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SCOTUS bars bankruptcy clawback from IRS

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The Supreme Court has denied the attempt of the bankruptcy trustee of a failed business to claw back assets fraudulently transferred to the Internal Revenue Service from the debtor-business’s assets to satisfy the personal federal tax liabilities of the shareholders. 

The shareholders had misappropriated $145,000 in company funds to satisfy their personal federal tax liabilities. The trustee filed an action pursuant to Section 544(b) of the Bankruptcy Code, which allows a trustee to “avoid any transfer of an interest of the debtor … that is voidable under applicable law by a creditor holding an unsecured claim.” 

In order to prevail under this section, a trustee must identify an actual creditor who could have voided the transaction under applicable law outside of bankruptcy proceedings. The government argued that the trustee’s claim failed because the trustee could not identify an “actual creditor” that could have voided the fraudulent transfer because sovereign immunity would have barred any such cause of action in Utah against the government. 

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The U.S. Supreme Court in Washington, D.C.

Stefani Reynolds/Bloomberg

The bankruptcy court, the district court and the Tenth Circuit disagreed. But the Supreme Court held otherwise, finding that the waiver of sovereign immunity in Section 106(a) of the Bankruptcy Code applies only to a Section 544(b) claim itself and not to state-law claims “nested within that federal claim.”

The opinion, issued in United States v. Miller, was an 8-1 decision, which likely surprised many who thought the government had an uphill battle to get a reversal, according to Alissa Castaneda, a partner at law firm Dorsey & Whitney. 

“Practically, the ruling means that the government — and only the government — can keep fraudulent transfers received between two to four years before bankruptcy,” she said. 

“The Supreme Court determined that if it adopted the trustee’s reading, that it would ‘transform that statute from a jurisdiction-creating provision into a liability-creating provisions,’ and affirmatively expand the trustee’s avoidance powers to a bankruptcy trustee, allowing the trustee to ‘avoid any transfer of an interest of the debtor … that is voidable under applicable law by a creditor holding an unsecured claim,” explained Castaneda.

“‘Applicable law’ can refer to any federal or state law other than the Bankruptcy Code, but trustees generally rely on state statutes, and most frequently, on ‘fraudulent transfer’ state statutes specifically,” she said. 

The Miller case involved a Chapter 7 trustee of a Utah company that filed for bankruptcy in 2017. The trustee filed a lawsuit against the United States, seeking to avoid $145,000 of tax payments made by the company in 2014 to the IRS to satisfy the personal income tax obligations of the company’s principals. 

Because the transfer of the $145,000 to the IRS took place more than two years prior to the bankruptcy petition date, the trustee could not void the transfer since that statute only had a two-year lookback period. Instead, the trustee invoked Utah’s fraudulent transfer statute, which had a four-year lookback period as the ‘applicable law,’ she noted. 

“The government did not dispute that the debtor received nothing of value in exchange for this transfer, but rather asserted that the trustee could not satisfy the ‘actual creditor’ requirement, because there was no actual creditor who could have voided the transaction because sovereign immunity would bar any Utah state cause of action against the government,” Castaneda added.

The bankruptcy court rejected the government’s arguments and entered judgment for the trustee. The district court adopted the bankruptcy court’s decision and the Tenth Circuit affirmed the decision. 

The Supreme Court reversed the Tenth Circuit and held that waivers of sovereign immunity are jurisdictional, and not substantive in nature, nor as broad as the trustee claimed. It did not alter the substantive waiver of immunity that would not exist under the applicable Utah state law.

On the surface it looks like a favorable result for the shareholders who engaged in the fraudulent transfer. Their debt to the IRS is satisfied, and depending on Utah’s statute of limitations and prosecutorial discretion, there may be no future legal action.

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Accounting

IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Accounting

Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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Accounting

At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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