Well, after further investigation I believe the software hack is fine but I have signal integrity issues. I was able to get the digital aux to work for brief moments on the bench. By "work" I mean the empeg bar graph lit up and I witnessed bits going from the DSP to my digital out board. In the car it was hopeless.

To be fair, my method of communication is a hack. The real solution would be an SPDIF board in the XM unit, and a corresponding SPDIF receiver (reverse of the Eutronix board) in the empeg. Right now I'm running a simple single ended driver/receiver pair for the I2S signals (WS,CLK,DATA).