Nonprofessional Investors’ Perceptions of Real-time Corporate Tax Audits

Abstract

The Compliance Assurance Process (CAP) is a federally funded IRS corporate audit program. The program’s goal is to determine the best tax treatment for complex transactions before a corporation files its tax return. The US Department of the Treasury has voiced concerns regarding resource constraints and whether the program enhances public (nonprofessional investor) and investor confidence. We conduct a behavioral experiment using 176 Master of Business Administration and Master of Accounting students as proxies for nonprofessional investors. In the experiment, we examine the effects of CAP participation and corporate tax risk profile on judgments about financial statement credibility. We use a 2 × 2 experimental design with corporate tax risk profile manipulated as high risk or low risk and participation in CAP manipulated as participatory or non-participatory. This research investigates whether CAP program participation and/or tax risk level influence nonprofessional investors’ perceptions of the certainty and accuracy of the provision for income taxes. The results suggest both CAP program participation and tax risk influence nonprofessional investors’ perceptions of the certainty of the income tax provision; and tax risk also influences nonprofessional investors’ perception of the accuracy of the income tax provision.

Citation

Cleaveland, M.C., Jones, L.C. and Epps, K.K. (2019), "Nonprofessional Investors’ Perceptions of Real-time Corporate Tax Audits", Advances in Taxation (Advances in Taxation, Vol. 26), Emerald Publishing Limited, Leeds, pp. 81-97. https://doi.org/10.1108/S1058-749720190000026005