Pfau, Suzanne-DB2-ACCT 612

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ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 1 Ethical Dilemmas in Tax Management: A Case Study of Inflated Rental Payments at Haddock Corporation Suzanne Pfau School of Business, Liberty University Author Note Suzanne Pfau I have no known conflict of interest to disclose. Correspondence concerning this article should be addressed to Suzanne Pfau. Email: sbpfau@liberty.edu

ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 2 Abstract This abstract explores the intricate ethical and professional challenges encountered by tax professionals, focusing on the case of inflated rental payments at Haddock Corporation. John Haddock, the majority shareholder, benefits from these payments, leading to a conflict of interest that undermines transparency and fairness within the company. Upholding ethical standards, including adherence to biblical principles and compliance with tax regulations, is crucial for maintaining the integrity of tax management practices. Additionally, professional standards articulated in the AICPA Code of Professional Conduct and Statement(s) on Standards for Tax Services stress the significance of independence, integrity, and objectivity in the actions of tax professionals. The abstract underscores the imperative for tax professionals to prioritize honesty, integrity, and fairness to uphold ethical standards and preserve the tax system's integrity. Keywords : Ethical Conduct, Compliance, AICPA Code, Biblical Principles

ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 3 Ethical Dilemmas in Tax Management: A Case Study of Inflated Rental Payments at Haddock Corporation John Haddock, holding 75 percent of Haddock Corporation's stock, with his wife, Marsha, owning the remaining 25 percent, is the majority shareholder. Assigned as a tax manager responsible for preparing the company's tax return, I uncovered a troubling practice: the company pays rent to John for a building co-owned with his son, John Jr. These rental payments significantly exceed standard rates for similar properties in the area. The partner handling the engagement dismisses the issue, citing its longstanding nature and lack of objection from the IRS. However, the ethical implications prompt questions about the legitimacy and responsibility of tax professionals in adhering to ethical standards. Tax professionals must prioritize ethical considerations over longstanding practices to maintain the integrity of their work. Would I sign the tax return? The inflated rental payments raise red flags regarding potential tax evasion. As a tax manager, I am accountable for ensuring the accuracy and ethical integrity of the tax return, and I would not sign it. If I were to approve such a return, it would undermine my professional integrity, as the excessive rental payments might be an attempt to decrease Haddock Corporation's taxable income artificially. Potential Ethics Issues Conflict of Interest As a significant shareholder, John Haddock benefits from inflated rental payments. This situation creates a conflict of interest, as John's financial gain may not align with the best interests of Haddock Corporation. "Objectivity is not the same as honesty, since the regulatory

ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 4 document emphasizes that 'A professional accountant should not allow bias or impartiality, conflicts of interest, pressure from others to change professional or business judgment'" (Chulpanovna et al., 2021, p. 2). Additionally, John's dual roles as both a shareholder and a recipient of excessive rent raise concerns about transparency and fairness in the company's financial dealings. Ethical Conduct The inflated rental payments violate the principles of fair dealing and honesty, which are fundamental to ethical conduct in tax management. Such actions erode trust with stakeholders and undermine the tax system's integrity. Tax professionals must uphold these principles to ensure transparency and maintain public confidence in the fairness of tax practices. According to Black, Burton, and Cieslewicz (2022), "The internal struggles individuals may have with their desires or commitment to ethical behavior are not normally observed, and even unethical behavior is difficult to identify given the many ways unethical conduct can be performed and unethical behavior's inherent secretive nature" (p. 947-948). Any deviation from these standards risks tarnishing the reputation of the individual tax professional and the company they represent. Compliance with Regulations Tax authorities may conduct audits, potentially resulting in penalties or fines for the company if it violates tax laws. Additionally, engaging in unethical or non-compliant tax practices can lead to reputational damage and loss of trust from investors and customers. Dularif and Rustiarini (2022) explain that non-compliant behavior, from a taxation perspective, involves activities aimed at reducing tax obligations, commonly referred to as tax avoidance and tax evasion. Therefore, Haddock Corporation must ensure its deductions align with market standards and adhere to applicable tax regulations to mitigate these risks.

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