Essays in corporate tax compliance and financial reporting.

This dissertation explores two topics in corporate tax compliance and financial reporting. First, I explore the relationship between book-tax differences and Internal Revenue Service audit adjustments. A simple model which represents the firm's choices of book and/or taxable income reductions and the IRS' choices of detection probabilities provides a framework for the hypotheses. Empirical tests support the hypothesis that IRS proposed audit adjustments increase as the excess of book income over taxable income increases. This finding is important in understanding the friction between financial reporting and tax incentives. Since book income is relevant in the tax audit process, financial reporting may be used by researchers and by the Internal Revenue Service to infer tax effects. In addition, financial reporting incentives should be considered in forming tax policy. I also find that book-tax differences are greater for public firms, consistent with the hypothesis that these firms have higher costs associated with reducing book income for tax purposes. Tax regimes that require more book-tax conformity may result in firms with financial reporting constraints being more compliant with revenue-raising features and less responsive to incentives with deductions. Second, I investigate the relationship between tax expense and corporate tax compliance costs. Prior descriptive evidence on compliance costs measures the burden of such costs. Existing analytical research on tax evasion introduces compliance costs as a voluntary expenditure incurred to avoid taxes. This dissertation measures the extent to which compliance costs are associated with decreases in tax rates. I present weak evidence that firms which spend more on tax compliance have lower effective rates of taxes on assets. While not denying that compliance costs are an overall burden on the economy, it appears that some firms obtain private benefits from such costs relative to other firms. Data availability permits controlling for differing tax planning opportunities provided by size, industry, and foreign activity. I suggest that remaining variation in observed tax rates and compliance costs is due to differing firm preferences for aggressive reporting.Ph.D.AccountingEconomic theorySocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/130071/2/9712040.pd