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Your Client Got a W-2 and a 1099 from the Same Company. Here’s How to Handle It

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Your client slides a W-2 and a 1099-NEC across the desk. Both are from the same company for the same tax year.

“Can this be right?” they ask.

Your gut says error. Often, it is. But sometimes that dual reporting is perfectly legitimate. Knowing the difference, and what to do when it’s wrong, separates a competent preparer from the advisor clients can’t afford to lose.

This is the territory Jeremy Wells, EA, CPA, covers in Part 2 of his worker classification series on the Tax in Action podcast. If you caught Part 1, you already know the common law control test for determining whether someone is an employee or contractor. Part 2 goes deeper into the statutory categories that break that simple binary wide open.

Statutory Employees: The Hybrid Category Most Practitioners Overlook

Beyond corporate officers (always employees) and common law employees (determined by the control test), the Internal Revenue Code creates a third category that confuses even experienced practitioners.

IRC Section 3121(d)(3) defines four occupational groups treated as employees for FICA and sometimes FUTA purposes, but not for federal income tax withholding. This hybrid status creates unique reporting requirements you need to understand.

The four groups are:

  1. Agent or commission drivers (FICA + FUTA): Workers distributing meat, vegetables, fruit, bakery products, beverages other than milk, or laundry/dry cleaning services
  2. Full-time life insurance salespersons (FICA only)
  3. Traveling or city salespersons (FICA + FUTA)
  4. Home workers (FICA only): Traditionally textile workers, but now including typing and transcribing services

Jeremy emphasizes an important point. “Home workers” doesn’t mean anyone working from home. It’s a specific statutory category.

To qualify as a statutory employee, these workers must meet three requirements. First, the contract must state the worker will personally perform all the work; no delegation allowed. If they can subcontract, they’re an independent contractor. Second, they can’t have substantial investment in facilities beyond transportation. Owning a delivery truck is fine; investing in other equipment probably disqualifies them. Third, there must be an ongoing work relationship, not a one-time gig.

Here’s where it gets interesting for practitioners.

Statutory employees receive a W-2 with box 15 checked. But that W-2 doesn’t go on page one of the 1040 as wages. Instead, it goes on Schedule C as gross income. The worker can then deduct related business expenses. That’s a huge advantage regular employees lost when the Tax Cuts and Jobs Act eliminated unreimbursed employee business expenses.

But there’s a catch. This income isn’t subject to self-employment tax because FICA was already handled through employer withholding. You must keep this Schedule C completely separate from any self-employment activity. And you can’t use this income to fund a SEP IRA or Solo 401(k).

Full-time life insurance salespersons get special treatment. They’re eligible for certain employee benefits from their companies. The other three statutory employee categories are independent contractors for benefit purposes. But even insurance salespersons can’t use their compensation for self-employed retirement plan contributions. “This is one of those cases where tax law just kind of won’t make sense,” Jeremy notes.

When Workers Are Never Employees, and When They’re Both

The code also designates three categories of workers who are never employees, no matter what.

First, sitter placement services under IRC Section 3506. Someone who only connects babysitters or caregivers with families isn’t the sitter’s employer as long as they’re paid on a fee basis and don’t handle wages. They’re just a third party making introductions.

Second and third are qualified real estate agents and direct sellers, covered by IRC Section 3508. Real estate agents need a license, commission-based pay, and a written contract stating they’re not employees. Jeremy notes this is “almost a universal arrangement” between brokerages and agents. Direct sellers follow similar rules. They sell products outside permanent retail establishments with commission pay and non-employee contracts.

This brings us back to our opening question. Can someone legitimately get both a W-2 and 1099 from the same company?

Yes. Revenue Ruling 58-505 tackled this exact situation. Insurance company workers served as corporate officers (running the company) and independent sales agents (selling policies). The IRS said they were employees for officer duties but contractors for sales activities.

“Imagine a corporate officer who also sits on the board of directors,” Jeremy says, offering a common example. “In fact, this is fairly common for a lot of companies, especially smaller family held companies.” If board service warrants separate compensation, they could receive employee wages for their officer role and contractor pay for director duties.

But dual reporting isn’t always this clean. “I’ve seen cases where the worker did not have the necessary paperwork to the employer in time to be on payroll when that worker had already been working,” Jeremy says. Sometimes a bookkeeper or tax advisor discovers mid-year that someone’s been misclassified all along. “I’ve been in the position where I’m the one having to have this conversation with a client,” he admits.

When you see both forms from one company, ask questions. What services generated each form? The answer determines whether you’re looking at a legitimate dual arrangement or a classification problem that needs fixing.

The Relief Toolkit When Classification Goes Wrong

Classification mistakes happen. Jeremy calls them “inevitable.” Knowing which relief mechanisms to use can mean the difference between a manageable fix and a disaster.

First, understand the employer is ultimately responsible. IRC Sections 3402, 3101, and 3111 require employers to withhold and pay employment taxes. Section 7501 requires holding these amounts in trust, with serious penalties for non-compliance.

There’s one escape valve. Under Section 3402(d), if an employer didn’t withhold income tax but the employee paid it anyway, the employer is off the hook for that amount. But only if the employee actually paid.

IRC Section 3509: Relief for Honest Mistakes

This applies when employers misclassify workers without “intentionally disregarding” their withholding duties. If they filed 1099s, the liability drops to:

  1. 1.5% of wages for federal income tax
  2. 20% of what should have been withheld for FICA

If there are no 1099s, those rates double to 3% and 40%.

