An Empirical Investigation of Factors Affecting Corporate Tax Compliance Behavior

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A n em pirical investigation of factors affecting corporate tax

com pliance behavior
B radley, Cassie Frances, P h .D .
The University of A labam a, 1994
C o p y rig h t © 19 9 4 b y B ra d le y , C assie F ra n c e s. A ll rig h ts re se rv e d .
UMI
300 N. Zeeb Rd.
Ann Arbor. M I 48106
AN EMPIRICAL INVESTIGATION OP
FACTORS AFFECTING CORPORATE
TAX COMPLIANCE BEHAVIOR
by
CASSIE FRANCES BRADLEY
A DISSERTATION
Submitted in partial fulfillment of the requirements

for the degree of Doctor of Philosophy in the
School of Accountancy in the Graduate
School of The University of Alabama
TUSCALOOSA, ALABAMA
1994
Copyright Cassie Frances Bradley 1994
ALL RIGHTS RESERVED
Submitted by Cassie Frances Bradley in partial
fulfillment of the requirements for the degree of Doctor of
Philosophy specializing in Accounting.
Accepted on behalf of the Faculty of the Graduate
School by the dissertation committee:
Ufa
William H. Woodall
Elizabeth M. Ferrell
J
/ft/C At
Michael TJ; P.oberts
Chairpep
Thomas P . Howard
Director of the School
lOae,. 10, 1 ^ 3
Diti----- /T
/ /
Ar
An*/£/
Ronald Rogers / Dean
/// 7
Date *
ii
This dissertation is dedicated
to the memory of
Oma Lee Cathey
who made pursuit of this doctorate possible.
iii
ACKNOWLEDGEMENTS
I wish to acknowledge the invaluable contributions of
my dissertation committee members, Dr. Michael L. Roberts,
Dr. Barney Cargile, Dr. George Klersey, Dr. Elizabeth
Ferrell, and Dr. William Woodall. Their willingness to
invest time in this project is greatly appreciated.
I wish to thank the following faculty who assisted me
throughout my doctoral program: Mike Dugan whose enthusiasm
helped me survive my coursework; Mike Roberts who made sure
my graduate assistantship was a valuable learning experience
and who directed this dissertation from a distance of 1,060
miles; and Liz Ferrell whose technical and emotional support
throughout my program were invaluable. Her friendship is
truly a gift.
I am most grateful for family and friends who supported
me in so many ways over the past four years. Thanks to my
sisters and my mother who made me believe that I could do
it. I would also like to express gratitude to my late
father for giving me a sense of humor that has so enriched
my life.
I wish to thank my wonderful daughters Allison, Ginny,
and Chelsea who loved me when I needed it most. Finally, I
iv
wish to express my deepest gratitude to my husband, Jim.
Without his love, understanding, and ability to cook, this
work would not have been possible.
TABLE OF CONTENTS
ACKNOWLEDGEMENTS........................................ iv
LIST OF TABLES.......................................... ix
CHAPTER
I. INTRODUCTION.................................... 1
Motivation for this Research................... 2

Significance of the Research to the
Accounting Profession....................... 5
Preview............... 6
II. THEORY DEVELOPMENT AND RELATED RESEARCH....... 7
Individual Compliance.......................... 7
Corporate Tax Compliance....................... 10
Complexity...................................... 12
Corporate Environment.......................... 15
Financial Stress................................ 18
Costs of Noncompliance......................... 19
Risk of Audit Adjustment....................... 22
Summary......................................... 23
III. RESEARCH DESIGN................. 25
Development of Compliance Behavior Framework... 25

Hypothesis Development......................... 28
Complexity of the Tax Law................... 28

Corporate Environment....................... 29
Financial Stress............................ 30
Costs of Noncompliance...................... 30
Risk of Audit Adjustment.................... 31
Compliant Individual Profile................ 32
Other Demographic Information............... 33
Presentation of the Model...................... 34
Measurement Issues................ 35
Measurement of the Dependent Variables........ 35

Measurement of the Constructs......... 37
vi
Supportive Corporate Environment............ 41
Chance of Audit Adjustment.................. 43
Level of Reporting Aggressiveness .... 45
Data Collection................................ 46
Sample....................................... 47
Questionnaire Design........................ 48
Summary......................................... 50
IV. ANALYSIS OF RESULTS............................ 52
Respondent Characteristics..................... 52
Test for Nonresponse Bias...................... 58
Construct Evaluation........................... 59

Supportive Corporate Environment............ 61
Risk of Audit Adjustment.................... 65
Level of Reporting Aggressiveness.......... 67
Descriptive Statistics on Selected Variables... 69
Model Testing.............................. 73
Application of the Results to the Stated
Hypotheses................................ 79
Hypothesis 1.............................. 79
Hypothesis 2 .............................. 80
Hypothesis 3 .............................. 81
Hypothesis 4 .............................. 81
Hypothesis 5 .............................. 82
Hypothesis 6 .............................. 82
Hypothesis 7 .............................. 83
Hypothesis 8 .............................. 84
Hypothesis 9 .............................. 84
Summary.................................... 85
Components of Complexity.................... 88
Summary...................................... 88
V. SUMMARY......................................... 91
Research Objectives............................ 91
vii
Contributions of the Research.................. 93
Limitations..................................... 95
Implications for FutureResearch................ 96
APPENDICES
A. INTERVIEW GUIDE................................. 98
B. SURVEY MATERIALS................................ 101
Sample Questionnaire........................ 102

Cover Letter................................. 110
Follow-up Postcard.......................... Ill
Follow-up Letter............................. 112
C. FACTOR LOADINGS FOR ALL SCALEITEMS............. 113
D. DESCRIPTIVE STATISTICS FOR SELECTED

QUESTIONNAIRE ITEMS............................. 1*7
REFERENCES ........................................... 122
viii
LIST OP TABLES
TABLE PAGE
3-1 Summary of Factors and Their Expected

Association with Aggressive Tax Reporting .... 36
4-1 Respondent Characteristics— Age and Sex

of Respondent.......... 53
4-2 Respondent Characteristics— Education

and Certification............................ 55
4-3 Respondent Characteristics— Primary

Business...................................... 56
4-4 Factor Analysis of Complexity Construct ...... 60
4-5 Factor Analysis of Supportive Corporate

Environment Construct........................ 62
4-6 Factor Analysis of Financial Stress

Construct..................................... 64
4-7 Factor Analysis of Costs of Noncompliance

Construct..................................... 64
4-8 Factor Analysis of Chance of Audit

Adjustment Construct......................... 66
4-9 Factor Analysis of Compliant Individual

Profile Factor................................ 66
4-10 Factor Analysis of Level of Reporting

Aggressiveness Construct..................... 68
4-11 Summary Statistics for Measurement Scales .... 70
4-12 Descriptive Statistics for Single Item

Dependent Variable Measures .................. 71
4-13 OLS Model with Reporting Aggressiveness

Construct as the Dependent Variable (AMBG) ... 76
ix
4-14 OLS Model with Single Item Reporting
Aggressiveness Global Measure as the
Dependent Variable (AGGRESS) ................. 77
4-15 OLS Model with More50 as Dependent Variable .. 78
4-16 Summary of All Regressions.................. 86
4-17 Frequency Distribution for Components of

