Taxation, Book-Tax conformity , IRS, Earnings management

Successfully producing relevant research requires investment throughout one's career to acquire fresh institutional knowledge, theories, and methods. In my case, almost a decade in public accounting launched multiple papers examining the tension between financial reporting and tax planning. Some of these papers directly generated new requirements for tax compliance (Schedule M-3) and indirectly influenced new financial reporting disclosures (FIN 48). As tax accounting researchers, we have the best competitive advantage in helping tax policymakers and tax authorities distinguish real effects from reporting effects. We can use that knowledge when analyzing the 2017 tax reform, especially with the help of the American Accounting Association (AAA) to build our professional networks.

We document that simulated corporate marginal tax rates based on financial statement data [Shevlin, T., 1990. Estimating corporate marginal tax rates with asymmetric tax treatment of gains and losses. The Journal of the American Taxation Association 11, 51–67; Graham, J., 1996a. Debt and the marginal tax rate. Journal of Financial Economics 41, 41–73] are highly correlated with simulated rates based on corporate tax return data. We provide algorithms that can be used to estimate the book or tax simulated rates when they are not available. We find that the simulated book marginal tax rate does a better job of explaining financial statement debt ratios than does the analogous tax return variable and discuss how the book-simulated rate is likely to be an appropriate measure in settings with global, long-term considerations.

We match large U.S. corporations' tax returns during 1989–2001 to their financial statements to construct a firm‐level proxy of firms' use of off‐balance sheet and hybrid debt financing. We find that firms with less favorable prior‐period Standard & Poor's (S&P) bond ratings or higher leverage ratios in comparison to their industry report greater amounts of interest expense on their tax returns than to investors and creditors on their financial statements. These between‐firm results are consistent with credit‐constrained firms using more structured financing arrangements. Our within‐firm tests also suggest that firms use more structured financing arrangements when they enter into contractual loan agreements that provide incentives to manage debt ratings. Specifically, we find that after controlling for S&P bond rating and industry‐adjusted leverage, our sample firms report greater amounts of interest expenses for tax than for financial statement purposes when they enter into performance pricing contracts that use senior debt rating covenants to set interest rates. Furthermore, we find that the greatest book‐tax reporting changes occur when firms become closer to violating these debt rating covenants. These latter findings are consistent with firms' contractual debt covenants influencing their use of off‐balance sheet and hybrid debt financing.

We investigate how firms use differences in state income tax regimes to lower their state tax burdens. We develop a model that predicts that firms’ state effective tax rates first decrease then increase as a function of the number of states in which they file returns. Using firm-level data, we find evidence consistent with the model's predictions and we estimate that such rates are minimized at 24 states. Consistent with predictions from prior literature, our evidence also suggests that firms use sales factor apportionment to reduce state tax burdens.

This paper examines the effect of book‐tax differences on the probability that a transaction is audited and the probability that additional taxes are collected. It constructs a stylized model in which the taxpayer reports both financial accounting income and taxable income. The government observes both reports before deciding whether to conduct an audit. The analysis of the equilibrium yields two hypotheses. First, the probability that the government will audit a transaction is higher if the transaction generates a positive book‐tax difference (e.g., an expenditure that is deducted for tax purposes but capitalized for financial reporting purposes) than if the transaction generates no book‐tax difference. Second, conditional on being selected for audit, transactions with and without book‐tax differences are equally likely to have detected understatements of tax liability. These hypotheses are tested using Internal Revenue Service (IRS) data from the Coordinated Examination Program. The empirical tests are consistent with the predictions of the strategic tax compliance model.

We investigate factors that explain firms' decisions to disclose and record contingent tax liabilities. Our findings are based on confidential Internal Revenue Service audit data and financial statement footnotes for 100 large industrial firms from 1987 to 1995. Descriptive statistics indicate that these firms often fail to disclose IRS claims for tax deficiencies that exceed a 5-percent-of-income rule of thumb. We find that the probability of disclosure increases in the relative amount of the claim or the expected loss, although the largest claims drive this result. Our evidence is consistent with firms using a stable measure of size, such as assets or normal income, to gauge materiality, rather than relying only on current period reported income. We also find that the amount accrued for the contingent liability increases in the amount of the expected loss. However, our inferences may not generalize beyond a population of large, frequently audited firms.