How do tax technology and controversy expertise affect tax disputes?
TRR 266 Accounting for Transparency Working Paper Series No. 101
55 Pages Posted: 12 Sep 2022 Last revised: 6 Dec 2022
Date Written: December 1, 2022
Given the rising number, magnitude, and harshness of tax disputes between firms and tax authorities, firms increasingly call on tax technology and controversy expertise to try to resolve these disputes. This study investigates how tax technology embedded in the firm’s Tax Risk Management System (TRMS) and the expertise of tax controversy managers affect dispute outcomes and compliance incentives. Using a game-theoretic model, we derive equilibrium strategies for a tax manager’s compliance effort, a controversy manager’s dispute resolution effort, and a tax authority’s litigation decision. Absent a controversy manager, we find that improving a firm’s TRMS quality unambiguously decreases the litigation probability. However, in the presence of a controversy manager, we surprisingly find that improving TRMS quality crowds out compliance efforts and can increase litigation probability. Overall, we find that a high-quality TRMS is essential to take advantage of the dispute resolution function of a controversy manager.
Keywords: tax dispute resolution, tax risk management, tax technology, controversy expertise, litigation
JEL Classification: H25, H26, C72, K34
Suggested Citation: Suggested Citation