Complexity (Part II) ........................ 89
CHAPTER I
INTRODUCTION
The Constitution of the United States gives Congress
the power to lay and collect taxes. Imposing taxes has
never been much of a problem. In fact, the first important
legislation George Washington signed as president of the new
country dealt with setting taxes on imports (Pechman 1987).
Collecting taxes, however, has proved to be a challenge from
the earliest days of the republic. Barely six years after
ratification of the Constitution of the United States,
farmers in four western Pennsylvania counties refused to pay
a manufactured whiskey excise tax. The first major test of
the new government to enforce federal law within a state was
The Whiskey Tax Rebellion of 1794. Washington used 15,000
troops to successfully crush the tax revolt and firmly
establish the right of the federal government to lay taxes.
Although noncompliance in the twentieth century is a
little less dramatic, it is certainly no less of a problem.
One method of attempted quantification of the level of
noncompliance in the U.S. today is the calculation of the
"tax gap," a figure developed by the Internal Revenue
Service (1988) which utilizes data obtained through its
audit function along with projected effects of policy and
2
economic considerations. The tax gap represents the
difference between the amount taxpayers owe the government
and the amount the taxpayers paid. According to a recent
GAO report, this difference fcr 1987 was estimated to be
$84.9 billion. The tax gap for corporations alone was
estimated to be $21.4 billion, over 25 percent of the total
tax gap for that year (GAO 1990). The IRS projects that the
1992 corporate tax gap will rise to $31.1 billion (IRS
1988), an increase of 45 percent in five years. Moreover,
the GAO estimates that since 1982 the corporate tax gap has
grown more than three times faster than the individual tax
gap (Rice 1992).
Motivation for this Research
During the past decade, research interest in the area
of taxpayer compliance has grown considerably. The focus of
compliance research has been mainly on individual taxpayer
behavior (Roth et al. 1989; Jackson and Milliron 1986; Hite
1988; Violette 1989) and compliance behavior of paid
preparers in public practice (Duncan et al. 1989; McGill
1990; Sanders and Wyndelts 1989).
Researchers have examined how individual compliance is
affected by financial self interest, social sanctions, legal
sanctions, and social commitment. Cognitive processes of
the individual taxpayer have been examined using expected
utility theory, behavioral decision theory, and prospect
theory to explain results. Researchers have contemplated
3
the role of complexity and uncertainly in taxpayer behavior.
Using paid preparers as subjects, researchers have examined
the effects of regulation (Ayers et al. 1989), ambiguity
(Sanders and Wyndelts 1989), and economic factors (Duncan et
al. 1989).
To date, however, there has been little research
directed toward corporate tax compliance. A few studies
have considered corporate tax evasion in economic models
(Marrelli 1984; Kreutzer and Lee 1986; Wang and Conant
1988). A recent study by Rice (1992) was the first attempt
to conduct an empirical corporate tax behavior study. Given
the evidence that the corporate tax gap is substantial and
is increasing at an ever growing rate, it is surprising that
this area of compliance behavior has not received more
attention.
Although some aspects of the individual compliance
research may be applicable in the corporate arena, findings
from individual compliance research do not transfer easily
to the corporate environment for several reasons. First,
the taxation of corporations differs in many ways from the
taxation of individuals. The computation of taxable income
is substantially different between corporations and
individuals. Much of corporate taxation is sourced in
different, and arguably more complex, sections of the
Internal Revenue Code. This greater complexity is perhaps a
reflection of the greater complexity of corporate
transactions. Corporations can be structured with multiple
4
layers giving rising to a myriad of income and expense
attribution problems. For example, taxing the foreign
income of a multinational corporation (with various foreign
subsidiaries) is generally much more complex than taxing the
foreign income of a single individual.
Second, audit rates for corporations are generally much
higher than those for individuals (Slemrod 1992). Large
corporations, in particular, are subject to extremely high
audit rates. In 1988, the IRS examined 64 percent of
corporations with assets over $250 million (GAO 1990). In
contrast, the IRS examined only about .92% of individual
returns (Wall Street Journal 1993). The high probability of
detection may produce different compliance behavior among
corporations as compared to individuals.
Third, corporations may have different motivations for
tax avoidance or evasion than individuals. Whereas an
individual will personally and directly reap the benefit of
noncompliance, the tax professional employed by a large
corporation does not directly benefit from a reduction in
the corporation's tax liability (unless the corporation has
a bonus arrangement tied to tax savings). Indirect rewards,
however, may be received in the form of enhanced status or
promotion.
The purpose of this study is to examine factors that
influence corporate tax compliance behavior. Six potential
factors are posited for this research— complexity of tax
law, supportive corporate environment, financial stress,
5
costs of noncompliance, risk of audit adjustment, and
personal profile of the corporate tax employee. Each of
these factors and related hypotheses are discussed at
greater length in the next two chapters.
Significance of the Research to the

Accounting Profession
This research also can provide empirical evidence to
assist taxpayers, tax advisers, tax administrators, and
legislators in the development of a more manageable and
equitable tax system. By identifying factors that influence
compliance behavior, this research can provide guidance to
these groups on ways to ease the corporate tax burden.
Particularly, information about causes of complexity
and their effects on compliance will be helpful in pursuing
simplification policies that simultaneously increase
revenues and reduce administrative costs. The corporate
environment factor along with the costs of noncompliance
will be helpful to corporate senior management in analyzing
ways that the corporation itself can facilitate the
compliance function. Tax administrators will be interested
in the financial stress and risk of audit adjustment factors
as possible inputs into audit selection techniques.
Finally, the personal compliance profile will give some
indication of whether selected findings in the individual
compliance research are transferable to corporate compliance
research.
6
A significant methodological contribution of this
research is the development and assessment of a set of
scales for measuring the factors that are believed to have
an important influence on the level of corporate tax
compliance. To the author's knowledge, this study is the
first attempt to measure these factors.
Preview
Following this chapter, Chapter II provides a review of
the relevant literature. Each factor will be defined and
examined. The third chapter develops the hypotheses and
introduces the model to be tested. Methodology is discussed
and the survey instrument is described. Chapter IV provides
an in-depth analysis of the research results. The final
chapter summarizes the study and contains recommendations
for future research.
CHAPTER II
THEORY DEVELOPMENT AND RELATED RESEARCH
What factors influence corporate tax compliance? Six
potential factors are posited by this research— complexity
of the tax law, supportive corporate environment, financial
stress, perceived costs of noncompliance, risk of audit
adjustment, and compliance profile of the individual
corporate tax employee.
Research related to each of the factors is discussed in
the following sections. A brief summary of prior findings
is presented in each section, along with possible
implications for corporate compliance behavior.
Individual Compliance
Most compliance research has focused on either the
individual taxpayer or the paid tax preparer of an
individual's return. IRS research has identified 64
potential factors affecting individual compliance (Jackson
and Milliron 1986). This section will include a brief
review of the most common factors associated with individual
compliance and the implications for corporate compliance.
Demographics have been found to significantly affect
individual taxpayer behavior. Prevalent findings suggest
that older taxpayers are more compliant (Warneryd and
8
Walerud 1982; Tittle 1980) and that females are more
compliant than males (Tittle 1980). Studies on the effect
of income level have yielded mixed results (Witte and
Woodbury 1985; Jackson and Milliron 1986) while research on
income source suggests that the type of income significantly
influences tax compliance (Madeo et al. 1987).
The taxpayer's opinions, personality, and group
association may also impact compliance. It has been
suggested that opinions regarding the equity of taxation may
heavily influence compliance decisions (Etzioni 1986; Spicer
and Lundstedt 1976). Yankelovich et al. (1984) found that
an individual's attitude toward honesty and human integrity
affected opinions on tax cheating. Group association with
noncompliant peers has been shown to be positively
correlated with tax evasion (Witte and Woodbury 1985).
Sanctions and the probability of detection have been
examined at length. Research in this area is particularly
difficult because of the interaction between the various
types of sanctions and the probability of any one type of
sanction (Roth et al. 1989). While some studies have failed
to support the hypothesis that higher penalty rates
encourage compliance (Spicer and Lundstedt 1976; Madeo et
al. 1987), others have found evidence to support this
hypothesis (Milliron 1988; McGill 1990; and Reckers et al.
1991). Cuccia (1994) found that penalties did affect
compliance behavior of CPAs, but in the opposite direction
from previous studies. CPAs became more aggressive under
9
increasing penalties, a behavior predicted by psychological
reactance theory.
Studies examining probability of detection have also
had mixed results. Although their comments were not
specifically targeted toward tax compliance studies, Minor
and Harry (1981) suggested that these ambiguous findings are
a product of the instability of an individual's risk
perceptions and that these perceptions are strongly
influenced by an individual's unique experiences.
Alternative approaches to explaining taxpayer
compliance have focused on the taxpayer's decision making
process. Theory supporting this line of research has
included both utility maximizing models of decision making
and cognitive approaches to decision making. Studies that
utilize the utility model approach consider utility theory a
benchmark of rational behavior against which actual behavior
is measured. Cognitive approaches, on the other hand, focus
on the workings of the human mind (Carroll 1989).
A utility maximizing model approach sees the taxpayer
as a rational individual who evaluates all possible outcomes
in terms of desirablity and likelihood, choosing the
alternative with the most favorabJ** expected utlility.
Prospect theory, which is a variation of the standard
expected utility model, assumes that the individual frames
outcomes as losses or gains. This theory has been explored
in several taxpayer compliance studies (Chang et al. 1987;
Schadewald 1989) with mixed results. While Chang et al.
10
(1987) found support for prospect theory when manipulating
alternative outcomes from a final state of wealth position,
Schadewald was unable to find support when using withholding
position as a reference point. Using another variation of
expected utility theory to explain results, Schepanski and
Kelsey (1990) successfully manipulated the audit risk
variable, resulting in significant findings as predicted by
Markowitz Utility Theory. The Markowitz theory value
function is similar to prospect theory and predicts risk-
seeking behavior for large losses and small gains and risk
averse behavior for large gains and small losses.
Cognitive processes of tax accountants has been an area
of growing interest for researchers. Cognitive processes
include how the human mind gathers information, processes
that information, and responds to the information (Carroll
1989). A majority of this line of research has looked at
whether tax accountants' cognitive processes utilized in
decision making differs from other decision makers (Roberts
1993). For example, Johnson (1993) examined the effects of
advocacy on preparer decision making, other studies have
included examination of use of analogical transfer in legal
reasoning (Marchant et al. 1991) and issue identification by
experts (Bonner et al. 1992; Roberts and Klersey 1993).
Corporate Tax Compliance
Although the popular press and various governmental
reports have addressed corporate noncompliance (e.g.,
11
General Accounting Office 1990; Birnbaum and Murray 1987),
very little academic research has examined reasons for
corporate noncompliance. In discussing the components of
the corporate tax gap, the General Accounting Office
identified type of industry as a demographic variable that
seemed to influence level of compliance. For small
corporations, the GAO found that manufacturing concerns had
the highest levels of compliance while service, retail, and
financial firms had the lowest levels of compliance. Rice
(1992) recently examined tax compliance by small
corporations (defined as corporations having assets less
than $10 million). Using 1980 Taxpayer Compliance
Measurement Program data1, Rice found that two-thirds of
small corporations are noncompliant. Noncompliance was
evenly divided between unreported revenue and overstated
expenses. Median unreported profits amounted to 12% of
median reported profits. Significant factors found to be
associated with compliance by small corporations were
required public disclosure (positive relationship),
marginal tax rate (negative relationship), firm size
(negatively associated), and location in an IRS-identified
poor compliance region (negatively associated).
Rice (1992) was among the first to empirically examine
corporate tax compliance behavior, focusing on small
corporations. The remainder of this chapter examines
research related to each of the factors hypothesized to
affect compliance among large corporations.
12
Complexity
It has been posited that tax complexity increases
compliance costs for the taxpayer and results in inefficient
allocation of society's resources (Browning and Browning
1979). In addition, it may contribute to tax evasion by
eroding public confidence in the equity of the tax law
(AICPA 1983).
Much speculation has been expressed recently regarding
the relationship between tax law complexity and the
corporate compliance rate. Former IRS Commissioner Fred
Goldberg stated at a subcommittee hearing that he believed
most noncompliance was not intentional but was due to the
complexity of the tax laws. He cited the difficulty for
agents to even identify the issues during audits (Carlson
1991). Peter Scott, a former Acting Chief Counsel for the
IRS, contends that the complexity of the tax law almost
prohibits a corporation from filing a 100% accurate return
(Carlson 1991). At a recent IRS Research Conference, Joseph
Weikel, conference coordinator, echoed these sentiments
(Berkley and Knell 1992). In addition, Tax Executives
Institute (an organization comprised of over 4200 corporate
tax professionals) argues:
Congress, the Department of Treasury, the

