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I reexamine the conflicting results in Frank, Lynch, and Rego (2009) and Lennox, Lisowsky, and Pittman (2013). Frank et al. (2009) conclude that firms can manage book income upward and taxable income downward in the same period, implying a positive relation between aggressive book and tax reporting. Lennox et al. (2013) conclude the relation is negative and aggressive book reporting informs users that aggressive tax reporting is less likely. I identify four key differences in the research designs across the two studies, including measures of aggressive book reporting, measures of aggressive tax reporting, sample time periods, and empirical models. I systematically examine whether each of these differences is responsible for the conflicting results by altering the key difference while holding other factors as constant as possible. I find the relation between aggressive book and tax reporting is driven by the measure of aggressive book reporting, as the relation is positive for some subsets of firms and negative for others. Firms accused of financial statement fraud have a negative relation while nonfraud firms exhibit a positive relation. Using discretionary accruals, I also look for, but do not find a “pivot point” in the relation between aggressive book and tax reporting. I provide a better understanding of the relation between aggressive book and tax reporting by identifying research design choices that are responsible for prior results. I show that measures of both discretionary accruals and financial statement fraud are necessary to gain a more complete picture of the relation between aggressive book and tax reporting.

Prior research has identified a number of variables that influence tax professionals’ judgments. However, these variables have usually been examined in isolation. This study has two main findings. First, using a structured questionnaire that allows for the collection of variables related to actual tax planning engagements, this study validates the findings of numerous laboratory studies using factor and regression analysis. Factors representing risks and rewards associated with the client and the IRS, along with task characteristics and client aggressiveness significantly affect the aggressiveness of tax advice given to clients. Second, tax professionals do not appear to charge a premium for aggressive tax advice. However, regarding the fee charged, a significant gender effect is found even after controlling for time spent on the engagement, experience, firm size and education.

This chapter investigates the effect of moral reasoning of tax professionals on the aggressiveness of their reporting recommendations. The findings of the study indicate moral reasoning influences the aggressiveness of tax reporting decisions separate from the influence of client pressure. As the level of moral reasoning increases, the aggressiveness of the reporting position is found to0 decrease. Contrary to prior research, client pressure is not related to tax reporting aggressiveness. Failure to observe this relationship may signal a shift in behavior resulting from the intense public and regulatory scrutiny at the time of data collection which was in the immediate aftermath of the Enron scandal.

We investigate how different cognitive conceptualizations of reference point and tax withholdings jointly influence aggressive tax filing. We utilize a field study with responses captured from actual taxpayers immediately after filing their returns. Consistent with both prospect theory and mental accounting perspectives, we hypothesize and find evidence that more aggressive filing decisions depend on mental categorization of whether taxpayers expect a tax refund or owe additional taxes relative to their expected asset position (EAP). We find a joint and additive impact of EAP with a cognitive link made between taxes and the categorization of amounts owed. Our findings suggest that more aggressive filing behavior is found in taxpayers in a tax loss position relative to their EAP and in those that do not separately categorize taxes owing from their own resources. By highlighting the importance of EAP and the cognitive separation of taxes owed, we provide insight for revenue agencies to use cognitive framing strategies to mitigate aggressive taxpayer behavior. The cognitive framing of EAP may be influenced by the use of installment payments and tax withholdings, but also may be affected by communications that alter taxpayers' expectations of taxes owed.

This paper takes a unique approach to provide additional insight into the agency view of tax avoidance. We directly investigate the association between the presence of agency conflicts and corporate tax avoidance. Using a measure of CEO centrality, developed by Bebchuk, Cremers, and Peyer (2011), we identify settings in which agency conflicts are likely to be high. In contrast to prior literature, our primary tests do not rely on the inferences of market participants regarding tax avoidance. We find that CEO centrality is positively and significantly associated with tax avoidance. Additionally, we analyze the mediating role of monitoring by institutional investors in our setting. We find that the relation between tax avoidance and the existence of agency conflicts is strongest for firms with low levels of CEO monitoring. We also add to prior literature by investigating the implications of our setting on future accounting performance and future firm value.