The lesson is, always file 1099s for workers you’ve classified as contractors. Even if you’re wrong, it cuts potential liability in half.

Section 3509 won’t help if the employer intentionally ignored the rules, withheld income tax but not FICA, or if the worker is a statutory employee.

In Mescalero Apache Tribe v. Commissioner (2017), the Tax Court ruled the IRS must share taxpayer information with employers in these cases, letting them verify whether workers paid taxes on their 1099 income.

Section 530 Relief: Wiping the Slate Clean

Section 530 of the Revenue Act of 1978 can eliminate employment tax liability entirely if three requirements are met:

  1. Reporting consistency: Timely filed 1099s
  2. Substantive consistency: Didn’t treat similar workers as employees
  3. Reasonable basis: Relied on prior audit, court precedent, or industry practice

The consistency test looks at actual duties rather than job titles. If you treat one delivery driver as an employee and another as a contractor, you’ve got a problem.

Worker-Side Relief

Workers can file Form 8919 to report their share of uncollected Social Security and Medicare taxes. They’ll need a reason code:

  • A: Received SS-8 determination saying they’re an employee
  • C: Other IRS correspondence confirming employee status
  • G: Filed SS-8, waiting for response
  • H: Received both W-2 and 1099 from same firm

Jeremy offers practical wisdom here. “I’ve actually been involved in situations where I thought my client really should have been treated as an employee. I told them about that, and they were perfectly fine going along with the status quo.” Your job is to inform, not insist. It’s ultimately the taxpayer’s decision.

Form SS-8 requests an official IRS determination. Either party can file it. The IRS gets both sides’ perspectives, then issues either a binding determination or non-binding advisory letter. This isn’t a tax return examination, so normal appeal rights don’t apply, though you can submit additional information for reconsideration.

Your Action Plan

Worker classification isn’t binary. Treating it that way gets practitioners and their clients in trouble.

Key takeaways from Jeremy:

  • Statutory employees live in a genuine hybrid space. W-2s that report on Schedule C. Business expense deductions that regular employees can’t claim. But keep that Schedule C separate from self-employment income.
  • Some workers are contractors by law. If real estate agents, direct sellers, and sitter placement services meet the statutory requirements, the common law test doesn’t matter.
  • Dual status is real. When you see both forms from one company, investigate before assuming error.
  • Always file the 1099. Getting classification wrong but reporting right cuts liability in half. Skip the 1099, and you double the pain.
  • Know your relief options. Section 3509 for honest mistakes. Section 530 when there’s reasonable basis. Form 8919 for workers needing FICA credit. Form SS-8 when you need the IRS to decide.

These aren’t rare edge cases. They’re the messy realities that walk through your door regularly. Having command of both the categories and corrections is what makes you indispensable.

For the full technical detail and Jeremy’ classroom-tested explanations, listen to the complete episode. And if you haven’t already, go back to Part 1 for the foundational common law control test. Together, these episodes give you the information you need to answer any worker classification question your practice will face.

The Overtime Deduction Just Made the Department of Labor’s Definition of Employee Your Problem

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The gig economy has exploded over the past decade. From Fiverr to Uber, from seasonal warehouse workers to freelance accountants, the line between employee and independent contractor has become increasingly blurred. California alone spent years in legal battles over worker classification, with court cases dragging on and state laws changing back and forth.

However, a single worker can legally be an “employee” under one federal law and an “independent contractor” under another for the same work, at the same time. And thanks to the One Big, Beautiful Bill Act, this distinction directly impacts your tax practice.

In Episode 24 of Tax in Action, Jeremy Wells, EA, CPA, tackles this complexity head-on in the first part of a two-part series on worker classification and misclassification. He breaks down exactly how the IRS distinguishes between employees and independent contractors and why tax professionals cannot ignore definitions that come from outside the Internal Revenue Code.

Payroll Taxes Are at the Heart of This Discussion

As Jeremy emphasizes early in the episode, “the tax consequences can be significant for both the employer and the worker.” The gig economy creates opportunities for flexible work, but also leaves workers without employment benefits, fair labor protections, and payroll tax matching.

Payroll taxes are “really the most important aspect of this discussion from a tax perspective,” Jeremy explains. It comes down to who’s responsible for the payroll tax or self-employment tax that results from the money earned.

The stakes are high. Misclassifying a worker can lead to both the employer and worker facing tax liabilities that compound quickly. Get it right, and everyone knows where they stand with FICA, FUTA, and federal income tax withholding.

One Word, Multiple Federal Definitions

For most of our careers, we’ve operated within the comfortable boundaries of Title 26, the Internal Revenue Code. If someone mentioned the Fair Labor Standards Act (FLSA), we knew that was the labor lawyers’ territory. Not anymore.

Jeremy explains that “employee” means different things in different contexts across federal law. There’s a well-established principle that a term should have the same meaning within a single title of the U.S. Code, but it can mean something entirely different when you cross from one title to another.

The Department of Labor uses what it calls the “economic reality test” to determine employee status under the FLSA. This test examines six factors:

  1. Opportunity for profit or loss based on managerial skill
  2. Investments by both parties
  3. Permanence of the relationship
  4. Nature and degree of control
  5. Whether the work is integral to the employer’s business
  6. The worker’s skill and initiative

The key question for the DOL is economic dependence. As Jeremy notes from the DOL’s Fact Sheet 13, “If the economic realities show that the worker is economically dependent on the employer for work, then the worker is an employee.”