Internal Revenue Service, and the tax community
as a whole seem now to agree that complexity of
the tax system has exacted an excessive price.
The costs, moreover, cannot be measured simply
in terms of the substantial resources diverted
from more productive activity and the uneconomic
structuring of transactions and organizations to
achieve tax efficiency. They also encompass the
13
frustrations and the distrust bred by a system

so complicated that full compliance may be
literally impossible. (Tax Executives Institute
1991, 107)
As Slemrod (1992) points out, some degree of complexity
is necessary in any tax system. There are multiple
objectives of a tax system and a tradeoff usually exists
between complexity and these other objectives. For example,
some complexity will exist solely to enable the tax system
to "distinguish among taxpayers in equitably assessing the
tax burden1' (Slemrod 1992, 46). This tradeoff should be
kept to a minimum, however. As the AICPA Blueprint for
Simplification (1992, 3) points out "A tax system that is
simple for all taxpayers may never be designed, but a
simpler tax system is a critical and achievable goal."
Complexity can have several different dimensions. For
example, administrative complexity may exist because of
burdensome record keeping, unrealistic time constraints, or
legislation becoming law before administrative flaws are
discovered. Conceptual complexity in tax law may be a
reflection of the complexity of the underlying transaction
itself, as in the case of the foreign tax credit provisions.
Reading complexity results purely from writing style and may
increase the difficulty of an already complex tax concept
(Karlinsky and Koch 1987).
On the other hand, Paul Posner of the GAO admits that
complexity is an issue (Carlson 1991) but contends that a
substantial degree of noncompliance is not due to ever
changing complex tax laws, but rather "flat-out
14
underreporting of business income." To address Posner's
charge, this research examines other factors in addition to
complexity that may influence tax reporting.
Most empirical studies addressing tax complexity have
focused on developing a definition of complexity and ways to
measure this construct. Milliron (1985) suggests that
taxpayers perceive the complexity of tax provisions in terms
of the nature of the topic, quantitative characteristics,
susceptibility to misuse, and readability. Long and Swingen
(1987), using a different approach, looked at complexity in
terms of ambiguity, calculations, changes, detail, forms,
and record keeping. Measurement studies have included Long
and Swingen (x987), where tax professionals quantitatively
ranked complexity of Form 1040 line items, and Watanabe et
al. (1987), where a methodology for comparing the complexity
of different tax methods based on an Error/Time Complexity
Index was developed.
Complexity of tax law may not always affect compliance
in the expected manner. For example, in a review of the tax
structure of seven different countries, Straaer and
Fogliasso (1989) categorized each country's severity of
noncompliance as either high, medium, or low, and linked
noncompliance to the country's tax complexity and control
system. The United States was ranked as "high" complexity
with a "high" control system and "medium" severity of
noncompliance. Japan, on the other hand, was ranked as
having "high" complexity, "medium" control system, and "low"
15
severity of noncompliance. Strader and Fogliasso note,
however, that their study did not attempt to address the
effect of moral attitude on noncompliance, a factor which
they feel well could be a significant determinant of
noncompliance.
Corporate Environment
The corporate tax professional's decisions are affected
and constrained by the corporate environment in which he
exists. Corporate environment encompasses many areas. The
single most important influence on corporate environment is
the corporate culture— the shared values and beliefs of the
organization's members (Davis 1984). The corporate culture
provides a frame of reference for the employees. It lets
employees know what is expected of them, what the accepted
way of doing things within the organization is, and what it
takes to get ahead in the company. Corporate culture can
affect everything from the way the employees socialize to
the autonomy given each employee.
The belief system of a corporation may vary by industry
and product line (Donaldson and Lorsch 1983). For example,
a car manufacturer usually has a long term perspective
toward product development. Years of strategic planning go
into car design and production. The product requires a lot
of capital investment and detailed forethought. The penalty
for poor planning is substantial. Consider, for example,
the recent debacle caused by the fuel tank positioning on
16
GMC trucks. On the other hand, high technology industries
tend to be more fast paced. Fortunes are made overnight.
The workforce is highly mobile and highly compensated. Star
employees can be created and eliminated in a week's time
(Deal and Kennedy 1982).
The business strategy of a corporation is highly
influenced by its culture. Arguably, part of the business
strategy of any corporation is tax compliance and tax
planning strategy. An organization with an aggressive
corporate culture may encourage aggressive tax strategy. On
the other hand, a more conservative corporate culture may
dictate less risk seeking tax behavior.
The corporate environment also includes the
corporation's commitment to maintaining the technical
expertise of their tax personnel. Continuing education
opportunities as well as current research materials may have
a measurable impact on the ability of the tax professional
to comply with the tax provisions. Clouding this issue is
the suggestion that training and experience of the preparer
may increase the "aggressiveness1' of tax positions taken on
third party returns (Nagin 1990).
Management's attitude toward tax minimization may also
affect corporate compliance. This attitude will affect the
resources available to the tax professional (outside
consultants, tax software, adequate personnel), the priority
of tax information requests, and the level of communication
between the tax department and strategic decision makers
17
within the firm. In addition, senior management's attitude
may affect the amount of pressure on the corporate tax
professional to minimize tax liability. This pressure may
be exacerbated by direct or indirect rewards for
noncompliance (e.g., a bonus based on "tax savings").
Several studies have empirically examined the
relationship between corporate culture and financial and/or
tax decisions. As early as 1964, Sorter and Becker
investigated the relationship between depreciation choices
for tax and book purposes with psychological aspects of the
firm. Their findings support the hypothesis that a
corporate personality exists and that corporate decisions
are influenced by that personality. In their study of
corporate financial disclosure prediction, Gibbins et al.
(1990) note that disclosure position is influenced by many
intraorganizational factors. In particular they found that
disclosure position was affected by corporate politics and
also by management's predisposition to act in a ritualistic
versus an opportunistic manner.
As mentioned in the above section on complexity, moral
attitude may be a major determinant of compliance behavior.
For the corporate tax professional, one would have to
consider both the moral attitude of the company and the
moral attitude of the individual. Reidenbach and Robin
state:
The moral development of a corporation is

determined by the organization's culture and, in
reciprocal fashion, helps define that culture.
18
In essence, it is the organization's culture

