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 states 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 Whittens tax staffers spend their 80 hours on technical tax updates, in either an online or a face-to-face setting. Only occasionally do these courses address tax preparer penalties, Circular 230, and other matters of tax ethics.

Among Whittens 40 employees are:

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 Whittens 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 firms operating procedures.

I

Manitou has brought to the firms 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 committees attention. Summarize 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 Alphas 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. Alphas 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.

Whittens fee for this work is 20 percent of the tax reductions as specified and confirmed as to technical soundness and amounts by Alphas 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.

Black is in charge of this years recommendations for Alpha. The proposals total $10 million, so Whitten bills Alpha for $2 million. Resulting text messages include the following.

Prasad to Black: Way to go, I love it!

Whitten to Black: Thanks for your work!

Whitten to Prasad: Uh-oh

Jackson to Black: Youre on your way!

Prasad to Whitten: Why doesnt 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 Betas 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.

The best idea to come from the tax group as to staffing the new Beta work is quickly to train Stephanie 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. Stephanies existing work can be transferred to Gloria, and this would accelerate Glorias 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 Ill 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 Betas 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. Lets get the work first, and tweak your staffing plans as we go.

Gamma

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 Groups three top officers, to everyones current satisfaction. Group carries no significant debt, and its employees are not unionized.

Gamma makes his charitable contributions from his personal accounts, although Group is his only source of ongoing income. Gammas 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 its not worth our time or his for you to call him, so just plug in the same amount as we used last year.

Gloria did just that; she completed the return, Stephanie reviewed it, and Todd signed and submitted it.

In reality, Gamma donated a much smaller amount ($12,000) to the charities for the year. When the IRS audited the Gamma Form 1040, it asked for substantiation for the $50,000 deduction, and Gamma could not produce more than $10,000 in adequate receipts.