The Role of Auditors, Non-Auditors, and Internal Tax Departments in Corporate Tax Aggressiveness

Abstract:     
Using confidential data from the Internal Revenue Service (IRS) on who signs the corporate tax return, we investigate whether the party primarily responsible for preparing a corporation’s tax return — the auditor, the external non-auditor, or the internal tax department — is related to that corporation’s tax aggressiveness. We find that both internally prepared tax returns and external non-auditor-prepared tax returns claim more aggressive tax positions than returns prepared by the company’s auditors. Given that preparer type is informative of tax aggressiveness, we also evaluate the usefulness of publicly disclosed tax fees to infer these parties. In a surprising result, we show that publicly disclosed tax fees paid to a company’s auditor do not provide information sufficient to replicate our core results, and that using tax fees to classify companies according to whether their auditor provides both services yields total error rates that exceed 60 percent. Our findings are important to understanding the advisory role that external tax preparers, including auditors, play in the tax compliance choices of firms, and the extent to which inferences using tax fees can be made about these parties.

Number of Pages in PDF File: 53

Keywords: tax preparer, auditor, tax fee, FIN 48, tax reserve, tax aggressiveness

JEL Classification: H25, M41

working papers series