that undergoes moral development. (1991, 273)
Financial Stress
Firm profitability has been suggested as one factor
that may influence corporate compliance (Slemrod 1992).
Opposing viewpoints exist regarding the influence that a
firm's profitability may exert on tax reporting behavior.
First, a firm that is experiencing financial difficulty may
use noncompliance as a means of increasing cash flow.
Positive accounting theory choice studies address a similar
phenomena. Healy and Palepu (1989) examined whether firms
close to violating their lending covenants make income
increasing accounting decisions to avoid cutting dividends.
Hand (1984) questioned whether firms entered into
debt/equity swaps during the early 1980's in order to relax
potentially binding sinking fund constraints.
On the other hand, a firm that is experiencing above
average earnings may have incentives to engage in
noncompliant tax activities that will reduce current after
tax book income in order to minimize political visibility
(Slemrod 1992; Watts and Zimmerman 1986). Current after tax
book income may be reduced by noncompliance that will reduce
both book and tax income (e.g., overstating of expenses
deductible for both book and tax purposes) or by
noncompliance that reduces only after tax book income (e.g.,
an improper tax depreciation method resulting in a higher
deduction for tax than book). The effect of firm
19
profitability on compliance may differ between public and
nonpublic corporations, since the latter are not subject to
market scrutiny.
Costa of Koncompliance
Taxpayers fail to comply for a variety of reasons, one
of which is that it simply saves the taxpayer money to
reduce taxable income as much as possible and minimize tax
paid. Noncompliance is not without potential costs,
however. For the corporate tax professional, these costs
can be categorized in two ways. The first type of cost is
external to the company and includes penalties and interest
charged by the Internal Revenue Service to the corporate
taxpayer. As penalties and interest levies increase, the
cost of noncompliance rises. Economic deterrence theory
suggests that the propensity for noncompliance is thus
reduced (Cowell 1985; Scotchmer 1985). Policy makers have
often favored this approach. For example, the Revenue
Reconciliation Act of 1990 provides for increased rates of
interest on large underpayments and increased accuracy-
related penalties in certain Section 482 cases (Smith and
Glicklich 1990).
The second type of cost is a cost internal in nature
and less quantifiable than the penalties and interest
discussed above. The internal cost is the effect that
noncompliance has on the corporate tax executive's
compensation and career progression. Senior management's
20
attitude toward compliance will greatly influence the
magnitude of this internal cost. If senior management is
very compliance oriented, noncompliance may result in costs
to the corporate tax executive in the form of management
disapproval or reduced merit pay increases if large IRS
audit adjustments occur. On the other hand, if management
is very aggressive, there may be an expectation that the
corporate tax manager should be just as aggressive in his
compliance activities. IRS audit adjustments may be seen as
just a cost of doing business rather than an indication that
the tax manager is not doing his or her job well. In fact,
failure to be aggressive may be disadvantageous to the
corporate tax professional in some circumstances.
Most researchers have examined the costs of compliance
rather than the costs of noncompliance. For example, a
number of researchers have attempted to quantify the
absolute costs of individual compliance, i.e., the costs of
actually preparing an individual income tax return (Pitt and
Slemrod 1989; Payne 1992; Slemrod and Sorum 1984). Pitt and
Slemrod estimated the cost of individual taxpayers to
itemize in 1982 totaled $1.44 billion dollars. Focusing on
the compliance costs in the corporate sector, Slemrod is
currently conducting a survey of large corporate taxpayers
concerning their direct and indirect tax compliance costs.
Noncompliance studies have concentrated mainly on the
deterrent effects of civil and criminal sanctions. It is
intuitively appealing to believe that sanctions increase
21
compliance. This belief is consistent with both exchange
theory and economic deterrence theory. The empirical
results about the effectiveness of sanctions is quite mixed,
however.
Most studies have failed to support the hypothesis that
higher penalty rates encourage compliance. Spicer and
Lundstedt (1976) found no significant relationship between
the tax resistance score and the severity of sanctions.
Economic models (e.g., Witte and Woodbury 1985; Madeo et al.
1987) also fail to indicate that increases in penalties for
noncompliance will affect taxpayer behavior. Violette's
(1989) findings suggest, however, that existing legal
sanctions may increase compliance if they are properly
communicated to appropriate taxpayers.
Jackson and Milliron (1986) caution that if a
relationship between legal sanctions and compliance exists,
it may not be a linear one. Prohibition is an example where
the law was considered so restrictive that citizens became
alienated and blatant disregard of the law resulted.
Schwarz and Orleans (1967) also refer to this alienation
phenomena and describe an eighteenth century British law
which mandated the death penalty for thefts over a certain
amount. Juries circumvented the law by consistently finding
that the theft was one shilling less than the threshold
amount, regardless of evidence presented to the contrary.
Benefits of noncompliance also must be considered. For
example, positive accounting theory (Watts and Zimmerman
22
1986) suggests that bonus plans create incentives for
managers to select income reporting methods that increase
the present value of the bonus plan awards (see also Kealy
1985). This theory is easily transferable to the corporate
tax manager who, if under a bonus plan that rewards tax
reduction, will be motivated to be as aggressive as possible
in his compliance behavior.
Klepper and Nagin (1989) point out that the interactive
effects between costs and benefits of noncompliance must be
considered. Researchers cannot examine the costs of
noncompliance in isolation. Becker (1968) argues that the
criminal differs from the noncriminal not in motivation but
in cost/baneric analysis. When applied to a corporate tax
reporting scenario, this rationale suggests that individuals
compare the costs of noncompliance to the costs of
compliance, with the higher expected utility being selected
by the corporate tax professional (von Neumann and
Morgenstern 1947).
Risk of Audit Adjustment
Several studies have examined the effect of tax audits
on individual reporting behavior (Dubin and Wilde 1988;
Witte and Woodbury 1985; Erard 1992). Many have examined
the effect of taxpayer audits on future compliance behavior
with findings that indicate a correlation between previous
audits and a lower, rather than higher, level of compliance.
Generalizability of these findings is difficult though,
23
because the experimental design has usually been confounded by
the audit selection strategy technique (Roth et al. 1989).
McGill (1990) recognized two components of audit
probablility when he examined compliance recommendations of
CPA's. His audit probability variable was a combination of
the chance of an audit and the chance that the position
would be examined.
Perception of risk rather than the actual risk is
another important dimension of this research area. In
general, noncompliers have been found to have a lower
perceived chance of detection than compliers (Mason and
Lowry 1981; Grasmick and Scott 1982). Since survey data
indicates that most taxpayers greatly overestimate their
detection probabilities, perception of risk is an important
element in the experimental design.
Summary
This chapter has reviewed the relevant literature for
the dependent variable of tax compliance behavior and for
each of the factors hypothesized to have an effect on tax
compliance behavior— complexity, corporate environment,
financial stress, costs of noncompliance, risk of audit
adjustment and compliant individual profile.
The next chapter will discuss the methodology used to
operationalize the variables, collect the data and analyze
the results. The specific scale items used to measure the
latent constructs will be presented.
24
ENDNOTES
*The IRS uses the Taxpayer Compliance Measurement

Program (TCMP) to conduct detailed examinations of randomly
selected Federal income tax returns. The information
derived from these examinations provide data for compliance
estimates, revenue estimates, and tax policy decision
making.
CHAPTER III
RESEARCH DESIGN
This study is the first to empirically examine the
compliance behavior of corporations as perceived by the
corporate tax professional. Because it is the initial study
in this area, it is appropriate that the research
methodology would use, at least partially, a grounded theory
approach. This approach develops theory which is based on
field research designed to specifically address the research
question (Glaser and Strauss 1967). The advantage of a
grounded approach is that it ensures that the variables
examined accurately reflect reality (Lincoln and Guba 1985).
The first stage of this research project utilized a grounded
theory approach through personal interviews while the second
stage used a more traditional hypothesis testing approach.
Development of Compliance Behavior Frameworfc
As an exploratory study, the first step in this
research was to interview corporate tax executives regarding
their compliance behavior and factors that they perceived
had an influence on that behavior. Interviews are
considered important vehicles for data collection because
they help researchers understand behavior by placing that
behavior in a specific context. For this study, interview
25
26
guidelines were based on an in-depth, phenomenologically
based interviewing technique proposed by Seidman (1991).
This technique uses primarily open-ended questions, with
follow-up questions that explore the participant's
responses.
Nine interviews were conducted with corporate tax
professionals who were employed by large corporations. The
nine interviewees were purposefully chosen in an attempt to
obtain a cross-section of opinions. Four out of the nine
corporations represented were privately held, and four of
the nine were multinational corporations, one corporation
was a United States subsidiary of a United Kingdom parent.
The states of Alabama, Florida, Tennessee, and Washington
were represented. Two-thirds of the interviewees were the
top tax executive in their corporation.
The interviews were conducted in person and took
approximately two hours to complete. Participants were
assured of confidentiality. Although the phenomenologically
based interview approach suggests building successive
questions from the respondent's answers, an interview guide
was utilized to provide some loose structure to the
interview (see Appendix A ) .
The first two phases of the interview were mainly to
relax the participants and to assist them in focusing on
their role as a tax professional within their corporation
(Seidman 1991). The interviews began with a discussion of
the participant's personal background. The appeal of
27
specific aspects of tax work to the individual, the
participant's educational and professional background, and
professional certifications were also discussed.
In the second phase of the interview, the participant
discussed their company and the role of their department
within the company. Topics included management's attitude
toward continuing professional education for tax
professionals, lobbying activities, and available outside
resources such as utilization of Big Six tax consultants.
Phase three of the interview focused on corporate tax
compliance behavior. This discussion included the types of
transactions that caused compliance problems and
identification of troublesome Code sections. The
participant was asked what specifically makes that
transaction or Code section difficult. The impact of
complexity on compliance was specifically addressed, with
opinions solicited about the areas of greatest complexity
and possible solutions to the complexity dilemma. The last
IRS audit was discussed, and the participant was queried as
to the type of audit adjustments (surprise versus expected,
controllable versus noncontrollable). Finally the
participant was asked to assign an accuracy percentage to
the last federal income tax form filed.
Overall, the interviewees expressed frustration with
the corporate income tax system. Three major complaints
were observed. First, the participants felt that the
complexity of the tax law had increased dramatically over
28
the past decade and that often regulations either were not
timely, not on point, or as difficult to understand as the
code section the regulation addressed. Second, the
participants felt that often the costs of the information
retrieval necessary to be in full compliance was excessive.
Finally, the executives expressed frustration with trying to
effectively communicate the nature of their business and the
structure of their information systems to IRS agents. In
addition, the executives felt that the level of support
within the corporation (both through resources available and
management attitude) for the tax department was a critical
factor in compliance and planning activities.
Hypothesis Development
Based on the findings from the personal indepth
interviews, six potential factors were identified. Since
this study is exploratory in nature, prior literature was
searched to determine if any existing theory could be
applicable in a corporate compliance setting. From this
literature search, a corporate compliance framework was
developed.
Complexity of the Tax Law
Complexity in the tax law creates ambiguity for
taxpayers and can affect their decision making processes.
An IRS-sponsored survey found that in the presence of
ambiguity, CPA's were more aggressive in their reporting
decisions than non-CPA's (Westat, Inc. 1980; Jackson et al.
29
1988). Milliron (1988) and Kaplan et al. (1988) both found
that ambiguity in the tax law is positively correlated with
aggressive income tax reporting. These studies suggest the
following hypothesis stated in the alternate form:
Ha^: As tax law complexity increases, the tax