The critical distinction is that the DOL explicitly states, “employment under the FLSA is not determined by technical concepts or common law standards of control. It is broader than the common law standard often applied to determine employment status under other federal laws.”

The 2025 Change

Why does this matter for tax professionals? The One Big, Beautiful Bill Act created a new deduction for overtime pay, but it specifically references FLSA Section 7, which deals with employees entitled to overtime compensation.

“An employee who is covered under FLSA Section 7 may qualify for a deduction for part of the overtime payment that the worker earned,” Jeremy explains, highlighting the significance.

This creates an unprecedented situation because “a worker can be considered an employee under FLSA and therefore eligible for potentially deductible overtime, yet not considered an employee for federal employment tax purposes.”

The IRS recognized this gap. In Notice 2025-69, the agency provides guidance on “how employers should report overtime paid to workers who are covered under FLSA Section 7 but are not employees for payroll tax purposes and so won’t receive a W-2.”

The IRS Control Standard: Three Categories That Drive Every Decision

So how does the IRS actually decide who’s an employee? It starts with IRC Section 3121(d), which provides four statutory definitions: common law employees, and corporate officers, certain statutory employees, certain statutory nonemployees.

For most situations, we’re dealing with the common law employee definition. That definition hinges on the common law “right to control” standard, which comes from Supreme Court precedent.

The standard boils down to one question: Does the employer retain the right to direct and control the means and details of the work?

“It’s less about whether the employer actually does control the worker, and more about whether the employer retains the right to control the worker,” Jeremy says, emphasizing a crucial distinction.

An independent contractor, by contrast, is “typically subject to control only as to the desired result, not the means or the methods of doing the work.”

The Evolution from 20 Factors to Three Categories

Courts have spent roughly half a century developing this definition. Key cases include Weber v. Commissioner (1994), Professional and Executive Leasing, Inc. v. Commissioner (Ninth Circuit, 1988), and Simpson v. Commissioner (Tax Court, 1975).

In 1987, the IRS and Social Security Administration compiled 20 factors from court precedents and published them in Revenue Ruling 87-41. Then in 1996, the IRS reorganized these into three categories of evidence in an examiner training manual. Jeremy stresses these are “categories of evidence. They are not themselves legal tests.”

Behavioral Control: The Details and Means of Performance

This category examines whether the employer has “the right to direct or control the details and means by which the worker performs the required services.”

Key indicators include:

  • Instructions: Jeremy uses a simple example: “If I hire a worker and tell that worker, ‘I need you to produce a widget for me,’ and I don’t tell them anything more than that, then I have given that worker essentially no instruction.” That leans toward independent contractor. But if you specify the tools, timeline, location, and step-by-step process, that leans toward employee.
  • Evaluation: Monitoring how work is performed (not just the final result) indicates greater control.
  • Training: Required, periodic, or ongoing training on methods and procedures suggests employment.
  • Uniforms and branding: These can indicate employment, but Jeremy notes modern realities. “Customer security concerns have led some of these companies to insist that their workers dress up in their uniforms, and have their logos displayed even though they’re classified as independent contractors.”

Jeremy adds a nuance particularly relevant for professionals: “Instructions imposed by the business merely to ensure compliance with customer orders or governmental or governing body regulations may indicate weaker control than more stringent guidelines imposed directly by the business.”

Financial Control: The Economic Aspects

This category looks at “the right to direct or control the economic and business aspects of the worker’s activities.”

Important factors include:

  • Significant investment: Who provides equipment and pays for large expenditures? Jeremy notes everything is relative. “I run an accounting firm. The biggest equipment expense we have is computers. That’s nothing compared to buying large equipment for a factory.”
  • Business expenses: “Choosing to incur unreimbursed expenses typically indicates that the worker has the right to direct and control the financial aspects of the business operations.”
  • Market availability: Can the worker seek other business opportunities? Jeremy emphasizes a critical distinction from the DOL test, citing Nationwide Mutual Insurance Co. v. Darden (Supreme Court, 1992): “The question here is whether the worker has the right to direct and control business-related means and details of the worker’s performance, not whether the worker is economically dependent.”
  • Method of payment: Guaranteed salary or hourly wages typically indicate employment, though Jeremy notes “plenty of independent contractors, especially freelancers and firms as well, bill for time.”

Relationship of the Parties: Intent Concerning Control

This category examines how both parties perceive their relationship.

  • Written agreements: These help establish intent, but Jeremy warns, “Just because something’s in writing doesn’t necessarily make it so. We still have to look at the substance of the relationship.”
  • Incorporation: If a worker operates through a legitimate entity that “follows corporate formalities and has at least one non-tax business purpose,” that generally supports independent contractor status.
  • Employee benefits: Certain benefits, such as tax-qualified retirement plans, 403(b) annuities, and cafeteria plans, can only be provided to employees. Benefits paid to contractors can often uncover a worker misclassification case. Jeremy is clear: “If we see any of these kinds of benefits, then by definition, we have an employee.”

The S Corporation Officer Trap

Jeremy saves one of his strongest warnings for corporate officers. “Corporate officers are generally considered employees, especially if they are providing services to the corporation.”

For S corporations, this is critical. “An officer of an S corporation that provides services to that corporation is an employee, meaning that individual needs to be paid wages.”

The only exception requires meeting both conditions: the officer provides minor or no services AND is not entitled to receive any pay, directly or indirectly.

