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The Lookback Period Mistake That Turns Valid Refunds Into Permanent Losses

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Lenora Hamilton thought she had everything figured out. She filed her 2017 tax return in November 2021—late, but still claiming a $2,070 refund she believed was rightfully hers. The IRS immediately rejected her claim. She appealed, lost, and spent nearly a year fighting in federal court.

The final verdict in early 2025 delivered a crushing blow: the court ruled her claim was “timely filed,” but she couldn’t recover a single dollar. Not because the refund was wrong, but because she missed something called the “lookback period.” A technical timing rule had permanently erased her entire refund.

In a recent episode of the Tax in Action podcast, host Jeremy Wells used Hamilton’s story to explain the refund statute of limitations—a subject most tax professionals think they understand but actually don’t. The stakes are enormous: once these deadlines pass, Wells warns, “there’s virtually no going back.”

The Two-Step Framework That Trips Up Even Experienced Practitioners

Most tax professionals think the refund statute of limitations is straightforward. File within three years, get your refund. But Wells explains it’s a complex two-step process where each step has different rules and different consequences.

Step One: Can You File at All?

The first step determines whether you can file a refund claim. This “limitation period” is the later of either three years after the return was filed or two years after the tax was paid if no return was filed. Wells calls this the “refund statute end date,” and it’s your final deadline to file any claim.

Here’s the key detail that trips up practitioners: “The filing of an original return, not an amended return, begins the period of limitation,” Wells explains. This means if you amend a return filed years ago, you’re still working within the timeline set by that original filing date.

Step Two: How Much Can You Actually Get?

Even if you file a timely claim, step two determines how much you can recover through the “lookback period.” The rules change dramatically based on when you file:

  • File within three years: You can look back at the full three years
  • File after three years: Your lookback period shrinks to just two years

This is where Hamilton got trapped. The court found she filed a timely claim, satisfying step one. But because she filed her 2017 return so late—November 2021—her lookback period couldn’t reach back to her 2017 tax payments, which were deemed made on April 15, 2018.

As Wells puts it, “The court said she filed a timely claim for refund. However, for that timely claim, there was no refund available. What does that mean? How can that be?” To understand the answer, you have to know when the IRS considers payments “made” under tax law.

The Payment Timing Trap That Caught COVID-Era Taxpayers

The lookback period depends on when payments are “deemed made,” not when they actually happened. This creates counterintuitive situations that can permanently cost taxpayers money.

The Withholding Rule

Under IRC section 6513, all tax withheld from your paychecks during the year is deemed paid on April 15th of the following year. It doesn’t matter if the money was withheld in January or December—it’s all considered paid on April 15th.

For Hamilton, “Her 2018 withholding is deemed paid on April 15th, 2019, which is the 15th day of the fourth month following the close of that tax year.”

The COVID-19 Disaster

These timing rules created a perfect storm during the pandemic. The IRS postponed filing deadlines—2019 returns were due on July 15, 2020, and 2020 returns were due on May 17, 2021. But payments were still deemed made on April 15th of each year.

This trapped taxpayers who filed during the postponement periods. Someone who filed their 2019 return on July 15, 2020 (perfectly timely) might wait until July 15, 2023, to file a refund claim. Their three-year lookback would run from July 15, 202,3 back to July 15, 2020. But their 2019 payments were deemed made on April 15, 2020, which falls outside their lookback window.

Wells explains: “This left taxpayers who didn’t file extensions for those tax years stuck with potentially valid refund claims, yet they didn’t have any periods within the lookback period because those payments were still deemed filed as of April 15th.”

The IRS eventually provided relief through Notice 2021-21, but only after recognizing that its own timing rules created harsh consequences for taxpayers who did nothing wrong.

The Dangerous “Due Date” Myth Costing Taxpayers Money

A destructive misconception in refund statute law sounds perfectly reasonable: “You have three years from the due date to claim a refund.” 

But Wells makes it crystal clear that this perception isn’t accurate. “The end date is actually three years from the filing date or possibly two years from the payment date.” The due date might coincide with these periods for taxpayers who file on time, but it’s not what controls the deadline.

Why the Due Date Myth Fails

The due date myth crumbles in the exact situations where practitioners need precision most:

  • Late-filed returns: A taxpayer who files their 2020 return in September 2023 doesn’t have until April 15, 2024 to claim refunds. Their three-year period starts from September 2023.
  • Amended returns with post-deadline payments: Wells explains these create situations where “a valid refund claim made more than three years after the due date, could look back into those payments made after the deadline.”

The Hamilton case perfectly illustrates this. If you applied the due date myth, you’d think she was too late filing in November 2021 for a 2017 return. But the court found her claim was timely because the real rules don’t work that way.

