JATA - Fall 1992

Volume 14, No. 2

Determinants of Tax Compliance:  A Contingency Approach

Julie H. Collins, Valerie C. Milliron and Daniel R. Toy


This paper adds to the tax compliance literature in two ways. The primary contribution of this research is the exploration of an approach for segmenting noncompliant taxpayers based on a contingency model framework. We examine how the contingency factors of taxpayer objective (correct return or minimize taxes) and tax preparation mode (self-preparation versus use of a professional preparer) affect the relation of taxpayer characteristics and noncompliance behavior. Second, the scope of U.S. taxpayer characteristics tested is expanded to include personality variables, tax knowledge, and anticipated benefits of noncompliance.

The contingency framework added to the explanatory power of the model. The relations between the predictor variables and noncompliance behavior varied across the subgroups identified by the contingency factors--taxpayer objective and preparation mode. The additional predictor variables of tax knowledge, anticipated benefits of noncompliance, and the personality characteristics (conformity, responsibility, value orthodoxy, and risk propensity) were especially helpful in distinguishing the profiles of the different groups of noncompliant taxpayers. The paper concludes with a discussion of specific considerations for future research.

Maximizing Retirement Plan Contributions Subject to Defined-Benefit, Defined-Contribution, and "Sum of Fractions" Limitations:  A Mathematical Programming Approach

Kenneth E. Anderson and J. Harvey Carruth


Carruth, Whitehead, and Anderson (CWA 1986) presented a linear programming approach to maximizing contributions to certain elective salary reduction arrangements. However, CWA (1986) assumed a defined-contribution Regular Plan and did not address participation in a defined-benefit Regular Plan. If an employee participates in both a defined-benefit and defined-contribution plan, the employee's benefits must satisfy the defined-benefit (DB) limitation of

I.R.C. § 415(b), contributions must satisfy the defined-contribution limitations of I.R.C. § 415(c), and the employee's benefits and contributions together may be subject to the "sum-of-fractions" (SOF) limitation of I.R.C. § 415(e). Consequently, contributions to elective salary reduction arrangements that are optimal under the linear defined-contribution constraints may have to be reduced to satisfy the DB and SOF limitations. This article (1) expands the CWA model by incorporating the DB and SOF limitations; (2) consolidates, modifies, and clarifies some aspects of the linear model presented in CWA (1986); and (3) presents an algorithm for solving the expanded model. Because of space limitations only Stage 1 of a two-stage algorithm appears in this article. Stage 2 is available from the authors upon request.

Evaluation of Tax Services:  A Client and Preparer Perspective

Anne L. Christensen


Tax clients and their return preparers have different perceptions about the importance of tax service elements. This study explores those differences and relates the differences to clients' judgments of tax service quality. Exchange theory and perception gap analysis are used to examine the evaluation of the return preparation services. A survey was administered to tax clients and to tax professionals employed by three international accounting firms, and the survey results were evaluated using structural equation analysis. The results revealed that tax preparers' perceptions of what clients expect from a quality tax service differ significantly from clients' expectations. Significant differences were found in the areas of reducing audit likelihood and in improving communication between tax preparers and clients. The survey also indicated that the greatest discrepancies between clients' expectations and the service actually received were related to tax savings strategies.

Earnings Management of Firms Subject to the Alternative Minimum Tax

Gil B. Manzon, Jr.


This study examines the extent to which reported earnings were managed in response to the book income adjustment component of the alternative minimum tax (AMT). A sample of 151 non-financial firms subject to the AMT was identified using the NAARS database. These firms were partitioned by their relative incentive to respond to the book income adjustment. Earnings management was operationalized using accruals related to long-lived assets (depreciation, amortization, and depletion).

The results indicate that certain firms managed accruals to minimize the cost of the AMT. These results are consistent across three alternate calculations of discretionary depreciation accruals. This finding corresponds with the view that firms altered their reporting behavior in response to the AMT and supports concerns expressed by policy-makers. Consistent with the evidence reported in Gramlich (1991) and Dhaliwal and Wang (1992), limited evidence is found of anticipatory earnings management in the year preceding the imposition of the AMT. After including variables to control for other possible factors that might motivate firms to manage earnings (leverage, firm size, and bonus scheme variables), the tax variable continues to be significant in its predicted direction.

Portfolio Optimization Subject to Tax Bracket Constraints:  A Linear Programming Approach

Dann G. Fisher, David O'Bryan,
Tom Schmidt, and James E. Parker


Conventional investment and tax-planning wisdom holds that the marginal tax rate is the critical variable in planning for the next dollar of taxable investment. The traditional approach to maximize after-tax returns is to invest incremental investment dollars in the asset yielding the highest after-tax return. In this paper we develop and implement a linear programming model to serve as an alternative to traditional analysis. Given a regime characterized by progressive tax rates, we argue that as an investor's taxable income exceeds the upper boundary of a tax bracket, optimal strategy results from a comparison of the after-tax return from an intra-bracket investment shift relative to the after-tax return from the traditional, or inter-bracket, approach. Our analysis suggests that tax planners may wish to jointly consider intra-bracket allocations of investment dollars.

Measuring Horizontal Equity:  A Regression Approach

Lawrence P. Grasso and Peter J. Frischmann


Variation of tax liability (or tax rate) within groups developed by classification schemes reflects differential tax treatment of economic unequals as well as horizontal inequity in the tax regime. The coefficient of variation (CV) of either tax liability or tax rate is frequently used as a measure of horizontal equity. The CV overstates the amount of horizontal equity in a tax regime to the extent that variation within groups is due to income level. An alternative measure of horizontal equity, the coefficient of residual variation (CRV) from a regression, is proposed. The CRV adjusts for progressivity, eliminating a source of distortion in the traditional CV measurement of horizontal equity. Empirical properties of the CV and CRV are compared and illustrated using 1979 and 1986 tax returns from the Ernst & Young/University of Michigan Tax Database.

The Relation Between Graduate Tax Education and Professional Performance

Philip H. Siegel, Mark B. Porcelain and John T. Risgby


In this study we investigate the relation between educational background and professional performance in tax accounting. We analyze educational and performance data from personnel files of tax staff employees from six regional offices of international accounting firms. Our sample is separated into two groups; a bachelor's degree only group and a master's degree group. The personnel data provided by the accounting firms includes annual performance evaluations and promotion rates. In general, we find significant differences between the two groups with respect to both performance measures. Additionally, tax staff with graduate tax education generally outperformed those having only a baccalaureate degree. The results are consistent with prior research suggesting that post-baccalaureate education is positively correlated with higher professional performance.