What Turns the Taxman On? Tax Aggressiveness, Financial Statement Audits and Tax Return Adjustments in Small Private Companies

52 Pages Posted: 14 Sep 2019 Last revised: 12 Feb 2021

See all articles by Hannu Ojala

Hannu Ojala

Tampere University; Aalto University - School of Business

Juha Kinnunen

Aalto University School of Business

Lasse Niemi

Aalto University - School of Business

Pontus Troberg

Helsinki School of Economics

Jill Collis

Brunel University London - Brunel Business School

Date Written: October 1, 2020

Abstract

This study examines the effect of tax aggressiveness and voluntary audit of the financial statements on the likelihood of tax adjustments in small private companies. We provide evidence that (1) tax aggressiveness increases the likelihood of the tax authority not accepting taxable income as reported, whereas (2) voluntary audit decreases it. To derive our hypotheses, we build a theoretical stochastic model explaining tax authority’s reactions to bias and noise in tax returns and how these two relate to tax aggressiveness and voluntary audit. In our empirical tests of the hypotheses we use a large proprietary data set comprising internal records of the Finnish Tax Administration for the fiscal year 2010 combined with data on the taxable income reported by around 19,500 small private companies. Our results show that while the findings on tax aggressiveness are significant when measured with the book-tax difference using proprietary tax return data from the Tax Administration, they are insignificant when based on the conventional tax aggressiveness measure of book-tax difference derived from publicly available financial statement data. Our paper contributes to the literature by being the first to document the effects of tax aggressiveness and voluntary audit on tax return adjustments of small private companies.

Keywords: Audit opinion, small private companies, tax adjustments, tax aggressiveness, voluntary audit

JEL Classification: M410, M420, F38

Suggested Citation

Ojala, Hannu and Kinnunen, Juha and Niemi, Lasse and Troberg, Pontus and Collis, Jill, What Turns the Taxman On? Tax Aggressiveness, Financial Statement Audits and Tax Return Adjustments in Small Private Companies (October 1, 2020). The International Journal of Accounting, Vol 55, No. 3 (2020) DOI: 10.1142/S1094406020500110, Available at SSRN: https://ssrn.com/abstract=3448661

Hannu Ojala (Contact Author)

Tampere University ( email )

Tampere, FIN-33101
Finland

Aalto University - School of Business ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Juha Kinnunen

Aalto University School of Business ( email )

PO Box 21220
FI-00076 AALTO
Helsinki
Finland

Lasse Niemi

Aalto University - School of Business ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Pontus Troberg

Helsinki School of Economics ( email )

P.O. Box 1210
Helsinki, 00100
Finland

Jill Collis

Brunel University London - Brunel Business School ( email )

Kingston Lane
Eastern Gateway Building
Uxbridge, Middlesex UB8 3PH
United Kingdom

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