The Professional Liability Risk

For tax professionals, relying on the due date myth creates serious liability exposure. When practitioners give advice based on this oversimplified rule, they risk costing clients money they can never recover.

Wells emphasizes the finality built into these rules: “Once that statute of limitations is up, once you have passed that refund statute end date, there is no going back with some very, very limited exceptions.”

Why These Rules Are So Unforgiving

The refund statute of limitations operates with mechanical precision, regardless of hardship or apparent unfairness. Courts consistently rule that these deadlines are clear and unambiguous, so there’s no room for equitable exceptions or reasonable cause relief.

The Finality Principle

Congress built finality into the tax code intentionally. As Wells explains: “There’s an implicit concept in the tax code that Congress has written into it. I tend to call it finality.” At some point, taxpayers should feel confident that old tax years are truly closed.

But this finality only works if practitioners understand the real rules. The Hamilton case, with its modest $2,070 refund that became a years-long legal battle, shows how even small amounts trigger the same unforgiving rules that govern million-dollar refunds.

The Stakes for Tax Professionals

These rules affect every practitioner who works with amended returns, late filers, or clients with potential refund claims. Understanding when the IRS deems payments made, how postponements interact with lookback periods, and when the due date myth doesn’t apply isn’t just technical knowledge—it’s client protection. And it can be the difference between recovering thousands of dollars and losing them forever.

When Time Runs Out, Money Disappears Forever

The refund statute of limitations represents tax law at its most technically demanding and unforgiving. The two-step framework of limitation periods and lookback periods creates a system where understanding timing rules can mean the difference between financial recovery and permanent loss.

For tax professionals, these rules represent the intersection of expertise and fiduciary responsibility. Relying on oversimplified rules or misunderstand the distinction between filing dates and due dates means risking giving advice that permanently costs clients money.

This finality places enormous responsibility on practitioners to understand and navigate these rules correctly.

Don’t let technical complexity cost your clients money they can never recover. Listen to Wells’ complete Tax in Action episode to master these critical timing rules and protect your clients’ interests and your professional reputation.

Why Your Audit Fails Before Fieldwork Even Starts

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“Some audits are doomed before the fieldwork even begins.”

In Episode 2 of Audit Smarter, Sam Mansour cuts to the heart of a problem many audit professionals face but don’t fully understand. You’ve been there: an experienced team, solid procedures, and a reasonable budget. Yet somehow, the engagement still feels like constantly playing catch-up. Testing seems disconnected. Risks surface at the worst possible moment. Partners ask questions during review that should have been answered weeks ago.

The culprit? Poor risk assessment that undermines everything that follows.

Most audit professionals understand risk assessment is important, but few realize how dramatically it shapes their engagement. Mansour explains, “The risk assessment drives the entire audit approach. And if we misidentify or overlook specific audit risks, your testing could be misaligned, and you could waste time. But even more concerning, you might miss material misstatements.”

Here’s what’s happening across the profession and, more importantly, what you can do about it.

Why Risk Assessment Gets the Short End of the Stick

The problem isn’t that auditors don’t know how to assess risk. It’s that firms have systematically devalued this critical phase, treating it as administrative overhead rather than the strategic foundation it actually is.

“Many teams view planning just as a compliance step and not as a strategic one,” Mansour observes. Budget pressures and efficiency demands create an environment where teams feel pushed to rush through risk assessment. “We devalue the risk assessment phase. We think of it as a textbook thing. Let’s just check some boxes and move on.”

This leads to what Mansour calls “pencil whipping,” mechanically completing checklists without genuine thought or analysis. The evidence shows up everywhere in audit files: work paper references that don’t make sense, incorrect years, or references to people who no longer work at the organization.

“It’s pretty clear it’s been rolled forward,” Mansour notes. “And it’s also very clear no one read through it.”

When external reviewers, whether peer reviewers or regulators, see this kind of documentation, it immediately raises red flags. “As a peer reviewer, you look at some of these risk assessments, and it’s crystal clear they just rolled this from last year and they didn’t even look at it,” he explains. “You’re probably going to be pretty strict when you’re looking at the rest of that file because clearly these guys are just rolling from the prior year.”

The pressure to be “efficient” in planning creates a dangerous cycle where the foundation of the audit becomes weaker, making it much harder to execute proper testing throughout the engagement.

5 Common Mistakes That Derail Audits

Understanding where things typically go wrong helps you avoid these pitfalls in your own engagements. Mansour identifies several patterns that consistently create problems.

