Do IRS Audits Deter Corporate Tax Avoidance? Jeffrey Hoopes, Devan Mescall and Jeffrey Pittman. The Accounting Review.
We extend research on the determinants of corporate tax avoidance to include the role of Internal Revenue Service (IRS) monitoring. Our evidence from large samples implies that U.S. public firms undertake less aggressive tax positions when tax enforcement is stricter. Reflecting its first-order economic impact on firms, our coefficient estimates imply that raising the probability of an IRS audit from 19 percent (the 25th percentile in our data) to 37 percent (the 75th percentile) increases their cash effective tax rates, on average, by nearly 2 percentage points, which amounts to a 7 percent increase in cash effective tax rates. These results are robust to controlling for firm size and time, which determine our primary proxy for IRS enforcement, in different ways; specifying several alternative dependent and test variables; and confronting potential endogeneity with instrumental variables and panel data estimations, among other techniques.
The Effect of Public Disclosure on Reported Taxable Income: Evidence from Individuals and Corporations in Japan Makoto Hasegawa, Jeffrey Hoopes, Ryo Ishida and Joel B. Slemrod. National Tax Journal
The potential behavioral response to public disclosure of income tax returns figures prominently in policy debates about its advisability. Although supporters stress that it encourages tax compliance, policy debates proceed in the absence of empirical evidence about this, and any other, claimed behavioral impact. This paper provides the first such evidence by examining the behavioral response to the Japanese tax return public notification system. The analysis suggests that, when there is a threshold for disclosure, a non-trivial number of both individual and corporate taxpayers whose tax liability would otherwise be close to the threshold will underreport so as to avoid disclosure, provoking a response of the opposite direction than what supporters stress. An analysis of public corporations' financial statements and a proprietary sample of public and private firms offers no evidence that these companies' taxable income declined after the end of the disclosure system.
What Do Firms Do When Dividend Tax Rates Change? An Examination of Alternative Payout Responses to Dividend Tax Rate Changes Michelle Hanlon and Jeffrey Hoopes, First round revise and resubmit at the Journal of Financial Economics
This paper investigates the responsiveness of corporate payout policy to individual level taxes. We predict and find a surge of special dividends in the final months of 2010, immediately before individual-level dividend tax rates were expected to increase (but did not). Consistent with prior research on dividend taxes and payout, we find that much of the increase is concentrated in firms largely held by insiders. In addition, we find evidence that firms alter the timing of their regular dividend payments by shifting what would normally be January, 2011 regular dividend payments into December of 2010. To our knowledge this is the first evidence in the literature about the timing of regular dividend payments in response to tax law changes. The changing of the timing of regular dividend payments is consistent with Slemrod's (1992) framework of taxpayer responsiveness to tax changes.
Financial Accounting Consequences of Temporary Tax Law: Evidence from the R&D Tax Credit - Job market paper
This paper investigates the extent to which extensions of a temporary tax law reduce market participants’ ability to predict and understand corporate earnings. Examining evidence from eight separate extensions of the R&D tax credit, I find that market participants adjust their expectations for corporate earnings upwards in response to extensions of the R&D tax credit, but doing so decreases the accuracy of earnings forecasts. The evidence also suggests that bid-ask spreads around quarterly earnings announcements increase by 25% for firms affected by an expired R&D tax credit, suggesting that trading costs rise when markets have difficulty interpreting earnings affected by the expired R&D tax credit. The results of this study call attention to previously unexplored costs of temporary tax laws—capital market confusion related to corporate earnings affected by expired tax laws.
The Effect of Tax Authority Monitoring and Enforcement on Financial Reporting Quality Michelle Hanlon, Jeffrey Hoopes and Nemit O. Shroff
We examine the relation between tax enforcement and financial reporting quality. We proxy for financial reporting quality using the extent to which accruals map into cash flows and the magnitude of discretionary accruals. We measure tax authority monitoring in the U.S. using data on the probability of IRS audits. In addition, we use a regime shift in tax enforcement in Russia as an alternative test setting. The data provide evidence that higher tax enforcement is associated with higher financial reporting quality and that the relation is generally stronger when other monitoring mechanisms are weaker. Overall, we interpret our evidence as being consistent with the predictions from the Desai, Dyck, and Zingales (2007) theory that the tax authority provides a monitoring mechanism of corporate insiders. Our paper also adds to the literature on the determinants of financial reporting quality and how the relation between accounting standards and reporting outcomes depends on country level institutions.
Taxpayer Search for Information Jeffrey Hoopes, Daniel Reck and Joel Slemrod
Prior literature has largely taken taxpayer knowledge of the tax system as given. However, at some point, taxpayers must acquire information in order to respond to, and comply with, tax laws. Using the capital gains tax as a focal case, we examine novel information search data from capital-gains-tax-related Google searches, Wikipedia Page Views, aggregate phone calls to the IRS, aggregate visits to IRS web pages, and aggregate searches conducted on the IRS’s webpage. We find strong seasonality in taxpayer information search for capital-gains-tax-related information, resulting from a surge in search behavior around tax filing deadlines. This evidence suggests that taxpayers seek information to comply with their tax obligations. We also find evidence that taxpayers search for tax-related information for tax planning purposes. Specifically, we document a year-end ramp-up in capital gains tax related information search, especially searches related to the treatment of capital losses in years following down markets. Capital-gains-tax-related information search co-varies with stock market trading volume, and with Google searches for stock advice, suggesting that taxpayers simultaneously trade and investigate the tax implications of their trading. Finally, we find substantial taxpayer information search around tax events unrelated to either compliance or planning, such as political and news stories related to capital gains taxation. Such events may increase tax salience.