A Theory of Tax Planning

42 Pages Posted: 5 Apr 2023

See all articles by Mark Penno

Mark Penno

University of Iowa - Department of Accounting

Date Written: October 2022

Abstract

I model a tax planning setting where the tax authority decides whether to challenge a taxpayer’s deduction with a limited scope audit, and the taxpayer must balance the probability of a rejected deduction against the size of an aggressive claim. Multiple interpretations are possible given the language-based classifications found in the tax code, and while the underlying facts are freely available (not hidden from the tax authority), the tax authority must still come to a judgment as to whether a transaction has been properly classified. Accordingly, as long as the probability of denying the claim is less than 50%, the doctrine of substantial authority protects the taxpayer from the assessment of tax penalties. The model describes a possible perception of ‘undersheltering’ where taxpayers with moderate unchallenged claims coexist with (potentially similar) taxpayers who make aggressive challenged ones. In contrast to models of tax evasion, the model describes how the tax authority’s net tax collections may increase under a policy of fewer challenges.

Keywords: Tax planning, Substantial authority, Shadow standard, FIN 48.

Suggested Citation

Penno, Mark C., A Theory of Tax Planning (October 2022). Available at SSRN: https://ssrn.com/abstract=4391927 or http://dx.doi.org/10.2139/ssrn.4391927

Mark C. Penno (Contact Author)

University of Iowa - Department of Accounting ( email )

21 E Market St, Iowa City, IA 52242
Iowa City, IA 52242-1000
United States

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