Jeremy calls out a common but problematic practice. “One way some tax professionals try to use two wrongs to make a right is issuing a 1099-NEC from the S corporation to that individual. Two wrongs don’t make a right.”

“Even though they both go into Social Security and Medicare, paying self-employment tax is different from paying FICA.” The tax liabilities remain; you’ve just created documentation of the misclassification.

Interestingly, Jeremy notes that one person can legitimately receive both a W-2 and 1099 from the same corporation. “You can have an individual working as an officer for a corporation and as a director for a corporation. That individual’s wages earned as an officer would be reported as wages on a form W-2, and then that individual’s pay as a director would be paid as compensation to a non-employee.”

Most Workers Live on a Spectrum

Jeremy brings us back to practical reality. “In the real world it’s a spectrum. On one end of that spectrum is a pure independent contractor where the employer just says, this is what we want you to do. Now go do it. On the other end, we have an employee where the employer tells the employee exactly how to do every single step.”

Most workers fall somewhere in between. As tax professionals, Jeremy explains, “we might have to make a determination of which end of that spectrum does this worker lean toward more?”

What Comes Next

This episode is part one of a two-part series. In part two, Jeremy will cover what happens when we have a misclassification and what workers and employers can do about that misclassification.

For now, the practical takeaways are:

  • Learn the DOL’s economic reality test. The overtime deduction depends on it.
  • Review IRS Notice 2025-69 for guidance on FLSA-covered workers who aren’t employees for tax purposes.
  • Use the three categories of evidence as your analytical framework, remembering the underlying legal test is the control standard.
  • Audit your S corporation clients. Officers providing services must be on payroll.
  • Document substance over labels in all worker relationships.

Listen to the full episode of Tax in Action to hear Jeremy walk through the complete analysis, including all the court cases and regulatory citations that inform these critical classification decisions.

How the Vatican’s Blessing Helped Hide $1.3 Billion in Missing Money

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In June of 1982, a postal worker walking along the Thames in London noticed something hanging beneath Blackfriars Bridge. At first, he assumed it was construction equipment, like scaffolding or a tarp caught on a pipe. Looking closer, he realized it was a man, still wearing a suit, with bricks in his pockets and a rope around his neck. For a few days, nobody knew who he was. Then the name came out: Roberto Calvi. Suddenly, a lot of very powerful people were very interested in who was under that bridge.

That story opened a recent episode of the Oh My Fraud podcast. Host Caleb Newquist dug into one of the largest and strangest banking scandals of the 20th century, the collapse of Banco Ambrosiano and the unsolved death of the man they called “God’s Banker.”

In this story, institutional prestige became the most dangerous fraud enabler of all. When a bank’s credibility rests on religious authority, secret power networks, and cultural trust rather than transparent financials, $1.3 billion can vanish through circular offshore schemes while everyone assumes someone else must have checked the books.

How a Methodical Banker Became “God’s Banker”

Roberto Calvi wasn’t supposed to be a mysterious figure. Born in Milan in 1920 to a working-class family, his early life followed the same path as many of his generation: World War II, military service, and rebuilding from the rubble. He joined Banco Ambrosiano in the late 1940s as an entry-level hire. By all accounts, he was exactly what institutions want: diligent, methodical, and reliable. As Caleb puts it, he was “the kind of person institutions tend to reward because they don’t rock the boat.”

And for decades, he didn’t rock it. Roberto climbed steadily, and was promoted to general manager by 1971, and chairman by 1975.

Banco Ambrosiano was one of Italy’s largest private banks, with deep ties to Catholic financial networks. Italy’s banking has always carried layers of political influence, regional loyalty, and religious connections. Banco Ambrosiano sat comfortably within that ecosystem.

The most important relationship was with the Vatican Bank, officially the Institute for the Works of Religion, which, as Caleb notes, “sounds less like a financial institution and more like a retreat center, but it functions as a bank.” It handles investments, transfers, and assets for church operations worldwide. Banco Ambrosiano became one of its primary external banking partners.

That partnership was worth more than money; it was reputational gold. “If a bank is trusted to handle the Vatican’s money, then a lot of people are going to assume it’s safe,” Caleb explains. And that assumption is where the trouble starts.

The financial press started calling Roberto “God’s Banker.” It was shorthand for “this guy has some serious connections.” But the nickname also fused the bank’s identity with one of the most trusted institutions on the planet. Investors were buying into the idea of a bank backstopped by centuries of religious authority.

“Where there’s a very deep sense of trust, there’s often a lesser degree of scrutiny,” Caleb points out. “Not explicitly, but psychologically.” The reputation became the product. When reputation does the heavy lifting, the actual financial structures don’t get tested nearly as hard.

During the 1970s, the bank genuinely grew through international expansion, complex financial products, and global operations. Some of that growth was legitimate. But growth also meant operating in jurisdictions where oversight was, as Caleb puts it, “loose.”

Italian regulators raised eyebrows more than once at the complex corporate structures, foreign subsidiaries that were hard to track, and financial guarantees that weren’t always transparent. Individually, each could be explained. Collectively, they formed a pattern. But the God’s Banker halo did its job of absorbing questions that might have demanded harder answers.

The Machinery of Fraud: Circular Money and Comfort Letters from God

Over a billion dollars doesn’t go missing all at once. It happens gradually, through structures so layered that by the time anyone understands them, the money’s already gone.

