchal & Cooper was Trump Media’s new auditing firm, the firm’s director of assurance services, senior partner Steven Marchal, received a phone call from Michael Horwitz, executive director of the BDO Alliance, in which Horwitz questioned the firm’s decision to take on Trump Media as a client, and asked why it didn’t alert the alliance in advance.

The suit further alleges that Horwitz threatened to kick SM&C out of the alliance if it didn’t resign from the audit, and claims that after the firm refused, it received a letter from the alliance dated May 31, 2024, with an effective date of June 30, 2024, that terminated the firm’s membership.

The BDO Alliance strongly disputes the allegation.

“The allegations in the complaint are frivolous and lack any foundation in the reality of why BDO Alliance USA chose to exercise its right to sever its relationship with the plaintiff,” it wrote in a statement to Accounting Today. “While members are independent firms charged with their own professional decision-making, BDO Alliance USA has the rarely used right to sever that relationship when quality and other issues are present. Plaintiff’s effort to distort the decision to sever the relationship will be vigorously defended in the judicial process.”

SM&C’s suit claims that the termination of the firm’s membership in the alliance has created the false and misleading implication that it happened either because somehow its independence as an auditor had been compromised by its political affiliation or because of some other supposed misconduct. But the firm asserts it has not compromised its independence nor engaged in any misconduct. Instead it says the alliance wanted it to compromise its independence by allowing political views to “infect” its role as an auditor of a publicly traded company.

Semple, Marchal & Cooper declined further comment beyond the lawsuit.

The Public Company Accounting Oversight Board posted new downloadable datasets related to PCAOB inspection reports.

The datasets contain multiple years of information related to PCAOB inspections findings. This information was previously only available in the individual PDF versions of firm inspection reports. 

“PCAOB inspection reports have always been a data-rich resource for investors and others,” PCAOB chair Erica Williams said in a statement. “With the release of these downloadable datasets, we are continuing our efforts to drive audit quality by increasing transparency.”

The two new datasets contain information from Part I.A and Part I.B of inspection reports for use in different applications, platforms or systems. Year-by-year information included goes back to 2018 for annually-inspected firms and 2019 for triennially-inspected firms and will be updated on a quarterly basis in the future. 

Part I.A of inspection reports discusses deficiencies where the PCAOB deemed a firm had not obtained appropriate audit evidence to support its opinion. The Part I.A dataset provides the entire description of each deficiency as well as relevant attributes. 

Part I.B of inspection reports discusses instances of noncompliance with PCAOB standards or rules that do not relate directly to the sufficiency or appropriateness of the evidence, such as critical audit matters and Form AP. The Part I.B dataset provides the entire description of each deficiency and the auditing standard related to the deficiency.

The PCAOB also enhanced the downloadable dataset that is focused on firm-level information for over 4,000 published inspection reports, first released in July 2023. 

Fraud victims wondering whether they can deduct a portion of their financial losses tied to scams on their taxes just got some clarification from the IRS. 

In a memo released last month, the IRS Office of Chief Counsel stated that victims seeking to protect their assets when they fell for a fraudster’s scam usually may deduct the tax basis of their losses for the year they discovered the theft. Previously, some financial advisors and tax pros had questioned whether that motive for moving assets qualified for the definition of “a transaction entered into for profit,” rather than a “personal casualty loss” — a type of deduction that the Tax Cuts and Jobs Act limited solely to disaster areas.

The five examples of scam losses covered in the memo reflect what experts say is a growing risk to consumers as fraudsters become more sophisticated at stealing their money. The memo held that the victims of compromised accounts, so-called pig butchering and phishing scams could receive the deduction for their tax basis. 

On the other hand, it generally ruled out tax deductions for victims of romance and kidnapping schemes. And it also noted that anyone withdrawing money early from an individual retirement account for a transaction that turns out to be fraudulent would still face normal penalties for those transactions. Furthermore, none of the five examples fit the definition of a Ponzi scheme that would qualify for additional deductions.  

Complexity and controversy

Critics have called for reform of tax rules that are complex and harmful to fraud victims. The IRS’ ruling is welcome, then, for allowing advisors and tax experts room to stem damages from efforts to safeguard assets for future investments.

Since fraud losses represent an unfortunate “part of our shared reality at this point,” the guidance can aid advisors assisting victims in the wake of a scam, said James Creech, a director with law firm Baker Tilly’s tax advocacy and controversy practice.

“The mechanisms that the fraudsters use are so polished and organized. They know the right psychological levers to pull at the right times,” Creech said. “When these happen, it’s incredibly isolating, and I find that there are a lot of people who just don’t know where to turn, and they don’t know what to do.”

In that context, some victims may be further surprised to learn that the deductible losses add up to their original basis (i.e. the initial $10,000 in an IRA that has appreciated to $100,000) instead of including any of the unrealized gains. Also, they first must verify that their money is not recoverable, said Miklos Ringbauer, the founder of Los Angeles-based tax firm MiklosCPA.

