JATA - Fall 1995

Volume 17, No. 2

Tax Litigation, Tax Reporting Game, and
Social Costs



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


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


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


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.