By the mid-1970s, Banco Ambrosiano was expanding aggressively into international markets. Foreign subsidiaries multiplied across Luxembourg, the Bahamas, and Panama, where regulatory oversight was minimal. Some entities served obvious purposes, such as international lending, currency transfers, or supporting clients abroad. But others had extremely vague business descriptions and corporate structures so layered that tracing ownership took real effort.

According to Caleb, the core scheme worked like this: “Some of those offshore companies weren’t really operating like independent businesses at all. They borrowed money from the bank, made deposits back into related entities, issued guarantees to support loans made to other subsidiaries in the same network. Money moving in a loop that created the appearance of capital strength without much actually underneath it.”

Circular financing isn’t automatically illegal. Multinationals do inter-company lending all the time. “The problem starts when those underlying assets aren’t as solid as everyone assumes, because then what looks like strength is really just confidence shifting from company to company,” Caleb explains.

His metaphor nails it: “It was financial scaffolding. Scaffolding works great while the building’s going up. Less great when someone leans on it expecting a finished structure.”

The Vatican Bank’s letters of patronage kept people from leaning too hard. These were essentially comfort letters, or assurances that were, as Caleb jokes, “about as secure as the Lord’s blessing.” But banks and counterparties treated them as something stronger than they technically were. If the Vatican says it stands behind something, who’s going to push back?

The ecosystem around Banco Ambrosiano was getting darker. Michele Sindona, another Vatican-linked Italian financier, had already blazed this trail. His banking empire collapsed in the mid-1970s through similar aggressive financing and opaque offshore deals. He was convicted of fraud in the U.S., later convicted of ordering a murder, and died in prison in 1986 after drinking cyanide-laced coffee.

Then there was Propaganda Due (P2) officially a Masonic lodge. When Italian authorities raided it in 1981, the membership list included Italian cabinet ministers, military leaders, intelligence officials, judges, and media executives. Roberto’s name was there, too. P2 members called themselves “Frati Neri,” Black Friars. Yes, the grim coincidence: Roberto was found under Blackfriars Bridge.

“Membership alone doesn’t prove wrongdoing,” Caleb notes, “but it suggests proximity to power, and in finance, proximity to power can smooth scrutiny, accelerate deals, and sometimes delay uncomfortable questions.”

Add another red flag. In 1981, Roberto was convicted in Italy for illegally exporting currency. He received a suspended sentence but it was still a criminal conviction tied to financial conduct. “Prior financial misconduct usually justifies closer monitoring, not looser scrutiny,” Caleb observes. Instead, institutional trust filled the gaps.

By early 1982, roughly $1.3 billion was unaccounted for. That’s in early 1980s dollars. Investigators later found a 2,400-pound safe in a secret office. When they cracked it open, they found a handwritten list of gold and silver items. No actual gold or silver. Just the list. “A pretty fitting metaphor for the whole operation,” Caleb says.

On June 5, 1982, Roberto wrote to Pope John Paul II warning the bank’s collapse would “provoke a catastrophe of unimaginable proportions in which the church would suffer the gravest damage.” On June 10, he fled Italy with a fake passport under the name Gian Roberto Calvini, having shaved off his mustache. Communication became sporadic, then stopped.

Death Under Blackfriars Bridge and the Lessons Left Hanging

The day before Roberto’s body was found, Graziella Corrocher, Roberto’s 55-year-old secretary, jumped from the fifth floor of the bank’s headquarters. She left a note that said, “May Roberto be double cursed for the damage he has caused to the bank and all of its employees.”

“That doesn’t sound like someone caught up in financial technicalities,” Caleb observes. “That sounds like betrayal.”

As for Roberto, the path from “dead banker” to “unsolved murder” took decades. The initial ruling was suicide. A 1983 inquest returned an open verdict. In 1998, authorities exhumed his body. Forensic analysis found neck injuries inconsistent with hanging and no traces of scaffolding paint, rust, brick dust, or limestone under his fingernails, evidence you’d expect on someone who climbed there himself. By 2002, Italian courts ruled it a homicide.

In 2007, five defendants including alleged Mafia figures went on trial. After twenty months of testimony, hundreds of witnesses, and mountains of forensic evidence, the judge threw out all charges for insufficient evidence. The public prosecutor said, “Roberto has been murdered for the second time.”

After negotiation and public pressure, the Vatican contributed between $224 and $250 million toward creditor settlements. The church framed it as a moral gesture, not an admission of legal liability. Caleb describes it as “the financial equivalent of saying we didn’t do anything wrong, but here’s some money anyway.”

What Accounting Professionals Should Take From This

Caleb closes with five key lessons from the wreckage:

  • Institutional trust is not a control. A respected name doesn’t guarantee sound financial structures. “A good reputation can chip away at skepticism, and reduced skepticism is exactly where fraud tends to thrive. People assume that someone must have checked.”
  • Complexity is not the same as sophistication. “Sometimes complexity is necessary, but it’s also camouflage.” If understanding the structure takes longer than anyone’s willing to spend asking questions, that’s probably a red flag.
  • Prior misconduct deserves attention. Roberto’s 1981 conviction didn’t doom the bank, but it should have triggered closer monitoring. Instead, institutional trust papered over a conviction that should have triggered alarm bells.
  • Liquidity crises expose accounting illusions extremely quickly. “A lot of frauds don’t collapse because someone discovers them. They collapse because cash gets really tight.” When creditors want repayment instead of extending credit, reality tends to win.
  • Fraud rarely happens in isolation. “This wasn’t just one banker making bad decisions. It was a network.” Most frauds reveal a rotten system, not just one bad apple.