professional's tax reporting aggressiveness will
also increase.
The target subjects in this study are executive level
tax professionals who possess a high level of tax expertise.
Their tax knowledge should allow them to be comfortable in
using the gray areas of the tax law to their employer's
advantage. Therefore, it is expected that the hypothesis
will be supported and that as tax law complexity increases,
tax professionals will report more aggressive tax reporting
behavior.
Corporate Environment
The second factor examined in this study is the effect
of a supportive corporate environment on reporting behavior.
A supportive corporate environment would encompass access to
corporate resources including availability of financial and
operating information. A supportive corporate environment
can reduce uncertainty for the tax professional and assures
him that he has all the data needed to make a fully informed
reporting decision. In a completely supportive corporate
environment, the only uncertainty the tax professional has
to deal with is the uncertainty in the tax law itself. The
30
following hypothesis (stated in the alternate form) will be
tested:
Ha 2 : As the level of support in the corporate

environment increases, the professional's tax
reporting aggressiveness will also increase.
It is expected that the hypothesis will be supported
and that corporate tax professionals who operate in a highly
supportive environment will be more aggressive in their
income tax reporting.
Financial Stress
Financial stress has been shown to have an effect on
accounting choices (Healy and Palepu 1989; Hand 1984). This
concept is easily transferable to tax reporting choices.
For example, Section 482 transfer pricing policies can have
a significant effect on U.S. taxable income and, therefore,
cash flow. The relationship described above leads to
testing the following hypothesis:
Ha 3 : As financial stress increases, tax reporting

aggressiveness will also increase.
It is expected that the hypothesis will be supported,
and that a positive relationship between tax reporting
aggressiveness and financial stress will be observed.
Costs of Noncompliance
Becker (1968) suggests that individuals act upon their
analysis of the costs of a given course of action compared
to the benefit of that course of action. An individual will
31
seek that path which affords him the most benefit for the
least cost. Tax reporting behavior is no exception. A
corporate tax professional will evaluate the personal
benefits associated with aggressive tax reporting versus the
costs of the aggressive behavior. Personal benefits might
include a bonus resulting from generating "tax savings."
Costs of aggressive behavior might result from a perception
that senior management blames the tax department for any
audit adjustments and penalties levied. As a rational
individual, the tax professional will chose that course of
action that nets him the highest benefit. This relationship
suggests the following hypothesis:
Ha4 : As the net personal costs of noncompliance

increases, the professional's tax reporting
aggressiveness will decrease.
and that an inverse relationship between the costs of
noncompliance and tax reporting aggressiveness will be
observed.
Risk of audit adjustment is a combination of the risk
that an audit will be performed, and the accuracy of the
return examined. For example, a high risk of audit with a
very accurate return would result in a lower risk of audit
adjustment. On the other hand, the high risk of audit
combined with a return whose accuracy is questionable would
result in a higher risk of audit adjustment. Mason and
32
Lowry (1981) and Grasmick and Scott (1982) both observed a
lower perceived chance of detection among noncompliers than
among compliers. These findings suggest testing the
following hypothesis:
Has: As the risk of audit adjustment increases, the

professional's level of tax reporting
aggressiveness will decrease.
and that an inverse relationship will be observed between
tax reporting aggressiveness and the tax professional's
perceived risk of audit adjustment.
Compliant Individual Profile
It is not known to what extent the findings in the
individual compliance literature will transfer to the
corporate tax professional who files a return for a
corporate employer. For example, will group association
with other noncompliant corporate employees make a corporate
tax professional tend to be more aggressive in his
employer's reporting as it was observed at the individual
reporting level (Witte and Woodbury 1985)? Will a corporate
tax professional who is aggressive on his own return tend to
be more aggressive on his employer's return?
The purpose of the sixth factor is to determine whether
a compliant individual scale can be developed and, if so,
whether that factor has any effect on the corporate tax
reporting aggressiveness. Specifically, this construct will
include scale items relating to trust in government, risk
33
preference, perception of equity, and association with
noncompliant peers. This effect will be tested via the
following hypothesis:
Hag: As the corporate tax professional more closely

resembles a compliant individual, the
professional's tax reporting aggressiveness will
decrease.
and that the more closely the corporate tax professional
fits the compliant individual profile, the less aggressive
he will be in his corporation's income tax reporting.
Other Demographic Information
As discussed in Chapter II, several demographic
variables have been found to be correlated with compliance
behavior. Two of the most tested demographics, age and
gender, will be examined in this study. Research has shown
that older taxpayers are more compliant (Warneryd and
Walerud 1982; Tittle 1980) and that females are more
compliant than males (Tittle 1980). Therefore, the
following hypotheses will be tested:
Ha 7 : The corporate tax professional's aggressive tax

reporting will decrease with the professional's
age.
Hag: The level of male corporate tax professionals'

aggressive tax reporting will be higher than
females' level of aggressive tax reporting.
It is expected that both hypotheses will be supported
and that older tax professionals and female tax
34
professionals will report a lower level of aggressive tax
reporting.
Responses to open ended questions on the pilot study
indicated that some tax professionals felt that a net
operating loss (NOL) position might affect the tax
aggressiveness of the corporate tax professional. The
following hypothesis will also be tested:
Hag: Corporate tax professionals who are employed by

firms in an NOL position will report a lower level
of tax reporting aggressiveness than
professionals whose firms are not in an NOL
position.
It is expected that the hypothesis will be supported,
and that NOL will be a significant factor in predicting
aggressiveness of a firm's tax reporting behavior. The
presence of an NOL position is expected to reduce the
reporting aggressiveness of the corporate tax professional.
Presentation of the Model
All of the hypotheses presented in the section above
were tested using an ordinary least squares regression
model. The significance of the individual independent
variables was assessed by the following OLS model:
Yi = a + B j C P L X + B 2 E N V + B 3 S T R E S S - B 4 C O S T -
B 5 P R O F - B 6A U D - B 7 A G E - B g G E N + B g N O L
35
The table on the following page summarizes the constructs
and their expected associations with tax reporting behavior.
Measurement Issues
Data for this model were gathered through the use of
mail questionnaires. The majority of the variables included
in the model are latent constructs, involving self reports
of individual perceptions. Statements about the variables
refer to the corporate tax executive's perception of the
variables. For example, references to the level of
corporate reporting aggressiveness refer to the corporate
tax executive's perception of the reporting behavior of his
corporation.
Measurement of the Dependent Variables
The dependent variable in this study is corporate tax
professionals' perceptions of their corporations' tax
reporting behavior. Three different measures of tax
reporting aggressiveness are used as the dependent variables
in this research. Two of the measures represent aggressive
behavior that is considered compliant (hereafter referred to
as aggressiveness) and one of the measures represents
aggressive behavior that is noncompliant as defined by the
IRS (hereafter referred to as noncompliance).
Since perception of aggressive tax reporting is not
only latent, but also can be a sensitive issue, it is
appropriate to measure the aggressiveness variable using
36
Table 3—1
Summary of Factors and Their Expected Association with