Generic, Template-Driven Approaches

When risk assessments are generic and not customized to the specific client, the walkthroughs and procedures that follow suffer. “If we are general or vague in our identification of risks, it results in generic audit procedures,” Mansour explains.

Copying Prior Year Without Thinking

Using prior-year documentation as a starting point makes sense, but many teams go too far. They simply copy everything over with minor adjustments, becoming “a little complacent, a little lazy” in the rollover process. A better approach is to use prior-year information as a guide but take a fresh perspective on the current year.

Failing to Link Risks to Procedures

One “gut-wrenching” moment in an audit review happens when the audit team identifies risks in checklists, but no corresponding procedures address them. “You identified this risk, but what did you do about it?” This mistake exposes fundamental gaps in audit logic.

Superficial Inquiries

Take related party transactions, for example. Many auditors accept a simple “we have none” from the client and move on. But as Mansour points out, “that’s not sufficient.” Instead, “auditors should dig into board minutes, vendor relationships, and ownership records” to understand whether related parties exist and what transactions might occur.

Misusing Junior Staff

Sending inexperienced team members to conduct walkthroughs without proper guidance is a recipe for problems. Junior staff might identify three issues out of ten while missing critical problems that experienced auditors would catch immediately. “Sometimes you need experience to tell you, you’re looking at ten different things and eight of them are going to be a problem and two of them are not,” Mansour explains.

The solution isn’t to avoid using junior staff. It’s to pair them with experienced team members who can provide real-time guidance and fill in the gaps.

Practical Tools to Strengthen Your Risk Assessment

The good news is that these problems are entirely fixable with the right approach and tools. Here’s what works:

  • Dynamic checklists. Move beyond simple checkbox exercises to checklists that challenge teams to collect new information and think deeply about what they find. Ask different types of questions that force auditors to go beyond surface-level inquiries.
  • Structured brainstorming sessions. Don’t just conduct one brainstorming session and call it done. Mansour recommends peppering collaborative discussions throughout the engagement. “Have the engagement team go out to lunch and consider that part of your brainstorming activity,” he suggests. These sessions force teams to share knowledge and often uncover overlooked areas.
  • Early data analytics. Instead of treating analytics as nice-to-have add-ons, deploy them “immediately after engagement acceptance,” Mansour advises. His approach: “Give me your trial balance, and I will do some data analytics on it right from the get-go.” This generates specific issues to investigate before client meetings, allowing you to connect numbers to client stories strategically.
  • Simple intelligence gathering. Something as basic as Googling your client’s name can reveal critical information, yet “a lot of auditors won’t even do that,” Mansour observes. “You’d be shocked at some of the stuff” these searches uncover. Review prior audit findings, look for industry changes, and stay current on client updates.
  • Collaborative team approach. Instead of having one person update risk assessment documentation alone, assign different sections to different team members. This ensures multiple people read through and think about the content, rather than having it all flow through one person who might miss important details.

What Separates Top Performers

Firms that consistently execute superior risk assessments share several key characteristics that set them apart.

They Treat Risk Assessment as a Mindset

“Top performers treat risk assessment as a mindset, not just a task,” Mansour explains. “They understand that there’s value in risk assessments. It’s not just a checkbox on their list.” Their teams are intellectually curious rather than robotic, but this requires giving people adequate time and breathing room to think deeply.

They Create Collaborative Environments

These firms don’t silo team members into individual sections. Instead, they “connect the dots between client goals, internal controls, and audit processes with purpose.” Team members actively consider how discoveries in one area impact testing in others, creating a comprehensive understanding that reduces risk while improving efficiency.

They Invest in Proper Mentorship

Rather than throwing junior staff into complex situations alone, top performers create systematic mentorship structures. They pair junior staff with experienced seniors who provide real-time guidance, immediate field discussions, and progressive responsibility increases.

They Focus on Custom Solutions

Elite performers avoid generic approaches entirely. They tailor audit plans to each client and engagement year. Their team members can explain their logic clearly without defaulting to “it’s what we were told” or “it’s what we did last year.”

Three Changes to Make Right Now

If your firm wants to improve immediately, Mansour recommends focusing on these three foundational changes:

  1. Slow down in the planning process and allow for deeper team discussions. Invest upfront time that prevents downstream scrambling and quality issues.
  2. Ensure walkthroughs include a formal evaluation of control effectiveness with documentation customized to the specific client and current year rather than generic templates.
  3. Critically assess each risk and match it to custom procedures designed to address it, eliminating the disconnect between identified risks and actual testing approaches.

How You Know You Got It Right

Success in risk assessment is measurable through specific indicators. Your audit plan should be tailored, not generic. This demonstrates genuine client-specific thinking rather than template dependency. Your team members should be able to explain their logic clearly and provide substantive reasoning for their approaches.