The Banco Ambrosiano scandal is ultimately about how prestige substitutes for scrutiny. Four decades later, we still don’t know who killed Roberto Calvi. We do know what killed Banco Ambrosiano: a system where reputation did the work that controls were supposed to do.

Every era has its version of institutions where reputations function as a get-out-of-scrutiny-free card. The vehicles change, but the dynamic stays the same. When trust replaces verification, fraud finds room to grow.

Listen to the complete episode of Oh My Fraud for the full story, including the prequel villain who died from prison coffee, a safe full of nothing but lists, and a mustache shave that fooled no one.

And remember Caleb’s parting advice: if the chairman of your bank ends up hanging under a bridge named Blackfriars, you’re probably not having a normal quarter.

The Billable Hour Is Broken and Every Firm Leader Knows It. So Why Won’t Anyone Kill It?

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Richard Lynch can list every reason the billable hour is broken. It undervalues experienced professionals, creates perverse incentives, burns people out, and reduces human beings to time-tracked units. But without a hint of irony, he admits that Sikich, one of the largest CPA firms in the country, still tracks hours “on a religious basis.”

That contradiction tells you everything about where the accounting profession stands right now.

On a recent episode of the Earmark Podcast, host Blake Oliver sat down with Richard, a managing principal at Sikich with over 25 years in public accounting. They had an honest conversation about where things actually stand. Not where the conference keynotes say they stand or where vendor demos suggest they stand, but where they actually stand inside accounting and advisory firms, at the level where someone still has to fill out a timesheet at 9 p.m. on a Tuesday.

The takeaway is that the profession’s transformation is stalling because firms can’t let go of the operational scaffolding they’ve built around the billable hour.

The Super Accountant Vision

Richard has a term for what’s coming: the “super accountant.” It sounds like marketing language, but his definition is specific. A super accountant has AI fluency, strong judgment, and understands compliance without needing to physically perform it. “They’re not a tech person doing accounting work,” Richard explains. “They are a technical person, maybe a CPA, that specifically knows how to leverage technology.”

The structural change everyone talks about is the pyramid becoming a diamond with fewer people at the entry level and more in the middle. But Richard makes an important distinction. The bottom rung is moving up in capability, not disappearing. Future CPAs will “reach a higher level of intellect, capability, and advisory skills at a much earlier age without decreasing the standards.”

Richard points to how this has happened before. Thirty or forty years ago, interns got coffee and made copies. Today, interns do actual client work. “The capability of interns moved up,” he says. The same shift is about to happen again, just bigger.

But the education system isn’t ready. Accounting programs are mostly theoretical. They “lay a foundation,” Richard says, but “certainly don’t give you anything that is pretty or accessible to a client.” Firms will have to bridge the gap with intensive training, it may look like six to eight months where new hires don’t touch billable work, just learn the craft.

The Review Problem

Blake raises the concern many accountants have voiced. If AI does all the basic work, how do people learn to review? The whole system depends on doing the work first, making mistakes, getting feedback, and building judgment.

Richard doesn’t dismiss this. He calls it “a real concern” and says you “can’t underestimate or understate the value of experience.” But then he reframes it with an analogy.

Try explaining to kids today why they need to know how to use an encyclopedia. It seems absurd. The skill became irrelevant because the tool changed. What replaced it was arguably harder: filtering reliable information from unreliable information online.

The same thing is happening with review. “Technology will take care of putting it in the proper box,” Richard says. “Your objective is to have the filter of understanding how to interpret the outcome.” And he goes further: “There may be a benefit to actually not having that anchor of how we used to do business.”

This isn’t theoretical. Tax GPT claims it fully automated 1040 preparation. Basis says it’s done the same for partnership returns. Richard has talked to both vendors. The pace of accuracy improvement is “impressive.” AI is rapidly getting to where it’s “right more than it’s wrong.”

But Richard draws an important distinction. Completing a tax return is just compliance. The real product is what happens after: the advice on paying less tax, structuring a business sale, or planning succession. “When you engage with your clients beyond delivering compliance services,” Richard notes, “fees don’t really come up.”

Why the Billable Hour Won’t Die

“Our people hate entering their time,” Richard says plainly. “There’s no value to the time they spend entering their time and it undervalues us.” Experienced professionals solve complex problems in an hour because they have 30 years of experience. Bill that as one hour, and you’re “undervaluing the 30 years of experience that allowed you to answer that question.”

Richard calls abandoning timesheets “the Mount Everest” of firm transformation. The billable hour is the operating system. Everything runs on it, including utilization, productivity, margin, capacity planning, performance evaluation, even work-life balance monitoring. “You can’t really erase billable hours without erasing all of it,” he says.

Then Richard makes an argument Blake hadn’t considered before. Timesheets might actually help prevent burnout. Sikich monitors employees running over their expected hours and treats it as a capacity problem. Without those guardrails, Richard argues, ambitious people “will work so hard, they’ll burn themselves out really quickly.”

But Blake zeros in on the real issue. AI has destroyed the link between time and value. If AI makes your team twice as fast, the client pays half as much under hourly billing. That math doesn’t work anymore.

So what replaces hours? “We haven’t necessarily identified a better alternative,” Richard admits. Accountants like data and hours provide lots of data. Any replacement becomes more subjective. Client satisfaction? Value delivered? Team engagement? These are harder to measure, and for a profession built on measurement, that’s a problem.