Aggressive Tax Reporting
Name of Sign of Expected

Construct Explanation Association
CPLX Tax professional's Positive

perception of complexity
of the tax law
ENV Tax professional's Positive

perception of how
supportive the corporate
environment is
STRESS Tax professional's Positive

perception of the
level of financial stress
of the corporation
COST Tax professional's Negative

perception of the costs
of noncompliance
PROF Tax professional's fit Negative

with the profile of a
compliant individual
AUD Tax professional's Negative

perception of the risk
of an audit adjustment
AGE The self reported age Negative

of the tax professional
GEN The gender of the tax Negative

tax professional, coded
as a one if male and
two if female
NOL The presence of an NOL Positive

reporting position, coded
as a one if an NOL reporting
position exists and as a two
if an NOL reporting position
does not exist
37
different approaches (Jackson and Milliron 1986). The two
measures representing aggressiveness differ in level of
abstractness. The first measure is a single seven point
Likert scale item which queries the level of aggressiveness
on the last Federal income tax return filed by the
respondent's corporation (see Appendix B, Part I, Question
38). This measure is the more abstract and more global of
the two dependent variables measuring aggressiveness. The
second aggressiveness measure is a four item formative scale
which asks the respondent to characterize (on a seven point
Likert scale) his corporation's reporting behavior under
conditions of ambiguous and unambiguous tax law (see
Appendix B, Part I, Questions 4 0-43). This measure is more
concrete and specific than the first measure.
The third measure of tax reporting behavior asks the
respondent to assign a percentage to that part of his
corporation's Federal income tax return that, if audited,
would have greater than a 50% chance of resulting in an
audit adjustment (see Appendix B, Part IV). This measure is
the most direct of the three measures and approximates
aggressiveness that is noncompliant by IRS definition.
Measurement of the Constructs
This study attempts to measure perceptions of corporate
tax professionals. These perceptions, or states of mind,
are referred to as constructs. Since constructs are latent
traits, they cannot be directly observed. Consequently,
38
scales must be developed to measure these constructs. A
scale is a set of items each of which is related to the
construct. By assigning numbers to the scale items, a
construct can be measured.
All scale items in this study use a seven point Likert
rating scale to indicate level of agreement or disagreement
with each item statement, with a one indicating strong
disagreement and a seven indicating strong agreement (Likert
1932). A mix of scale items including positive statements,
simple negations and bipolar negations was used. Both types
of negations were recoded to correctly reflect the
construct. All statistical analyses were performed using
the recoded items, with the exception of Appendix C which
gives descriptive statistics based on the questions in their
original form.
This study employs both reflective and formative scales
(Zeller and Carmines 1980). In the case of a reflective
scale, the construct is represented by responses to the
items. A reflective scale is appropriate where there exists
a truly large or infinite number of items, each of which
reflects some aspect of the domain. The reflective scales
developed in this research are the complexity and supportive
corporate environment scales. A formative scale, on the
other hand, is appropriate when the domain of items
measuring the construct is limited. The items define the
construct— the construct is a function of the scale items.
In this research, the financial stress, costs of
39
noncompliance, compliant individual, and aggressive tax
reporting scales are all formative scales.
The method of evaluating a scale was dependent upon its
classification as reflective or formative. Reflective
scales were subjected to common factor analysis (factor
extraction method: maximum likelihood) and formative scales
were subjected to principal components analysis (extraction
method: principal components). Varimax rotation was used
for both types of scales. For reflective scales, scale
items were deleted based upon poor factor loadings. In the
case of a formative scale, items were not automatically
deleted based upon poor factor loadings (Bollen and Lennox
1991) . Rather, since formative scale items define the
construct, the item was evaluated to determine the
congruence with the a priori conceptualization of the
construct.
After scale purification, the reliability of each
reflective scale was assessed by calculation of Cronbach's
coefficient alpha. Reliability is a measure of consistency
and stability of the measure. Alpha assumes parallel forms
and is calculated by looking at correlations between all
possible split halves (Peters 1979). In addition, since
formative scales do not meet the parallel forms requirement
of alpha, the coefficient theta, which is grounded in the
principal components model, was calculated for each
formative scale (Zeller and Carmines 1980). Both alpha and
theta are appropriate only for scales consisting of three or
40
more scale items. Therefore, any scale consisting of less
than three items does not have a reliability estimate
calculated.
No previously tested scales were found in the
literature. In general, the construct measurement scales
for this study were developed using information obtained in
the personal interviews. After receiving input from the
personal interviews, scale items were created. All measures
were reviewed for face validity and were pretested at the
end of the last four personal interviews. Items that the
interviewees considered unimportant or confusing were
deleted from the questionnaire. Any items suggested by the
interviewees were considered and included in the scale as
appropriate.
A pilot study with a sample of 400 corporate tax
professionals was conducted with a response rate of 52%.
Exploratory factor analysis and item total correlations were
conducted on this data to purify the measures (Churchill
1979).
Complexity off the Tax Law
A reflective scale consisting of ten scale items was
developed to measure the construct of tax law complexity.
As discussed in Chapter II, complexity of the tax law has
several different dimensions. The scale items covered in
this study focus on administrative complexity, legislative
complexity, structural complexity and ambiguity in the tax
41
law. A high numerical response indicates a perception of a
high degree of tax law complexity. The scale items for this
construct are listed below.
Tax law changes occur too frequently.
The sentence structure of the Internal Revenue Code

makes it difficult to read.
The vocabulary of the Internal Revenue Code makes it

difficult to read.
In the IRC, the cross references to other code sections

make it difficult to understand.
Tax regulations that affect my company are generally

clear and unambiguous.
Tax law does not impose an excessive amount of

administrative requirements.
Over the past decade, technical errors have contributed

to uncertainty in the tax law.
Major tax acts tend to make too many changes in the tax
law at one time.
The IRS imposes unreasonable timetables for compliance

with new regulations.
Sometimes the tax treatment for transactions in which

my corporation engages is not clear cut.
Supportive Corporate Environment
This reflective scale measures the extent to which the
corporation supports the corporate tax professional in his
job. The eight scale items focus on work environment and
available resources. A high numerical response indicates a
perception that the corporate tax environment is very
supportive. The scale items for this construct are listed
below.
42
The number of tax professionals employed by my company

is less than adequate for the workload.
I receive adequate continuing education in taxation.
My staff receives adequate continuing education in

taxation.
I am unable to use outside consultants when needed.
Senior management at my company consults the corporate

tax staff on strategic planning issues.
The tax library at my company is adequate.
My corporation does not support my participation in

professional organizations.
I can easily obtain information needed to file my

corporation's tax return from my corporation's
information systems.
My office affords me a quiet work environment.
Financial Stress
The financial stress construct uses a formative scale
consisting of three items. The scale items focus on long
term profitability, short term cash flow, and long term
earnings trend. Strong agreement with a statement indicates
a perception by the corporate tax professional that the
company is experiencing financial stress. The following
scale items comprise the financial stress construct:
Over the past five years, my company has maintained a

satisfactory level of profitability.
My company's level of cash flow is unsatisfactory.
My company has maintained a positive earnings trend

over the past five years.
43
Cogts of Noncompliance
A formative scale was used to measure the costs of
noncompliance. The five scale items concentrated on the net
cost of noncompliance. Strong agreement with a statement
indicated a perception of a net increase in the costs of
noncompliance. This scale is composed of the following
scale items:
I feel that senior management of my company think that

any penalties imposed by the IRS would be my fault.
Corporate tax penalties are too high.
When making reporting decisions, one of the factors I

consider is the cost of compliance (e.g., the cost of
retrieving the information) relative to the cost of
noncompliance (e.g., magnitude of the item and
penalty/interest considerations).
The enhanced rate of interest (two percentage points

higher than the regular rate on tax deficiencies)
imposed on large corporate underpayments is unfair.
My company directly or indirectly rewards measures I

take to minimize the Federal income tax liability.
Chance of Audit Adjustment
Chance of audit adjustment was measured using a
formative scale. As discussed previously, this construct is
defined as the chance that an audit adjustment will be made
and is a combination of the risk of an audit taking place
and the corporate tax professional's perception of the
accuracy of the tax return. A high numerical response
indicates that the tax professional perceives there is a
high risk of an IRS audit adjustment. The scale items for
this construct are listed below.
44
I am completely confident in the technical accuracy of

the last return filed by my corporation.
If the last tax return filed by my corporation was

examined by a competent auditor, I would not expect any
audit adjustments at the field agent level.
My corporation is likely to be audited by the IRS.
Nine scale items were developed to measure the
compliant individual construct. A formative scale was used.
The scale items were based on findings in the compliant
individual literature including factors such as trust in
government, equity, compliant peers, and risk preference. A
high score on this scale indicates a compliant individual
while a low score would indicate an individual who did not
fit the compliant individual profile. The scale items are
listed below.
A.cross the organization, I would characterize my

corporation's philosophy as low risk.
I consider myself to be a risk averse person.
I believe that most corporations sometimes deliberately

ignore what is mandated by tax law.
I have a high level of trust in the United States

government.
I believe that, overall, the current Federal corporate

income tax is a fair tax.
The Federal corporation income tax sometimes does not

treat corporations equally who are in similar tax
situations.
During my years as a corporate tax professional, I have

had substantial contact with IRS auditors.
I believe that most large corporations pay their fair

share of Federal income tax.
45
When the opportunity is available, I usually choose not

to take an aggressive position on my personal income
tax return.
Level o f Reporting Aggressiveness
One measure of the dependent variable reporting
aggressiveness is a formative scale consisting of four scale
items. This scale queries as to reporting behavior in each
of four situations created by manipulating two levels of law
ambiguity (unambiguous vs. ambiguous) with two levels of
information availability (complete information vs.
incomplete information). To control for wording effects,
approximately half of the respondents were asked about the
aggressiveness under each of the situations and half of the
respondents were asked how conservative their tax reporting
would be. T-tests indicated no differences between the mean
responses of the two groups. These scale items are listed
on the following page.
In instances where I have complete information (i.e.,

company records provide adequate information) and the
Code and Regs are unambiguous, the tax position taken
by my company could be characterized as aggressive
(conservative).
In instances where I do not have complete information

but the Code and Regs are unambiguous, the tax position
generally taken by my company could be characterized as
aggressive (conservative).
In instances where I have complete information and the