Most importantly, when partners or regulators review your documentation, they should be able to “read your risk assessment and understand the rationale,” as Mansour puts it. They should see a clear narrative and strategic thinking rather than dry, templated responses.

If your team can’t explain their logic, or if external reviewers see obvious evidence of rolling forward prior year templates, you’re still in checkbox mode rather than strategic thinking mode.

The Foundation Makes the Difference

Risk assessment isn’t preliminary work that happens before the “real” audit begins. It’s the foundation that determines whether your entire engagement succeeds or struggles. As Mansour explains using a gardening analogy, if the risk assessment seed “doesn’t get planted properly, if it’s not cared for properly, it sets you up for failure.”

Firms that recognize this and invest accordingly create sustainable competitive advantages through systematically superior approaches to this critical phase.

The strategies and tools we’ve covered are proven approaches to transform your risk assessment process from liability into a strategic advantage. However, implementation requires commitment to changing how your firm approaches and uses its resources for this foundational work.

Ready to dive deeper into these risk assessment strategies and discover the specific frameworks top performers use? Listen to the full episode of Audit Smarter for Sam Mansour’s complete insights on transforming your approach to risk assessment and elevating your audit practice.

Stop Talking About Culture and Start Fixing These Three Problems

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“There’s nothing worse we can do for our people and our organizations than doing it the way we’ve always done it,” says Erin Daiber, CPA and founder of Well Balanced Accountants. In this episode of the Earmark Podcast, Daiber joins host Blake Oliver to tackle one of accounting’s biggest challenges: how to actually change firm culture instead of just talking about it.

From Big Four Burnout to Culture Coach

Daiber’s story starts with an ironic twist. When she entered business school, she told her parents she’d do “anything but accounting.” Yet a professor convinced her she was good at it, and at 19 or 20 years old, she took that advice to heart. “Being at that moldable stage, I thought, well, okay, I guess that’s what I need to do,” she recalls.

While she doesn’t regret her path, Daiber discovered a fundamental mismatch between her personality and the detailed work required at the staff and senior levels. “I’m not naturally detail oriented,” she admits. “I would get review notes back from my manager and the partners, and I just had nothing left to give. I really couldn’t care less about some of those details, as important as they may have been.”

What kept her going was the people. “I loved interacting with my colleagues on a day-to-day basis,” she explains. But when the managers she connected with left the firm, things unraveled. By the time she reached senior level—about three and a half years in—burnout had taken hold. “I was driving to work, looking at other people doing their jobs and thinking, gosh, that looks nice. Even the guys that were mowing the lawn on the side of the highway, I’m like, at least they get to be outdoors and breathing fresh air every day.”

After leaving for industry work that didn’t solve her problems, Daiber enrolled in a coach training program for self-discovery. Eventually, she found her way back to serving the accounting profession, but with a different mission: helping firms navigate the challenges that drove her away.

The Gap Between What We Say and What We Do

When discussing firm culture, Daiber cuts straight to the heart of the problem. “There’s often the one that we say we have, and then there’s the one that we actually have,” she states. Culture isn’t about the values on your website, it’s about “the values we live by, the behaviors that show up and are accepted and tolerated and encouraged inside of a firm.”

She shares an exercise from her firm retreats: projecting the firm’s stated values on a slide without commentary. “Oftentimes they don’t recognize them because they are not living those values every single day,” she observes. These values become “almost a mythical thing out there that we’re working towards, but not very intentionally.”

To expose this disconnect, Daiber challenges firms with a thought experiment: “If I was observing your organization from the outside in and could hear and see what’s going on, what would I say your values are? Is it profit first? Is it billable hour is king?”

Oliver agrees, sharing his preference for honesty over hypocrisy. “I would almost prefer it if the firms that are not people-first were just open about it,” he says, comparing it to Wall Street investment banks that make no pretense about prioritizing profits. “At least that’s honest.”

What Keeps Firms Stuck in Old Patterns

The conversation reveals three main forces preventing real culture change in accounting firms.

First is the scarcity mindset that infects decision-making. Oliver openly shares his struggle with saying yes to too many speaking engagements, even though he knows it prevents him from focusing on long-term goals and family time. “I say yes to these things, even though I shouldn’t, I know I shouldn’t, but then I do it anyway,” he admits.

Daiber sees the same pattern with client acceptance. She walks firm owners through their fears. “Usually within five or six steps we can get a firm owner to, well, we’ll be bankrupt. We won’t exist anymore.” The reality? “They’re so far away from that, that’s not really going to happen.”