“Until we know that we are a victim, there’s no deduction,” Ringbauer said. “Once we are aware of it, we make the appropriate police reports and everything else when it becomes apparent that it’s nonrecoverable.”

READ MORE: Rising scam risk calls for coordinated prevention strategy, study says

The memo’s findings

The IRS memo acknowledged some of the confusion. For example, it noted the fact that there is “no statutory definition of ‘a transaction entered into for profit'” beyond some court-case analysis describing it as “a primary profit motive.” In addition, it cited some further IRS guidance from 16 years ago laying out the circumstances that investors can obtain a “safe harbor” from taxes on their losses from a Ponzi scheme. 

One important aspect of the qualification criteria for Ponzi losses requires a “lead figure” who is charged or otherwise named as a defendant in a criminal complaint alleging theft after they secured victims’ money, claimed to generate income, paid other investors through the earlier customers’ outlays and misappropriated those assets. None of the five circumstances discussed in the memo fit that definition. But three of them qualified for a separate deduction tied to the tax basis of their losses at the hands of “Scammer A.”

“For taxpayers who authorized distributions and transfers to new accounts or directly to Scammer A, we look to their motive in doing so to determine the character of the transactions. Taxpayers who establish that their motive was to transfer their investment funds from existing investment accounts to new investment accounts, i.e., to safeguard existing investments or to engage in new investments, had a profit motive when authorizing the distributions and transfers,” the memo said. “For taxpayers who were motivated to transfer funds to Scammer A as part of a non-investment scam, i.e., the romance scam and kidnapping scam, there is no profit motive for the transaction, and the loss is a disallowed personal casualty loss. For taxpayers who did not authorize any distribution or transfer, the loss does not result from the actions of the taxpayer, so that the relevant transaction for determining the character of the loss is the original investment and the motive of the taxpayer at that time.”

Regardless of that distinction, each of the victims must pay any penalties for early IRA withdrawals or outlays from other accounts subject to them. The lack of any deduction for the latter two cases would likely arrive as bitter news for an investor tricked into believing a new online romantic partner had a close family member “in dire need of medical assistance” or someone fooled by an artificial intelligence-generated recording into thinking a grandson had been kidnapped and needed a ransom payment.

READ MORE: Financial professionals have slowed the growth of elder fraud cases

Room for improvement to the rules

The memo “shows that more victims than perhaps previously thought might qualify for the theft loss deduction, but it also illustrates how much work remains to help all taxpayers who find themselves victims of fraud,” according to a blog post on it last week by National Taxpayer Advocate Erin Collins, head of an independent IRS unit that evaluates the agency’s operations and reports recommendations to Congress and the rest of the government. Last year, Collins listed tax-related scams as among the agency’s “most serious problems” and called for letting the limitation on deductions for theft losses expire at the end of the year.

“The memo offers important clarification on when and how taxpayers may claim a theft loss deduction,” Collins wrote. “It also exposes gaps in the current law that leave many taxpayers without meaningful relief.”

Besides asking lawmakers to eliminate the restriction on deductions for theft, Collins called on them to extend the three-year statute of limitations on refund claims to the IRS, waive the penalty on early IRA withdrawals for scam victims and enable taxpayers to amend prior returns to report income differently for the years that they sustained the losses. It’s not clear that such policy ideas will gain any traction as the current Congress considers the sunsetting provisions of the 2017 law this year, since they would increase the cost of the legislation.

READ MORE: Tax Cuts and Jobs Act expiration: A guide for financial advisors

How advisors can help

Despite the complexity, advisors “really play such a critical role” through empathy for the victims combined with the technical expertise to point them to the next step, according to Creech of Baker Tilly. They often feel the sense that they “worked so hard to build this legacy, and now it’s gone and I have nothing to show for it,” and Creech has spoken with many who have gone from expecting “a very comfortable retirement to having Social Security income only,” he said. Asset allocations or interest rates often seem much easier to discuss.

“It’s more of an art than a science. No one gets financial certifications to be a grief counselor,” Creech said. “Those are important conversations and I think, sometimes, they keep people alive.”

With AI and other technology bringing new types of risk, advisors and tax pros should guide clients on prevention strategies to avoid the scams in the first place, Ringbauer said. For instance, if they hear from someone claiming to be from their financial institution, they should either hang up from the call or refrain from answering the text message, according to Ringbauer. Then they can take the time to call into the corporate headquarters separately on their own to see whether there is any legitimacy.

“The problem is, we live in a digital world and, in that process, we don’t do due diligence. We don’t think very quickly because we are faced with a catastrophic or emergency situation. In that process, our natural instinct is to protect,” Ringbauer said. “Today you don’t know if you are talking with me. For you as a taxpayer or an individual, the only protection you have is, you go back to the original source.”