Tax Litigation, Tax Reporting
Game, and
Social Costs
Woon-Oh-Jung
Abstract
This study investigates the consequences of tax litigation
on the equilibrium behaviors of taxpayers and a tax enforcement
agency. Tax litigation is modeled for a situation in which tax laws
are ambiguous and tax courts are used to resolve the disputes between
taxpayers and the tax agency. This study examines the impact of
both taxpayer uncertainty and economic factors such as litigation
costs, tax rate, and audit costs upon the tax agency's revenue collections,
the frequency of tax trials, and an aggregate level of audit and
litigation costs. An increase in the taxpayers' litigation costs
result in less aggressive reporting behavior, which increases the
tax agency's revenue and reduces the aggregate level of audit and
litigation costs. The effects of a rise in the tax agency 's litigation
costs are indeterminate. As the level of taxpayer uncertainty is
elevated, the model indicates that there will be fewer tax trials
and the aggregate audit and litigation costs will decline. However,
an increase in tax rate does not necessarily decrease the aggregate
audit and litigation costs nor increase the litigation frequency.
Tax Practitioner Ethics:
An Empirical Investigation of
Organizational Consequences
Jane O. Burns and Pamela Kiecker
Abstract
This study examines whether tax accountants' ethical
judgments are influenced by deontological (essential characteristics
of the behavior) and /or teleological (consequences of the behavior)
considerations. Prior business ethics research is extended by applying
the Hunt-Vitell theory of ethics model to tax professionals. A cross-section
of 418 CPAs who are tax practitioners in supervisory positions read
two scenarios containing ethical/unethical behaviors and answered
questions about (1) how ethical/unethical they believed the behaviors
to be and (2) the extent that they were inclined to encourage/reprimand
the behaviors. Analysis of variance (ANOVA) and structural equations
modeling (LISREL) were used to examine descriptive statistics and
the theoretical relationships among variables. The results suggest
that tax supervisors' ethical judgments are dependent on both deontological
and teleological considerations. The experimental design and results,
which are consistent with previous use of the Hunt-Vitell model,
provide insights that are relevant for tax practitioners and future
ethics research in taxation.
The Effects of Financial Accounting
Conformity on Recommendations of Tax Preparers
C. Bryan Cloyd
Abstract
When the "correct" tax and financial accounting
treatments of a transaction are ambiguous, the choices of each may
be interrelated because of the perception that aggressive (e.g.,
taxable income decreasing) tax positions are strengthened by conforming
financial accounting treatments. From the tax preparer's perspective,
the costs and benefits associated with recommending a particular
tax position are partly determined by the client's intended financial
accounting treatment, as well as the client's attitude toward risks
resulting from aggressive tax return positions. This study reports
the results of an experiment designed to document the existence
of the aforementioned perception among tax preparers and to investigate
the impact of financial accounting conformity with aggressive tax
treatments and client risk attitude on the strength with which tax
preparers recommend aggressive tax return positions. This study
also raises the possibility that tax preparers may influence firms
financial accounting choices related to such transactions.
The Effect of Magnitude of
IRS Assessment
and Engagement Letters on Tax Preparer Liability
Kathy Krawczyk and Roby B. Sawyers
Abstract
An experiment was conducted to explore the effects
of the magnitude of assessments by the IRS and engagement letters
that clarify tax preparer or taxpayer responsibilities or limit
claims against tax preparers on tax preparer liability. One hundred
seventeen members of civic organizations received two hypothetical
scenarios in which the magnitude of IRS assessment and the type
of engagement letter were varied. Tax preparer liability was measured
by the likelihood that subjects would hold a tax preparer responsible
for an adverse IRS determination, whether they would bring suit
against the tax preparer, and how much they would try to collect
from the tax preparer.
Overall, the magnitude of IRS assessment influenced
the percentage of taxpayers bringing suit against a tax preparer
and the dollar amount requested in the suit. Adding statements about
client or tax preparer responsibilities to engagement letters also
reduced the dollar amount of lawsuits brought against the tax preparer.
While the tax preparer's use of language limiting the client's claim
to the fees charged in the engagement reduced the dollar amount
of lawsuits, it resulted in the surprising effect of increasing
the likelihood of holding the taxpayer responsible.