Whitten LLC: Tax Work, IT Consulting, and Ethics Review in Action

Background of Whitten LLC

Five years ago, Laura Whitten left the regional accounting firm where she had worked for 15 years, since  her graduation from college.  Laura obtained her CPA two years after joining WesternCPAs, and the  parting from Western was on amicable terms.  In the time since Laura left Western, Whitten LLC has  grown into a profitable consulting firm, concentrating on tax work and IT consulting.  Laura was one of  the state’s leading tax experts at one time, but now she spends her time “growing the practice” in both  tax and IT, rather than working on too many specific tax returns.

Whitten LLC requires that an associate be licensed by the state as a CPA before attaining the position of  manager.  The firm pays for 80 hours of professional continuing education over a two?year period.  Most  of Whitten’s tax staffers spend their 80 hours on technical tax updates, in either an online or a “lunch  and learn” setting.  Only occasionally do these courses address tax preparer penalties, Circular 230, and  other matters of “tax ethics.”

Katie Prasad, JD and EA, chief operating officer of the Whitten tax practice.

Todd Black, CPA, a senior manager who will be up to make partner within 3 years.  He supervises  four tax managers throughout the year.

Lisa Lee, MBA, a non?CPA with HR experience, who is the chief administrator of the firm.

Gloria Hansen, CPA, a tax associate who Whitten hired three years ago upon graduating with a  five?year accounting degree.

Stephanie Jackson, CPA, a tax manager who carries a heavy workload, because she is seeking a  promotion.

Jake Wong, an IT specialist who manages the tax client databases and interacts with the Whitten  employees who prepare and review tax returns.

Nate van Court, a clerical employee who works on tax return compliance as well as non?tax  clients of Whitten.

The bulk of Whitten’s tax work for the year was completed 3 months ago.  Initial debrief sessions were  held to capture comments concerning the completed tax filing season, and to forge ideas for the next  year.

Now Lisa Lee has assigned Carole Manitou, a retired CPA who spent many years as a lead tax compliance  partner for a different firm in the county, to review a sample of the client files for the past season as to  technical tax matters, firm procedures, and tax ethics and penalties.  Whitten has followed this practice  in each of the last two years, and the firm finds that this special attention is crucial in identifying the  strengths and weaknesses of the firm’s operating procedures.

Requirements for managers and continuing professional education

Manitou has brought to the firm’s tax group several specific cases that may need additional review.  As a  member of the Tax Quality Control Committee of the firm, you will present your comments at the next  committee meeting as to the following three cases among those that Manitou has brought to the  committee’s attention. your comments for that meeting.  Address your concerns as they  apply both to the employee involved and to the firm overall.

Alpha is a tax?return?review client only for Whitten.  Alpha is not publicly traded, and Whitten does not  audit Alpha’s financial statements.

Alpha employs a large internal tax staff that prepares all income tax returns for the corporation.  Alpha  engages Whitten to review the returns for three days, two weeks before they are filed.  Alpha’s Tax VP  signs an engagement letter prepared by Prasad for the firm:  Whitten will provide a list of at least five  items that Alpha should change on its returns, computing the current? and future?year tax reductions  that result from them, reduced to present values. Alpha examines these suggestions and files the  returns after incorporating some or all of them into the returns.

Whitten’s fee for this work is 20 percent of the tax reductions as specified and confirmed as to technical  soundness and amounts by Alpha’s tax staff.  Whitten rebates, within 90 days, 75 percent of any fee that  relates to a Whitten?suggested filing position that is reversed by agreement between Alpha and the IRS,  or by a court decision.  This is the third year that Whitten and Alpha have worked together in this way,  and no reversals or rebates have occurred yet.

Prasad to Whitten:  Why doesn’t Todd head up an effort among our senior managers to do more of  these engagements?

Beta is a corporate tax client of Whitten.  Beta projects that, by opening up multinational sales activity for its TabletWipe solution, used to clean the sensitive glass used for screens on tablets and  smartphones, significant profits can be recognized within no more than three years.  At first, Beta would  act as an exporter only, but once the business is settled and sustainable, production of the solution can  commence in Allegro, a EuroZone country with favorable financing and grants available for offshore  manufacturers.

Whitten has a long and fruitful relationship with Beta, and it wants to extend its services to Beta’s  international operations.  Laura was comfortable with international tax provisions at one point, but she  no longer is up to date with the pertinent tax provisions and planning ideas.  Katie and Todd have  domestic tax knowledge only.  

Employees of Whitten LLC

The best idea to come from the tax group as to staffing the new Beta work is to train Stephanie quickly  on the international provisions of the Code; Stephanie enjoys taking on new projects and nearly always  succeeds with them, and she has been looking for a new professional direction for several months.   Stephanie’s existing work can be transferred to Gloria, and this would accelerate Gloria’s schedule  toward making manager.  A new hire also would come in at the senior associate level to work with  Gloria.  The tax group finds it preferable to move Stephanie, rather than a new person, into this key role.  These various re?training steps will take some time and present some short?term risk regarding the  quality of the work of all of those affected.  Resulting text messages include the following.  Prasad to Lee:  We will need to free up some new comp dollars when we take on the new Beta work.

Black to Prasad:  I think I can manage all of the shifts of work here, but I’ll need your support.  This will  put Stephanie in a bind for a while.

Prasad to Black:  Stephanie can handle it.  Quick, find her some online courses to take in International.  Prasad to Whitten:  We need you especially now, to get Beta’s work, and not let them go out and bid the  work with competitors.  This one should be big for us.  Whitten to Prasad:  I can do that.  Let’s get the work first, and tweak your staffing plans as we go.

LaCharles Gamma has built a successful career as a franchisee of fast?casual restaurants.  Gamma always  has been a tax and compilation client of Whitten, and all parties are happy with the arrangement.    Gamma operates the LaCharles Group as a one?person LLC; he is not married and has no children.   Succession planning concerns have been discussed in a preliminary form with Group’s three top  executives, to everyone’s current satisfaction.  Group carries no significant debt, and itsemployees are  not unionized.

Gamma makes his charitable contributions from his personal accounts, although Group is his only  source of ongoing income.  Gamma’s preferred charities include the SpotLight Church and the Midnight  Basketball League.  In the typical year, he donates 15 percent of his gross salary to these two entities  (combined), totaling about $50,000.

But Gloria noticed in preparing the most recent Form 1040 for Gamma that Contributions as listed in  LaCharles’ tax?data spreadsheet were zero.  Stephanie had worked on the Gamma return a few years  ago, so Gloria asked Stephanie after a staff meeting what to do.  Stephanie said “He probably just  goofed up on that line, but it’s not worth our time or his for you to call him, so just plug in the same  amount as we used last year.”