This paper examines the accuracy of the reporting recommendations of professional tax preparers, the extent of agreement among those recommendations, and the degree of aggressiveness of preparers' recommendations. In contrast to prior laboratory studies, however, archival data from six tax-return preparation contests reported in Money magazine from 1988 to 1993 are examined. These contests have professional tax preparers evaluate the tax obligation of a hypothetical family. While the contests resemble in some ways conventional experiments in taxation and other fields, they overcome some of the typical criticisms of laboratory experiments—including the lack of access to peer consultation and decision-aiding tools and the absence of strong financial or reputational incentives to perform well. The data reported in Money shed light on some possible determinants of tax preparers' accuracy, agreement, and aggressiveness that have been identified in the laboratory. When statistically significant results are found, however, they often conflict with those from laboratory experiments.

This study examines how Certified Public Accountants (CPAs), as tax practitioners, interpret and apply the ethical tax standards established by the American Institute of Certified Public Accountants and the Internal Revenue Service (IRS), using a hypothetical situation. Although the authors attempt to determine if CPAs are more likely to apply the substantial authority standard given certain factors affecting both the CPAs and their tax clients, one-dimensional standard threshold applications leave us to interpret only whether these factors affect the CPAs’ decision to sign a tax return upholding an ambiguous position. The authors find that an aggressive CPA (self-reported) is more inclined to sign the return than an unaggressive CPA. The authors also find that favorable prior dealings with the IRS, and awareness that the IRS is not pursuing a contrary position to a certain tax position, both contribute significantly to the CPA’s willingness to sign the return. While an aggressive tax client also fosters willingness to sign, it appears that tax clients with a refund pending (as opposed to a payment pending) are more apt to trigger a signed return. Study results indicate that ambiguities in the tax code, in concert with mitigating CPA/client factors, may lead to significant discrepancies in interpretation and application.

The existing literature documents mixed evidence toward the association between corporate social responsibility (CSR) and corporate tax planning (e.g., Davis, Guenther, Krull, & Williams, 2016; Hoi, Wu, & Zhang, 2013). In this study, I aim to identify a causal relationship between CSR and tax planning, leveraging the staggered adoptions of constituency statutes in US states, which is a plausibly exogenous shock to firms' emphasis on their social responsibility. In general, the statutes permit firm directors to consider the interests of all constituents when making business decisions, including those who benefit from firms paying their fair share of income taxes. Thus, the adoption of the statutes raises the importance of firms' social responsibility in paying income taxes. Employing a staggered difference-in-differences (DiD) method, I find that firms incorporated in states that have adopted constituency statutes exhibit significantly higher effective tax rates (ETRs) based on current tax expense. This causal relationship suggests that managers, with the legitimacy to consider the social impact of tax avoidance, become less aggressive in tax planning. I further find that the effect of adoption is stronger for financially unconstrained firms and firms in retail businesses, where the demand (cost) for tax avoidance is lower (higher). Finally, I show that my main results are driven by firms located in states with a high sense of social responsibility and firms with high levels of tax avoidance prior to the adoption. Overall, the findings in this chapter contribute to the literature by delineating a negative causal relationship between CSR and tax avoidance and identifying a positive social impact brought by the passage of constituency legislation.

To better detect potential audit issues, since 2010, the Internal Revenue Service has required firms to file a separate schedule individually disclosing each of their uncertain tax positions (UTPs). This study uses an experiment to examine how this increase in detection risk from the newly created IRS schedule influences both a firm’s tax reporting and financial reporting concurrently. We find that corporate tax professionals were more likely to recommend an UTP when their firm had a strong UTP reporting quality, regardless of the detection risk level of the reporting environment. However, we find an interaction effect for the recording of the tax reserve. In a low detection risk environment, corporate tax professionals recorded a higher (lower) tax reserve when their firm had a weak (strong) UTP reporting quality. However, in a high detection risk environment, corporate tax professionals recorded a lower (higher) tax reserve when their firm had a weak (strong) UTP reporting quality. Overall, the results provide insight into the dual nature of UTP reporting and the determinants that influence each reporting behavior.

This study examines how creditor interventions after debt covenant violations affect corporate tax avoidance. Using a regression discontinuity design, we find that creditor interventions increase borrowers' tax avoidance. This effect is concentrated among firms with weaker shareholder governance before creditor interventions and among those with less bargaining power during subsequent debt renegotiations. Our results indicate that creditors play an active role in shaping corporate tax policy outside of bankruptcy.