The Basketball Team Problem

Richard draws on his sports background to explain what might work better. Think about the 1990s Chicago Bulls. Michael Jordan and Scottie Pippen scored the points. But Dennis Rodman, the defensive specialist who didn’t score much, was essential. His contribution didn’t show up in the headline stats, but the team needed him.

“We’re not even looking at points. We are looking at time on the court.” Blake points out. The profession measures the wrong thing entirely.

But Richard warns that team models only work if everyone performs. If Rodman doesn’t hustle for rebounds while Pippen is scoring, or if Pippen takes a game off while Rodman is sacrificing his body, the whole thing falls apart. “You have to have a culture where the team performs within kind of a standard deviation of each other.”

The deeper problem is cultural. “The connotation of the employee becomes, I am an hours-based person. All I am is hours,” Richard says. When every review, promotion, or conversation starts with “how many hours did you work,” people internalize that their value is their time. Not their judgment or ideas.

And the system treats every hour as equal, which Richard calls “baseline, categorically false.” Some people think faster. That doesn’t make them more valuable, but under an hours system, it makes them look more productive.

The Implementation Gap

Richard says people actually don’t burn out from long hours. “I don’t hear complaints about the hours when it’s engaging work,” he says. He says his team gets excited working a long weekend for a complex client issue. The burnout comes from being stuck at 9 p.m. “dealing with software issues and plugging numbers into spreadsheets.”

AI can eliminate that burnout-causing work. But only if firms actually let it.

“We’re playing with it, but we’re not really implementing it,” Richard says. “We’re purchasing it, but we’re not really relying on it.” Firms pour billions into AI tools, but their training, career paths, and daily operations haven’t changed. The technology is there but the willingness to break old processes isn’t.

“There will be progression and there will be extinction. The question is at what pace,” Richard says, framing the stakes clearly.

Working harder won’t compensate for failure to adopt anymore. Buying AI products doesn’t mean you’re adopting AI. And trying to fit AI into existing processes instead of letting it break them is a choice with consequences.

“If you consistently try to find a place of complacency and comfort, you will not adopt at the pace necessary,” Richard warns.

The Choice Firms Are Making Right Now

What makes this conversation valuable is Richard’s willingness to acknowledge he doesn’t have all the answers. “I still have a lot to learn,” he says.

He can see the billable hour is broken and the pyramid is unsustainable. He can see buying AI tools without changing operations is theater. And Sikich is still tracking hours religiously.

That honesty tells you where the real work is. The super accountant future requires dismantling training models, educational assumptions, and measurement systems that have existed for decades. Not just purchasing new software.

For accounting professionals at every level, including partners making decisions, managers caught between old metrics and new realities, or someone early in their career wondering what’s ahead, the question is whether the firm will let AI change your work.

Richard has a message for other firm leaders: “Don’t let fear rule the day.” The firms that use AI as permission to break outdated processes will thrive. The firms that bolt AI onto unchanged operations will struggle. And that divergence is accelerating.

“I have every desire to be on the side of progression,” Richard says. Which side is your firm choosing?

Listen to the full conversation between Blake and Richard on the Earmark Podcast for deeper discussion on replacement metrics for the billable hour, building the super accountant pipeline, and why letting go of the past might be the profession’s biggest challenge. Then visit earmark.app to earn free NASBA-approved CPE credit.

When Tax Day Was Party Night at the Post Office — And Why AI Is About to Upend Everything Else About Accounting

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Before tax e-filing took over, April 15th was a public spectacle at American post offices. As Blake Oliver and David Leary discussed on their Tax Day episode of The Accounting Podcast, crowds would gather until midnight, with live entertainment, giveaways, and even Playboy offering “stress relief massages” in pink booths. In Philadelphia, there was a “dunk the IRS agent” booth for charity. Radio stations broadcast live. Fast food chains handed out samples. It was America’s weirdest annual party.

Those days are gone — 94% of returns are now filed electronically. But as the hosts explored in this wide-ranging episode, the accounting profession faces disruptions far more profound than the shift from paper to pixels. Within three years, KPMG expects routine audit testing to have “next to no human beings” doing the work. Hobbyist developers are cloning QuickBooks with AI over a weekend. And a third of workers aren’t even checking AI outputs before they submit them.

The IRS Can’t Keep Up — With Rules or Technology

The profession’s struggles with rapid change start at the top. Just five days before the filing deadline, the IRS finalized which jobs qualify for the new no-tax-on-tips deduction. Podcasters made the cut (Oliver and Leary were pleased), along with tattoo artists, ice sculptors, and golf caddies. Accountants didn’t.

“Five days after they finalized these rules to implement them for our clients,” Oliver noted with frustration. The deduction allows eligible workers to exclude up to $25,000 in tips from taxable income, but mandatory service charges don’t count. “This could be the death of the automatic gratuity,” Leary speculated, since those forced tips won’t qualify.

Meanwhile, Americans are spending 11.6 billion hours completing federal compliance forms — mostly tax returns. The value of that labor? Over half a trillion dollars. “That’s material,” Oliver said, noting it represents a significant chunk of the economy devoted to paperwork.

The IRS’s own modernization efforts tell a cautionary tale. The agency had 126 AI projects running as of last summer, up from just 10 in 2022. But after losing 25% of its workforce, 61% of those projects remain unfinished with no plan to close the skills gap. Even more puzzling: the IRS killed its Direct File program despite it costing only $16 million instead of the estimated $61 million and growing 78% year-over-year. “The program was gaining traction and was less expensive than they thought it was going to be, and yet it got canceled anyway,” Oliver observed.