Second is the resistance to change itself. “When I hear of firms that say, ‘we’re just doing it the way we’ve always done it,’ that is like Kryptonite,” Daiber emphasizes. “Nothing in the world is the same as it was even five years ago. How can you justify not changing how you’ve done things and how you’re serving your clients?”

Third is simple busyness. “As soon as we step back into our day-to-day, there is an almost insurmountable inertia that keeps you in that sway of busyness,” Daiber explains. Without creating what she calls “white space” in the day, there’s no capacity to implement changes.

The conversation also touches on structural problems like billable hours (“every hour is not created equal”) and micromanagement that develops when leaders lack diverse management tools. As Daiber notes about micromanaging leaders, “They actually don’t have to take responsibility for it, because you’re going to check in with them all the time.”

Making Change Actually Happen

Moving from theory to practice requires specific actions and uncomfortable decisions. Here’s what Daiber recommends:

Start by saying no

This includes “cleaning up your own mess” by transitioning out clients who don’t align with your values. “Finish out your term of working with that client, but let them know we’re not going to continue,” Daiber advises. Firms need what she calls a “red velvet rope policy” that only accepts clients who “treat our people with respect, value our services, and are willing to pay.”

Create structural changes that force new behaviors

One firm Daiber mentions implemented mental health days with a twist. “If you said, I’m taking a mental health day and anyone was caught making a request of that person on that day, they were the ones in trouble.” Oliver suggests an even more radical experiment: turning off firm email during certain weekend hours.

Build real accountability

“The firms that are really successful with this are willing to call each other out in a respectful way,” Daiber states. This means partners holding each other to commitments. “Hey, that was one of the things we said we were going to not do. Let’s fix that going forward.”

Show genuine appreciation

This goes beyond generic praise. “Catching people doing a good job is so simple. It’s free,” Daiber notes. But it also means “checking in on someone, not just about their progress on a task. How are they feeling? Do they feel like they’ve grown?”

Exit interviews reveal what happens without genuine appreciation. People say, “I don’t feel like I’m a valuable or valued member of the team. No one’s training me. No one’s taking me under their wing,” Daiber shares. “I’m going to go somewhere where I feel like somebody cares about my development.”

Most importantly, leaders must model the values they claim. “Encourage them to take time off and unplug during their time off, don’t email them on the weekend,” Daiber emphasizes. “All of those things that we wish people would do for us, we need to do for them.”

The Choice Every Firm Must Make

As the conversation wraps up, both Oliver and Daiber acknowledge that changing firm culture isn’t mysterious; it’s just uncomfortable. It requires letting go of profitable but problematic clients, breaking long-held habits, and having difficult conversations with colleagues.

“We have to start creating a culture of ownership and responsibility,” Daiber explains. But this can’t happen while clinging to old metrics and methods. Each leader must take personal responsibility for “working through their own blocks and concerns or scarcity or fears around letting go of this old way of doing things.”

The accounting profession faces a clear choice: continue losing talented people to outdated practices and fear-based management, or do the hard work of aligning daily operations with stated values. As Daiber’s own journey shows, when good accountants leave the profession entirely, everyone loses.

Listen to the full episode to hear more about Daiber’s framework for culture transformation, including additional exercises for exposing true firm values and strategies for breaking the micromanagement cycle. Whether you’re a partner watching good people leave, a manager caught between competing demands, or staff wondering if change is possible, the conversation offers a practical roadmap for moving from culture as concept to culture as daily experience.

The R&D Credit Reality Check Every Tax Professional Should Understand

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Picture this: A small business owner walks out of a networking event buzzing with excitement. Someone just told them about the Research and Development tax credit. They’re already mentally calculating how much they’ll save on the custom software they’ve been developing for their consulting practice.

This scenario happens all the time, and it shows the gap between what business owners expect and what the tax code actually delivers. In this episode of Tax in Action, host Jeremy Wells, EA, CPA, breaks down one of the most misunderstood areas of tax law: the Section 41 Research and Development Credit.

The Credit That Sounds Simple But Isn’t

When clients first hear about the R&D credit, they focus on that appealing 20% credit for increasing research activities. It sounds straightforward: spend money on research, get 20% back as a tax credit. But as Wells explains, this credit is much more complex.

“I work with a lot of small service-based businesses,” Wells says. “So it doesn’t come up a lot in my practice, but there have been some cases where we’ve had businesses qualify for the credit, and that’s always a little exciting for me.”

That excitement comes after navigating through layers of complexity that immediately separate hopeful applicants from actual recipients.

