Corporate Compliance Essay

7684 Words Mar 29th, 2011 31 Pages
National Tax Journal Vol 49 no. 3 (September 1996) pp. 421-35

CORPORATE TAX COMPLIANCE AND FINANCIAL REPORTING

CORPORATE TAX COMPLIANCE AND FINANCIAL REPORTING
LILLIAN F. MILLS
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Abstract - The tax law provides varying opportunities for tax planning, and firms have competing incentives to consider in planning a tax reporting strategy, including financial reporting effects. I present preliminary results that Internal Revenue Service audit adjustments increase in the excess of book income over taxable income. This is evidence that firms incur additional costs for reporting higher book income than taxable income. I also investigate the relationship between compliance costs and taxes paid. Existing descriptive research emphasizes
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Preliminary results indicate that firms which spend more on tax research
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OVERVIEW The tax law provides varying opportunities to firms for tax planning, and firms have competing incentives to consider in planning a tax reporting strategy, including financial reporting effects. In this paper, I first present preliminary

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University of Michigan, Ann Arbor, MI 48109.

National Tax Journal Vol 49 no. 3 (September 1996) pp. 421-35

NATIONAL TAX JOURNAL VOL. XLIX NO. 3

and planning report lower tax expense. Although complexity in the tax law creates additional compliance costs, it may also provide opportunities for planning. Those tax laws which are complex without net tax effect, such as alternative minimum tax depreciation for many firms, generate compliance costs which provide no planning opportunity for the firm. Such laws are likely to create the most protest from corporate taxpayers. Tax regimes where the compliance costs are related to the taxes paid may be less objectionable to taxpayers if opportunities exist to obtain a private benefit from tax planning.

The U.S. accounting and tax systems each have enough uncertainty so that managers may choose varying degrees of conformity between book and tax income. If there were no cost to reporting taxable income below book income, then firms would respond to financial reporting incentives independently from tax savings incentives. In the extreme, a firm

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