Code and Regs are ambiguous, the tax position generally
taken by my corporation could be characterized as
aggressive (conservative).
In instances where I do not have complete information

and the Code and Regs are ambiguous, the tax position
g e n e r a l l y taken by my corporation could be
characterized as aggressive (conservative).
46
Data Collection
Using information gathered from the interviews, a
questionnaire was designed to elicit corporate tax
professionals' opinions about factors that are posited to
contribute to corporate tax compliance. In order to
maximize the response rate, Dillman's (1978) Total Design
Method was used a a guide for questionnaire design, mailing,
and follow-up procedures. The Total Design Method is built
upon a theory of response behavior and includes a detailed
plan of implementation. Dillman recommends procedures such
as personalized correspondence and repeated follow-up
mailings.
Since the questionnaire included some rather sensitive
questions, i.e., tax reporting behavior, respondents were
guaranteed confidentiality. All results were promised to be
reported in summary form only. Several respondents who
called wanting more information regarding control of the
questionnaires were assured that the researcher was
personally inputting all data and that no one else would
have access to individual responses. To verify that the
respondents were not anxious regarding the confidentiality
of their answers, the following seven point Likert scale
question was included at the end of the survey:
How comfortable were you with answering the

questions on this survey?
A response of one indicates "very uncomfortable" while
a response of seven indicates "very comfortable." The mean
47
response to this question was 5.5 indicating a fairly high
degree of comfort with responding to the questionnaire.
Approximately six percent of the respondents indicated a
comfort level of less than four. None of these response
sets was identified as an outlier. T-tests on the dependent
variables between the comfort and noncomfort groups showed
no differences between the means.
Sample
A random sample of 775 corporate tax executives were
surveyed for this research. The sampling frame was a large
organization of corporate tax professionals, representing
over 2,000 of the leading corporations in North America.
Three questions were included at the end of the
questionnaire to ensure that the participants were
appropriate respondents. One categorical question asked how
much tax compliance and tax planning was done by the
corporate tax department (see Chapter IV, page 58). Another
seven point Likert scale question asked about the
respondent's familiarity with the corporate tax return with
a "one" indicating a low degree of familiarity and a "seven"
indicating a high degree of familiarity (mean « 6.45). The
third question asked the respondent's influence in Federal
income tax reporting decisions, with a "one" indicating a
low level of influence and a "seven" indicating a high level
of influence (mean = 6 .2 0 ).
48
Questionnaire Design
As previously described, the questionnaire design began
with the personal in-depth interviews, resulting in
development of a preliminary questionnaire. This
preliminary questionnaire was piloted using a sample of 400
corporate tax professionals. A response rate of 52% was
attained. After analysis of the results and consideration
of comments offered by the respondents, the final
questionnaire was developed (see Appendix B).
The first part of the questionnaire consists of 45
seven point Likert scale items. These items measure the six
independent variable constructs (tax complexity, supportive
corporate environment, financial stress, costs of
noncompliance, chance of audit adjustment, and compliance
profile) and the dependent variable construct of tax
reporting aggressiveness. In addition, a single item
measure of tax aggressiveness was included in this section.
Part II of the questionnaire specifically addresses the
complexity of the tax law. Respondents are asked to rank
order nine items that contribute to tax law complexity.
These items were identified during the personal interviews
and through the literature search.
The third part of the questionnaire also focuses on
complexity of tax law. Different sections of the tax code
are listed and respondents are asked to assign a number
between 1 (low) and 100 (high) that reflects their
familiarity with the code section and a number that reflects
49
their opinion about the complexity of that code section. In
addition, the respondent is asked to identify the source of
the complexity using the list of contributors from Part II.
The results from this section are not analyzed in this
study. The purpose of this section of the questionnaire is
to provide evidence about sources of complexity by code
section and to help identify troublesome code sections for
use in future research projects.
The next section of the questionnaire, Part IV, elicits
the third measure of the dependent variable. Respondents
are asked to assign a percentage to each of three categories
as applicable to the last Form 1120 filed by the
corporation. The categories represent increasing levels of
aggressiveness. The first category is the part of the
return that respondent feels is unquestionable and would not
be questioned by an IRS agent. The second category is the
part of the return that is questionable but has less than a
50% chance of resulting in an audit adjustment. The final
category, which is used as the third measure of reporting
aggressiveness, is that part of the return that is
questionable and has greater than a 50% chance of resulting
in an audit adjustment. This measure represents
noncompliance as defined by the IRS.
The last part of the questionnaire gathers demographic
information such as personal and professional background of
the corporate tax professional and basic descriptive data on
the corporation (e.g., total assets, gross revenue). Also
50
included in this section are the questions concerning
familiarity with and influence on the corporation's tax
reporting. Space was provided on the back page of the
questionnaire for the respondent to add any additional
comments about the items in the survey or about corporate
tax compliance.
Summary
This chapter has discussed the expected relationships
between tax reporting behavior and the constructs of tax
complexity, supportive corporate environment, financial
stress, costs of noncompliance, risk of audit adjustment,
and compliance profile. This discourse led to the
development of six different hypotheses which will be tested
using an ordinary least squares regression model. In
addition, three demographic variables consisting of age,
gender, and NOL are expected to impact tax reporting
behavior. These demographic variables were included in the
OLS model.
This chapter also discussed measurement of each
independent variable construct. The dependent variable of
tax reporting aggressiveness will be measured three ways: a
single item seven point Likert scale measuring compliant
aggressiveness at a global level; a four item scale
measuring compliant tax aggressiveness under the specific
conditions of ambiguity and nonambiguity; and a measure of
noncompliant aggressiveness (as defined by the IRS) where
51
the respondent assigns percentages to increasing levels of
aggressiveness on the last corporate tax return.
The questionnaire was also introduced and the five
parts individually presented (see Appendix B ) . Part I
includes 45 Likert scale items designed to measure the
independent variable constructs and also take two measures
of the dependent variable. Parts II and III investigate
reasons for tax law complexity and how it applies to
specific code sections. Part IV takes the third iutsasure of
the dependent variable— IRS defined noncompliance. The
final part includes demographic questions concerning the
respondent and the respondent's corporation.
CHAPTER IV
ANALYSIS OP RESDLTS
This chapter presents the empirical results of the
study. First, respondent characteristics are discussed.
The subsequent section evaluates the measurement scales used
and discusses modifications to purify the constructs. Next,
results of the hypotheses tests are presented. Finally,
summary statistics for Parts II and III of the questionnaire
(which collect data on components of complexity) are
described.
Respondent Characteristics
A total of 492 responses were received. Respondents
who did not complete all the independent and dependent
variable questions were eliminated for a final response rate
of 61% (471 respondents out of the 775 sample). Table 4-1
summarizes the distributions of the respondents.
Approximately 65% of the respondents were between the ages
of 36 and 50. The most frequently checked category was the
41-45 age group. Not surprisingly, most of the respondents
were male (83.7%). Government statistics report that the
large majority (61.5%) of all financial managers are male
(U.S. Bureau of Census 1992). It is reasonable to expect
52
53
Table 4-1
Respondent Characteristics— Age and Sex of Respondent
AGE CATEGORY NUMBER PERCENT OF TOTAL
Under 25 0 0
25-30 13 2.8
31-35 67 14.2
36-40 105 22.3
41-45 113 24.0
46-50 88 18.7
51-55 49 10.4
56-60 21 4.5
61-65 11 2.3
over 65 4 .8
TOTAL 471 100.0
SEX CATEGORY NUMBER PERCENT OF TOTAL
Male 394 83.7