Section 41 actually has three different parts: qualified research expenses, basic research payments, and Energy Research Consortium credits. For most businesses, only the first part matters. The basic research component applies to research without specific business goals, which Wells dismisses for his small business clients. “If they don’t have a business goal, they probably are not going to be able to afford to pay me for very long.” The energy research component targets massive global energy companies, not typical clients for most tax professionals.

Here’s where the “20% credit” gets misleading. It’s not 20% of research expenses. It’s 20% of the excess of qualified research expenses over a “base amount.” This base amount calculation is complex, but for most businesses, it defaults to 50% of qualifying research expenses.

Wells breaks down the math: “In general, we’re looking at 50% of qualified research expenses and then we’re taking 20% of that.”

The result? What sounds like a 20% credit actually delivers roughly 10% of qualifying research expenses as an actual tax benefit.

But even this 10% assumes businesses can navigate the qualification requirements, which proves much harder than the math.

The Science Requirement That Trips Up Most Businesses

The real barriers come from qualification requirements that act like scientific gatekeepers. Wells identifies the core problem: “This is probably the strongest limitation on what qualifies for research relevant to my clients. The research has to involve a process of experimentation that relies on the principles of either the physical or biological sciences, engineering or computer science.”

This creates an immediate disconnect. When most business owners think about research and development, they think of any effort to improve their operations: better customer service, more efficient workflows, or custom software. But Section 41 demands genuine experimentation rooted in hard sciences.

The “process of experimentation” adds another hurdle. Wells explains that this process “evaluates one or more alternatives to develop or improve a business component where the result was uncertain.” This isn’t about having a clear goal and executing a known path—that’s implementation, not research. True qualifying research requires genuine uncertainty about whether proposed alternatives will work, plus systematic testing of multiple approaches.

This eliminates entire categories of business activities that feel innovative but don’t meet the technical standards. Market research, customer satisfaction studies, workflow optimization, and business process improvements all fall outside the boundaries. As Wells states, “If your research consists of trying to understand your customers better, that’s not going to qualify as research.”

Software development faces even tougher standards. Internal software must pass what Wells calls “a very high bar” through the high threshold of the innovation test. This test requires proof of “substantial and economically significant” improvements, backed by “significant economic risk” where the business commits “substantial resources” with genuine uncertainty about recovery.

The economic risk part proves particularly challenging for small businesses because it excludes what Wells calls “sweat equity.” He explains, “What doesn’t count here, is that sweat equity, or the time spent by the business owner, or the uncompensated work by their partners, or even their staff.”

This requirement for actual cash rather than time investment doesn’t align with how most small businesses operate. The solo consultant developing custom software or the manufacturing business owner optimizing processes typically invest primarily time and expertise rather than substantial cash. Under Section 41, this automatically disqualifies them.

Making It Work: Expenses, Strategies, and Professional Help

For businesses that navigate the scientific requirements, the wage allocation requirements immediately complicate things for any business hoping to qualify through employee efforts.

Wells explains the 80% rule: “If you’ve got some sort of support staff spending at least 80%, four out of five working days a week directly involved in that research project, then their wages qualify in full.” Anything less than 80% requires careful splitting between research and non-research activities.

This gets trickier with executives. Wells has seen businesses try to claim big portions of C-suite wages for research. However, even technical CEOs who contribute to research projects rarely abandon their executive duties entirely. Wells says practitioners must “look at bifurcating, if not entirely writing off, their wages and salaries as not related to the actual research project itself.”

For businesses without internal research capacity, contract research offers an alternative, though with percentage limitations that reduce the effective credit rate. The general rule allows only 65% of contractor payments to qualify, though this increases to 75% for qualified research consortia and 100% for eligible small businesses, universities, or federal laboratories.

Wells breaks down the math for businesses relying entirely on contractors. “If all the qualifying research expenditures are paid to contractors, then we only get about 6.5% of those expenditures in terms of the credit.”

Despite this reduced rate, Wells suggests the contractor route might be easier than internal allocation headaches. “It might also be more advantageous to pay contractors and be able to take 65% of what’s paid to contractors than to worry about taking existing staff and trying to allocate some of their work toward the research project.”

Wells also highlights the payroll tax election as a cash flow strategy for startups. Rather than waiting years to use R&D credits against income taxes, businesses can elect to apply credits against the employer’s 6.2% Social Security tax, creating immediate benefits.

Given all this complexity, Wells strongly recommends working with specialists. “Finding a good, reputable firm to work with or to recommend and refer your clients to. But in general, it’s important that you understand the basis and the basics of section 41.”

Busting Common Myths

Wells addresses two common misconceptions about the R&D credit.

