Michelle Hanlon, Lllian Mills and Joel Slemrod have released a working paper titled "An Empirical Examination of Corporate Tax Noncompliance", available on SSRN here. The paper was prepared for a 2005 conference at the University of Michigan.
Using IRS audits and appeals data merged with confidential tax return data, the study looks at noncompliance measured by proposed tax deficiencies on audit and upheld after taxpayer appeals. Here is a statement of their tentative conclusions.
First, [the study] has confirmed that corporate tax noncompliance, at least as measured by deficiencies proposed upon examination, amounts to approximately 13 percent of 'true' tax liablity. ...
Second, noncompliance is generally a progressive phenomenon ...[that] increases with the size of the company. Combined with other information that the noncompliance rate among very small businesses is significantly higher than 13 percent, this suggests that ...medium-sized businesses hav[e] the lowest rate of noncompliance.
Third, noncomplaince is related to some observable characteristics of companies. ...
Fourth, ...incentivized executive compensation schemes are associated with more tax noncompliance.
Finally, ...there is no consistent simple or partial negative association between [the] measure of tax noncompliance and measures of the effective tax rate calculated from financial statements. This might mean that the financial statements are uninformative about tax aggressiveness in part because of the tax cushion for future adverse judgments that is included in the tax expense amount on the financial statements. In addition, it may be that publicly available effective tax rate measures affect the aggressiveness with which the IRS pursues tax noncompliance.
They note that the measure they use for noncompliance is a result of an audit of a "tax return declaration that may itself be the opening bid in what is expected, often correctly, to be an intense negotiation and formal appeals process." This statement merely confirms what most understand is common practice. Because a taxpayer is not penalized under the Code for positions taken on a return so long as the taxpayer had "substantial authority" for the position or, in the case of disclosed positions, had a reasonable basis for the position, there is no incentive for aggressive taxpayers to file returns that reflect the position that the taxpayer reasonable believes more likely than not to be the correct position. Those low, litigation-based standards combine with low audit rates to give large corporate taxpayers--and their managers who are compensated for higher returns--every incentive to engage in aggressive tax strategies.
Cracking down on this behavior with increased enforcement, as the IRS has recently done, is a good first step. But Congress should change the statutory penalty standards to require taxpayers to file returns that they think are correct, not just good "opening bids" in a personalized negotiation with the IRS that makes a mockery of fairness requirements.
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