Advances in Taxation: Volume 13

The purpose of this study was to identify how individuals form fairness judgments about a tax system and what factors they attend to when comparing the fairness of a flat tax system with the current tax system. Based on equity theory and prior tax research the complexity of the tax system, the policy objectives achieved by the tax system and the financial effect of the tax system were hypothesized to influence individuals' fairness judgments. Further, the function served by an individual's attitude toward the tax system was expected to further explain when, self-interest would be particularly salient.The study's hypotheses were tested using the responses to a questionnaire sent to a cross-section of U.S. citizens. The study participants compared the current federal tax system with a flat tax system that differed from the current system on three dimensions. The alternative system was less complex than the current tax system, it achieved different policy objectives than the current system and the personal tax liability of the participants differed between the two systems. Regression analysis was used to assess the relative influences on the respondents' fairness judgments. Respondents' comparative fairness judgments were influenced by their judgments regarding economic goals achieved by each tax system, unjustified complexity, and, especially, self-interest.

Corporate tax rate changes are an incentive for high marginal tax (HMT) firms to shift taxable income into a period of lower tax rates. The Tax Reform Act of 1986 (TRA 86) reduced the top corporate statutory rate for ordinary income from 46% to 34%, and increased the corporate rate on net capital gains (NCGs) from 28% to 34%. Given the effective dates of TRA 86, HMT firms had an incentive to delay recognition of ordinary taxable income from 1986, and these firms had an incentive to accelerate NCGs into 1986.Prior research has shown that HMT firms shifted book-tax conforming income away from 1986. The present study finds that HMT firms shifted non-conforming income (i.e. the difference between pre-tax income and taxable income) into 1986. It also finds that HMT firms shifted NCGs (a tax subsidy due to preferential tax rates) into 1986. This evidence of shifting behavior suggests that implicit tax costs, as well as other cost disincentives, were insufficient to offset the tax rate change incentives.

The income tax rules concerning distributions from qualified retirement plans are considered by most to be a maze of rules defying logic. Some distributions qualify for a variety of special federal income tax treatments while others are taxed as ordinary income.In 1974, Congress proposed to equalize the total tax of taxpayers who receive distributions from retirement plans regardless of whether the distributions are received in a lump sum or as an annuity. The legislation provided a ten-year forward averaging rule for determining the tax to taxpayers receiving a lump sum distribution from a qualified pension plan. This rule was subsequently modified to five-year forward averaging in 1986.Congress recently repealed the five-year averaging rule and enacted a simplified method for determining an annuity's return on investment. The justification for the new legislation was “simplicity” rather than the original purpose — to prevent the bunching of taxable income into a single year as results from a lump sum distribution.Although Congress set out to equalize the income tax across the two forms of distributions, after two decades of tinkering, the law penalizes taxpayers who elect to receive the deferred compensation in the form of a lump sum distribution and, thereby, encourages the withdrawal of retirement assets over the life of the retiree all in the name of simplification. However, the result of the changes in the law is neither equality nor simplicity.

We conducted a mail questionnaire survey using both the randomized response (RR) technique and the direct questioning (DQ) technique to directly estimate the prevalence and type of income tax evasion. We also assessed the effectiveness of the RR technique in reducing response and non-response biases and examined the relationship between tax evasion and key demographic variables.Of the respondents completing the RR survey instrument, 5.5% admitted tax evasion by under-reporting income, and 6.5% admitted tax evasion by over-claiming deductions. The corresponding proportions obtained from the DQ survey instrument were 1.7% and 4.2% respectively. The RR technique was ineffective in reducing non-response bias, but the estimated proportions of tax evasion obtained by the RR technique are higher than those obtained by the DQ technique. A relationship was found between the demographic variables examined and tax evasion. However, interpretation of the results was restricted by the lack of statistical significance of the differences.

Professional standards are used as a means of regulating professional behavior. This relationship raises the question of how standards can be effectively employed. This study considers whether tax preparer aggressiveness is influenced by the preparer's familiarity with the relevant professional standard. The current “realistic possibility” standard replaced the “reasonable basis” standard as the previous standard was considered too low a threshold. Its application did not afford an effective form of ethical guidance controlling tax practitioner aggressiveness (Bandy et al., 1993; Graetz, 1987). The results of this study indicate that practitioner aggressiveness is inversely related to familiarity with the standard. This finding in turn suggests that a program of familiarization may be needed to achieve compliance with professional ethical standards.

This article presents procedures that can be followed in behavioral research when indirect measures are needed for a variable of interest. It is hoped that these procedures will be used to develop a database of scales that can increase generalizability across accounting studies. The suggested framework was used to develop a measure of client advocacy, an important construct when studying the judgments and decisions of tax professionals. This measure of client advocacy may be defended for both its reliability and its validity, and the usefulness of this scale is illustrated in two studies. Davis and Mason (1997) tested whether different levels of advocacy affected judgments of similarity in tax authority evaluation. Including advocacy allowed for a more specific interpretation of their results. Measuring advocacy at two points allowed Levy (1996) to examine whether advocacy is an inherent attitude or can be influenced by other variables, such as client preferences.

This study investigates professional tax preparers' willingness to include questionable client-provided data in a tax return without verifying the information. Although a recent survey of tax practitioners by Yetmar et al. (1998) found that the issue of reliance on client data is a significant ethical problem in practice, a very limited amount of previous research has investigated the factors that influence tax practitioners' reliance decisions. In the current paper, the issue of client reliance is viewed as a problem of trust and suspicion, and the general model of trust and suspicion proposed by Kee and Knox (1970) is adopted as a conceptual framework for addressing this issue. Based on this model and previous research findings, it was hypothesized that client reliability, the client's year-end tax payment status, the general propensity to trust others, and tax practitioners' attitudes toward risk would influence reliance decisions. The findings, based on a study of CPA tax practitioners, indicate that client reliability and tax payment status each had a significant impact on client reliance. However, contrary to expectations, the general tendency to trust others did not influence client reliance decisions in a tax context. The results provide mixed support for the hypothesized effects of tax preparers' risk attitudes on decisions. The findings of the study also raise questions regarding the appropriateness of tax practitioners' client reliance decisions.

The coefficient of variation (CV) and coefficient of residual variation (CRV) have been used as measures of horizontal equity. Both, however, are noisy measures in that they overstate the amount of variation due to inequity in the tax system (Grasso & Frischmann 1992). The purpose of the current study, therefore, is to use the CRV of tax liability and provide an estimate of the portion of this CRV measure that is due to the tax system alone and that portion that is due to specification error. This precision is an improvement over the Grasso and Frischmann model. The first purpose is achieved by computing the difference between two CRV measures. The first CRV measure is derived from a regression of an expanded total income amount (ETI) on tax liability; the second CRV measure is from a regression of several explanatory variables on tax liability. To the extent that the more fully-specified regression captures the Internal Revenue Code provisions, the reduction in the CRV measure can be attributed to the tax system. A second purpose of this study is to estimate the extent to which the various types of tax code provisions cause this variation. The second purpose is achieved by an iterative process of omitting one explanatory variable from the full regression and determining the change in CRV due to this omitted variable.

Over the years, Generally Accepted Accounting Principles (GAAP) issues have been raised in tax litigation by both taxpayers and the IRS. By studying the tax cases in which GAAP has been used, the authors were able to identify which issues the parties raised, which issues the courts used in making decisions, and whether raising the GAAP issue helped the taxpayer or the IRS prevail. The information developed in this study is useful to tax advisors and the IRS, in deciding when and how to use GAAP as part of a tax litigation .strategy, and to the courts, in assessing the proper use of accounting standards in determining taxable income.