First, that service businesses automatically don’t qualify. While most service businesses won’t qualify for traditional reasons, Wells suggests this shouldn’t lead to automatic dismissal. “It might be possible to advise them in such a way to help them qualify for it, at least in part.” This might involve outsourcing research to qualified contractors, developing products for eventual sale rather than purely internal use, or ensuring research projects involve genuine experimentation rather than predetermined paths.

Second, that payroll is required. Wells points out that contract research expenses can qualify, even if at reduced percentages. While the effective rate drops for businesses using only contractors, “that might be better than nothing,” and “better than thinking that it has to be payroll and therefore nothing qualifies.”

The Bottom Line for Tax Professionals

The Section 41 R&D credit shows how well-intentioned tax policy is accessible primarily to those with sophisticated professional guidance. What sounds like a straightforward “20% credit” turns into a technical challenge that eliminates most hopeful applicants.

For tax professionals, understanding complex credits isn’t just about technical knowledge; it’s about managing client relationships and setting appropriate expectations. The practitioner who dismissively tells clients they don’t qualify without understanding restructuring possibilities doesn’t serve the client well. But the advisor who raises false hopes by oversimplifying requirements creates bigger problems.

Listen to the full episode of the Tax in Action podcast for Wells’ full breakdown of Section 41. His practical approach helps practitioners distinguish between realistic opportunities and unrealistic expectations while serving clients’ best interests.

The R&D credit may be complicated, but understanding its complexities opens doors to legitimate opportunities.

The Math Is Brutal: Every CPA Must Triple Their Productivity by 2035 or Face Professional Extinction

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“When you chart out demand versus supply of people over time, what that math tells you is that ten years from now, 2035, every CPA in the profession will have to be 2.7 times more productive on a revenue per employee basis than they are today. That is crazy.”

David Wurtzbacher shared this projection on a recent episode of the Earmark Podcast. As the founder and CEO of Ascend, a private equity-backed platform that’s completed over three dozen firm acquisitions in just over two years, Wurtzbacher offers an outsider’s perspective on the profession.

His background scaling Lightwave Dental from 7 to 80 locations taught him how private equity can either destroy professional cultures or transform them for the better. Now he’s applying those lessons to accounting, where the numbers paint a sobering picture: demand for services keeps climbing while fewer people enter the profession each year.

To put this in perspective, a typical well-performing firm today generates around $200,000 in revenue per employee. Wurtzbacher’s projection means that number needs to approach $600,000 per person within a decade. Even scarier? By 2035, roughly 85% of the profession will consist of people with ten years or less of experience in an industry where most say you can’t even make partner in that timeframe.

But Wurtzbacher isn’t just highlighting the problem. Through Ascend’s model of preserving firm independence while providing enterprise-scale resources, he’s showing how firms can achieve these seemingly impossible productivity gains through three key transformations.

The Leadership Evolution: From Managing Partner to True CEO

The biggest barrier to 2.7x productivity isn’t technology or talent. It’s how firm leaders spend their time. Most managing partners remain trapped doing client work while trying to run their businesses, creating a fundamental ceiling on growth.

“The very first place we go is to the leader of the firm,” Wurtzbacher explains. “We want to help them through a transition to become a true CEO, defined as them having one client, which is the firm.”

This leadership trap stems from what Wurtzbacher calls the “fiercely independent” culture of accounting. During his research, he consistently heard from entrepreneurial CPAs who valued their independence: the name on the door, community reputation, caring for people and clients their way. But this independence prevents the changes necessary for breakthrough growth.

The problem runs deeper than time management. The client service orientation that defines quality accounting actually caps leadership development. With seasonal demands and constant client pressure, managing partners find limited windows for strategic work throughout the year.

The real breakthrough requires confronting a limiting belief. “When you’re close with your clients, you believe nobody can do the work but you,” Wurtzbacher observes. “No one else can have this client relationship.”

Consider Lee Cohen from LMC in New York, who exemplifies this transformation. Cohen was initially stressed, unhappy, and heavily involved in client work. Through Ascend’s CEO transition process, “Cohen literally became a different person. He would tell you that,” Wurtzbacher says.

Fifty percent of Cohen’s transformation came from a mindset shift. The other fifty percent came from bringing in a Chief Growth Officer—not a traditional business development role, but a general manager from outside the profession. “A lot of them have MBAs, but they are hungry, humble, smart people that come in and create visibility for that leader about what’s going on in the business and where there are opportunities.”

This operational support, combined with the mindset shift away from client dependency, sets leaders free to focus on what only they can do: building and directing their firms.