The Big Four’s Radical Restructuring

While the IRS struggles with basic modernization, the Big Four are racing ahead with AI automation that could eliminate thousands of jobs and upend the billable hour model that has defined the profession for decades.

KPMG is moving fastest. They’re piloting AI systems this summer and deploying them next year for routine testing of transactions like payroll, receivables, and cost of goods sold. “Within 2 or 3 years, routine testing could become the first major audit area with effectively no human audit team directly doing the work,” Oliver quoted from KPMG’s audit chief digital officer. “Next to no human beings.”

The other firms aren’t far behind. PwC’s evidence-matching tool now processes 30 client document types, up from six months ago. EY is testing something even more futuristic: AI audit agents that talk directly to client AI agents to gather documents and prepare workpapers. Only Deloitte is publicly pumping the brakes, emphasizing AI should “augment not replace” human auditors.

The numbers are stark: Big Four leaders expect 20-30% of a typical audit to be fully automated by 2029. KPMG UK is already cutting 440 audit jobs. “I don’t see any other outcome than the Big Four just cutting massive numbers of staff jobs,” Oliver said. “If they do this right… that’s 20 to 30% of their billable hours. What are they going to do? Just raise their rates 20 to 30% to compensate?”

Leary had the line of the episode: “Agents are the perfect accounting firm employees. The partners are going to love them.”

The traditional career path is crumbling too. EY’s talent chief told Business Insider that linear career models are becoming “less relevant” as AI values skills over tenure. Oliver speculated firms might shift from hiring masses of new graduates to recruiting experienced professionals from industry, or moving to an apprenticeship model with smaller, more intensively trained classes.

Everyone’s Building Their Own QuickBooks Now

The disruption isn’t just coming from the top. A Reddit user built a full accounting system that runs inside Claude Desktop — no interface, just chat. You tell Claude what happened, and it updates your books. Another developer cloned QuickBooks Desktop using AI, creating a free open-source alternative. The motivation? “I didn’t want to pay for QBO.”

“You as an accounting firm had control over your tech stack and your clients’ tech stack,” Leary explained. “We’re a Xero shop or a QuickBooks shop… Now your clients are just building their own stuff. How do you as a firm manage this now?”

Oliver’s prediction, based on every past tech revolution: “We will end up with more work rather than less, because it will enable our clients to do way more accounting stuff that we’ll have to clean up.”

On the funded startup side, Juno raised $12 million to build AI tax prep that automates 90% of data entry while keeping CPAs in the loop. The key: transparency over autonomy, with source-to-return traceability and visual validation tools. Artifact launched Omni, which Leary called “a Zapier for accounting firms” — it trains AI agents to use your existing tech stack rather than replacing it.

Meanwhile, legacy players are scrambling. Xero published a blog post claiming to be an “AI native operating system.” Leary counted over 20 buzzwords and read them aloud in a devastating list: “AI native, intelligent SaaS, autonomous finance, system of action…” His verdict: “I don’t think this is written for customers. I think this article is written for the street in an attempt to move the stock price.”

The Quality Crisis Nobody’s Talking About

Here’s what should terrify every firm leader: 35% of workers rarely or only occasionally review AI output before submitting it, according to a Resume Now survey. Eighteen percent trust it straight out of the box. Only 40% review AI output every single time. And 15% use AI at work secretly without telling their manager.

“That should scare you as an accounting firm owner,” Leary said.

Oliver argued firms need systems with built-in controls: “If an employee is just generating something with AI… and they didn’t change anything or they didn’t spend any time looking at it, then flag that.”

The stakes are real. The episode covered two fraud cases that show what happens with weak oversight. A New Jersey preparer filed over 100 false returns seeking $170 million in pandemic credits, getting $55 million before being caught. A Pennsylvania preparer started a new $5.5 million fraud scheme while still on supervised release from a previous conviction.

What Separates Winners from Losers

A Hinge Marketing study of 133 firms revealed a massive performance gap emerging. High-growth firms are growing at 33% annually versus 9.6% for average firms. The difference? High-growth firms spend 9% of revenue on marketing (versus 5% for others), and over 90% use AI for content creation, automation, and research.

“If you have a firm that’s growing at 10% and you want it to grow at 30%, spend 10% of your revenue on marketing,” Leary summarized, though Oliver questioned whether it’s causation or correlation: “Is it just that the firms that are growing really fast have money to burn on marketing?”

The Reckoning Is Here

The accounting profession has always adapted slowly. As Leary noted, “Just ask Xero how it takes decades for them to barely make a scratch into the QuickBooks world.” But this time feels different. The changes are coming from every direction at once — Big Four automation, bedroom coders, funded startups, and clients building their own systems.

The irony is thick. Even as AI promises to make location irrelevant, EY is requiring US tax staff to work in-office 12 days a month. The IRS has 126 AI projects but can’t finish them. Firms are adopting AI while a third of workers don’t even review its output.

For firms willing to invest, experiment, and build proper controls, the opportunity is massive. For those hoping to wait it out, the message from this episode is clear: the profession that gathered at post offices until midnight to file paper returns is gone. The question isn’t whether AI will transform accounting — it’s whether the profession can maintain its core promise of trustworthiness while everything else changes around it.

To hear the full discussion — including the story of a disgruntled worker who burned down a $500 million Kimberly-Clark warehouse over pay disputes — listen to the complete episode of The Accounting Podcast.