Tax Return Complications As Bill Adams packed his briefcase on Friday, March 15, he could never remember being so glad to see a weekend. As a senior tax manager with a major accounting firm, Hay & Hay, on the fast track for partnership, he was worried that the events of the week could prove to be detrimental to his career. Six months ago, the senior partners had rewarded Bill by asking him to be the tax manager on Zentor Inc., a very important client of the firm in terms of both prestige and fees. Bill had worked hard since then ensuring that his client received impeccable service, and he had managed to build a good working relationship with Dan, the CEO of Zentor Inc. In fact, Dan was so impressed with Bill that he recommended him to his brother, Dr. Rim, a general medical practitioner. As a favor to Dan, Bill agreed that Hay & Hay would prepare Dr. Rim’s tax return. This week a junior tax person had prepared Dr. Rim’s tax return. When it came across Bill’s desk for review today, he was surprised to find that, although Dr. Rim’s gross billings were $480,000, his net income for tax purposes from his medical practice was only $27,000. He discussed this with the tax junior, who said he had noted this also but was not concerned, as every tax return prepared by the firm is stamped with the disclaimer “We have prepared the return from information provided to us by the client. We have not audited or otherwise attempted to verify its accuracy.” On closer review, Bill discovered that the following items, among others, had been deducted by Dr. Rim in arriving at net income: • $15,000 for meals and entertainment. Bill felt that this was excessive and probably had not been incurred to earn income, given the nature of Dr. Rim’s practice. As Deere & Company, Northern Trust Corporation, and Snap-on Incorporated in the United States. Copyright 1977. All rights reserved. • Dry-cleaning bills for shirts, suits, dresses, sweaters, and so on. Bill believed these to be family dry-cleaning bills that were being paid by the practice. • Wages of $100 per week paid to Dr. Rim’s twelve-year-old son. Bill telephoned Dr. Rim and had his suspicions confirmed. When Bill asked Dr. Rim to review the expenses and remove all that were personal, Dr. Rim became very defensive. He told Bill that he had been deducting these items for years and his previous accountant had not objected. In fact, it was his previous accountant who had suggested he pay his son a salary as an income-splitting measure. The telephone conversation ended abruptly when Dr. Rim was paged for an emergency but not before he threatened to inform his brother that the accounting firm he thought so highly of was behind the times on the latest tax planning techniques. Bill was annoyed with himself for having agreed to prepare Dr. Rim’s tax return in the first place. He was afraid of pushing Dr. Rim too far and losing Zentor Inc. as a client as a result. He could not anticipate what Dan’s reaction to the situation would be. Bill was glad to have the weekend to think this over. Just as Bill was leaving the office, the tax senior on the Zentor Inc. account informed him that the deadline had been missed for objecting to a reassessment, requiring Zentor Inc. to pay an additional $1,200,000 in taxes. The deadline was Wednesday, March 13. The senior said he was able to contact a friend of his at the Tax Department, and the friend had agreed that if the Notice of Objection was dated March 13, properly signed, and appeared on his desk Monday, March 18, he would process it. Bill left his office with some major decisions to make over the weekend.
Questions ( answer in 2-3 full paragraphs)
1. Identify the ethical issues Bill Adams should address.
2. What would you do about these issues if you were Bill?