Creating an “Irresistible Offer” for Top Talent

Even the best leadership transformation can’t solve the profession’s talent crisis through traditional methods. When quality candidates routinely field six, seven, or eight job offers, firms need something fundamentally different.

Wurtzbacher’s solution centers on creating an “irresistible offer,” and it starts with better recruiting. “So many firm recruiters grew up in the profession, and they’re trapped with the baggage of old ways of doing things,” he explains. Ascend built a team of professional recruiters from outside accounting who understand best practices for finding candidates and closing deals.

But the real breakthrough is compensation innovation. While the profession is “very base salary heavy,” Ascend developed an off-the-shelf bonus program that lets firms pay more cash than competitors. They also extended equity ownership far beyond traditional partner levels.

“We have well over 100 people across all our firms that are managers or senior managers that are investors in Ascend. They own Ascend stock,” Wurtzbacher reveals. These employees invest $10,000 to $50,000 annually in company stock—typically funded through the enhanced bonus program—essentially dollar-cost averaging into equity appreciation throughout their careers.

This creates what Wurtzbacher calls “a different cultural energy.” When people understand how equity value creation works outside the traditional partnership model, they connect their daily work to long-term wealth building. The psychological shift from employee to owner fundamentally changes commitment levels.

The design also solves a collaboration problem. Because everyone owns Ascend stock regardless of which firm they work for, “it creates a one team attitude across all our firms” that unlocks knowledge sharing across the platform.

The results speak for themselves. Firms that described capacity as their “#1 issue” now consider that problem solved. “Our big issue now is how do we go and get all the right kinds of new business that we want to keep our great people excited and motivated,” Wurtzbacher notes.

Technology at Enterprise Scale

Achieving nearly triple productivity requires more than incremental improvements. It demands systematic transformation through AI, global teams, and automation that individual firms cannot afford alone.

But there’s a gap between AI hype and reality. “There is so much more hype and future forecasting than there is reality in this area,” Wurtzbacher observes. For firms feeling behind, “that’s just not the case.” Most firms implementing AI are saving perhaps two hours per person per week, and that’s only for the most advanced adopters.

This creates both opportunity and strategic imperative. While individual firms struggle with overwhelming AI options, they lack technical expertise and capital for truly transformative capabilities. The solution requires enterprise scale.

Ascend illustrates this advantage in action. They’re building a 30-person software engineering and AI team by year-end. “No medium-sized or smaller firm is going to be able to do that,” Wurtzbacher explains.

Their strategy operates on two fronts: strategic buying versus building. For general needs, they purchase existing products. For capabilities essential to their workflows, they invest millions annually developing proprietary AI solutions.

One promising area addresses what Wurtzbacher calls the client context problem. Years of relationships generate institutional knowledge typically trapped “in your head, in spreadsheets, in work papers, in your inbox, and some other tool.” Their AI team works on aggregating this context into accessible systems that transform practitioners from information gatherers into true advisors.

Global talent represents another productivity component. Ascend’s acquisition and transformation of Sentient Solutions, a global capability center exclusively serving US accounting firms in Hyderabad, India, demonstrates sophisticated global team integration. But this isn’t simple outsourcing; it requires developing playbooks that elevate rather than replace domestic work.

Even basic infrastructure offers huge opportunities. Practice management systems in accounting are “so messed up,” Wurtzbacher notes. Before AI delivers transformation, firms need fundamental technological foundations for tracking work and maintaining institutional knowledge.

The Choice Facing Every Firm

Survival depends on three interconnected transformations happening simultaneously: leaders evolving from client servers to strategic CEOs, revolutionary talent approaches through equity ownership, and enterprise-scale technology investments individual firms cannot achieve.

This is a watershed moment for professional services. The mathematical reality of 2.7x productivity gains will separate surviving firms from those becoming obsolete. When 85% of the profession will have a decade or less experience by 2035, traditional models don’t just fail; they become mathematically impossible.

But there’s reason for optimism. Firms embracing these changes discover that freeing leaders from client work unleashes strategic energy, equity ownership creates cultural transformation beyond salary increases, and enterprise-scale technology delivers impossible productivity gains.

Wurtzbacher’s personal timeline reinforces this long-term vision. At 37, he tells people “this very well could be the last thing I do. So I’m thinking of Ascend in terms of decades.” While typical private equity investments last three to four years, his commitment spans the time needed for real transformation.

For accounting professionals, this is an existential threat and an unprecedented opportunity. The mathematical moment of truth has arrived. The question isn’t whether change is coming. It’s whether you’ll lead it or be overwhelmed by it.

Listen to the full conversation with David Wurtzbacher on the Earmark Podcast to hear more about Ascend’s approach to transforming accounting firms while preserving their independence.