Female 77 16.3
TOTAL 471 100.0
54
that the percentage of males within senior management would
be even more.
Table 4-2 summarizes education and certification
characteristics of the sample. The vast majority of the
respondents (92.2%) indicated at least a college-level
degree. Almost 40% of the respondents had a master's degree
and 18.3% had earned a juris doctor. Only 17.4% of the
respondents indicated they had no professional certification
designation. Approximately 54% indicated a CPA designation.
The mean years of experience was 17.7 years with a standard
deviation of 7.1 years. Ninety percent of the sample had at
least ten years of tax experience.
The sample included both privately held (29%)
corporations and publicly held corporations (71%). The
primary business of the respondents is summarized in Table
4-3. The sample was heavily weighted toward the
manufacturing industry, which represented approximately 42%
of the corporations. This weighting is reflective of the
heavy manufacturing base (38% of all businesses) of the
United States (U.S. Bureau of Census 1991). The next most
frequent category was the financial, insurance, and real
estate industries (15.8%).
Most of the corporations surveyed were large in asset
size and gross revenues. The average total assets reported
was $5.41 billion and average gross revenues was $3.38
billion. Over 50% of the sample had assets greater than one
billion dollars and over 50% had gross revenue greater than
55
Table 4-2
Respondent Characteristics— Education and Certification
EDUCATION CATEGORY NUMBER PERCENT OF TOTAL
High School Diploma 3 .6

Bachelor's Degree 161 34.2
Master's Degree 186 39.5
Ph.D. 1 .2
J.D. 86 18.3
other 34 7.2
TOTAL 471 100.0
CERTIFICATION CATEGORY NUMBER PERCENT OF TOTAL
CPA 254 53.9

CMA 1 .2
CIA 2 .4
Attorney 55 11.7
Other 9 1.9
None 82 17.4
CPA/Attorney 68 14.5
TOTAL 471 100.0
56
Table 4-3
Respondent Characteristics— Primary Business
TYPE OF BUSINESS NUMBER PERCENT OF TOTAL
Agriculture 7 1.5
Fin/Ins/Real Estate 74 15.8
Construction 9 1.9
Manufacturing 194 41.5
Mining 16 3.5
Pub Util/Trans 30 6.4
Services 29 6.2
Wholesale/Retail 51 10.9
Other 58 12.4
TOTAL 468 100.0
57
one billion dollars. Nearly 28% of the sample was in an NOL
position.
Several questions were included in Part IV to ensure
that the respondent was appropriately included in the
sample. First, the respondent was queried as to the amount
of tax compliance work done in-house by the corporate tax
staff. Almost all (99.4%) of the respondents indicated that
the majority of the tax compliance work was performed by the
corporate tax staff. Second, the respondents were asked how
familiar they were with their corporation's Federal income
tax compliance function. On a seven point Likert scale (1 =
very unfamiliar and 7 = very familiar), the mean response
was 6.45 (standard deviation of .95) indicating a high
degree of familiarity regarding the Federal income tax
return among the respondents. Finally, the questionnaire
asked how influential the respondent was on the
corporation's Federal income tax return reporting decisions.
The mean response on a seven point Likert scale (1 = not
very influential and 7 = very influential) was 6.2 with a
standard deviation of 1 .0 1 , indicating a high level of
influence among the respondents.
In summary, most respondents were college educated,
middle-aged males who possessed some type of professional
certification and an average of 18 years of tax experience.
The corporate employers represented a variety of industries
with the predominant industry being manufacturing. Most
corporations were not in a net operating loss position.
58
Data were gathered to give assurance that the sample is an
appropriate one to use for this research study. The vast
majority of respondents reported that their corporate tax
department held primary responsibility for the tax
compliance function. In addition, almost all respondents
indicated that they were familiar with the Federal income
tax compliance function and were influential in the tax
reporting decisions.
Test for Nonresponse Bia9
Nonresponse bias is a potential problem in survey
research. It is possible that the part of the sample that
did not return the questionnaire would have responded in a
manner different from those that did return the
questionnaire. Therefore, the representativeness of the
sample might be called into question. Armstrong and Overton
(1977) suggest comparing the responses of early and late
respondents to check for nonresponse bias. The late
respondents are considered proxies for the nonrespondents.
Selected responses of early and late survey
participants were compared for significant differences to
determine if nonresponse bias existed. Early respondents
were defined as the first ten percent of questionnaires
returned and late respondents were approximately the last
ten percent returned. T-tests were performed on all three
measures of the dependent variable and on the mean construct
responses. No significant differences were found between
59
the two groups. Nonresponse bias is, therefore, assumed not
to be a problem in this research study.
Construct Evaluation
This research developed scales to measure six
constructs that are hypothesized to affect corporate tax
compliance reporting behavior— tax complexity, supportive
corporate environment, financial stress, costs of
noncompliance, chance of audit adjustment, and fit with a
compliant individual profile. In addition, a scale was
developed to measure the dependent variable, aggressive tax
reporting behavior. This chapter presents tables that
include scale items retained after scale purification.
Refer to Appendix C for factor loadings on all scale items.
Complexity of the Tax Law
The construct of complexity of tax law was measured
using ten scale items. Scale purification resulted in
retention of six of these items. Table 4-4 presents the
factor loadings for the six items retained.
The common factor analysis resulted in formation of two
factors. The first factor includes the scale items that
relate to the physical structure of the code: sentence
structure, vocabulary, and cross referencing. The second
factor relates to the legislative process of new tax code:
timetables, number of major tax acts, and effect of
technical errors. Both types of complexity were identified
by the AICPA (1992) as targets for simplification. Since
60
Table 4-4
Factor Analysis of Complexity Construct
ITEM FACTOR 1 FACTOR 2
C2 Sentence structure of Code .7699

C3 Vocabulary of the Code .7342
C4 Cross references in Code .6588
C7 Technical errors in legislation .4463

C 8 Too many changes in law at once .5782
C9 Unreasonable timetables to .5400
comply with new laws
EIGEN VALUE 1.6173 .9015

% OF COMMON VARIANCE 64.21 35.79
% OF TOTAL VARIANCE 26.96 15.02
61
the interfactor correlation was relatively modest, .38,
these factors are treated as two separate constructs in the
OLS model. The first factor is labeled as physical
structure complexity of the tax code (variance explained
equals 26.96%) and the second factor is labeled as
complexity created by the tax legislative process (variance
explained equals 15.02%). The overall Cronbach's
coefficient alpha (for standardized variables) for the
physical structure complexity was calculated at .8059.
Alpha for the legislative complexity factor was .5916.
Supportive Corporate Environment
The reflective scale of supportive corporate
environment was evaluated using common factor analysis.
Nine items were initially included in the scale. During
scale purification, two items were deleted because of poor
factor loadings (see Appendix C for full factor loadings).
The rotated factor pattern on the remaining nine items
resulted in extraction of two factors which are presented in
Table 4-5. The first factor deals with continuing
professional education received by the corporate tax
professional and his staff. The second factor extracted
concerns other types of corporate resources available to the
corporate tax professional such as tax library, adequate

staff, and outside consultants.
Although two factors were extracted, the interfactor
correlation between the two factors is relatively high at
62
Table 4-5
Factor Analysis of Supportive Corporate Environment

Construct
E2 I receive adequate CPE .8421

E3 My staff receives adequate CPE .8381
E4 Access to outside consultants .4462

E5 Senior mgt consults tax staff .4583
E6 Adequate tax library .5332
E7 Participate in professional orgs .5355
E9 Quiet work environment .3205
EIGEN VALUE 1.5243 1.2142

% OF COMMON VARIANCE 55.66 44.34
63
.50. Therefore, these two factors will be treated as one
factor in the OLS model. The combined variance explained by
the supportive corporate environment factor is 39.13%. The
alpha coefficient for this factor is .7224.
Financial Stress
The financial stress factor is measured by a three item
formative scale which includes statements regarding
profitability, cash flow, and earnings trend. No items were
deleted during scale purification. Table 4-6 presents the
factor loadings.
Principal components analysis extracted one factor
which explained 77.16% of the total variance. Theta, the
appropriate measure of reliability for a formative scale,
was .8519.
Costs of Noncompliance
The construct of costs of noncompliance was measured
using a formative five item scale. One item was deleted
during scale purification (see Appendix C). The principal
components factor analysis is presented in Table 4-7.
Two factors were extracted in the analysis. The first
factor consisted of two items that are related to external
costs to the corporation itself. The second factor related
to internal costs to the corporate tax professional that
originate from within the corporation. The interfactor
correlation between the two factors is very low— .04.
Therefore, these factors are treated as two separate
64
Table 4-6
Factor Analysis of Financial Stress Construct
ITEM FACTOR1
FI Long term level of profitability .9219

F2 Current cash flow .8291
F3 Long term earnings trend .8817
EIGEN VALUE 2.3148

% OF TOTAL VARIANCE 77.16
Table 4-7
Factor Analysis of Costs of Noncompliance construct
ITEM FACT0R1 FACT0R2
CST1 Blamed for IRS penalties .7614

CST2 IRS penalties too high .8404
CST4 Interest rate unfair .8334
CST5 Company rewards aggressiveness .7766

% OF SHARED VARIANCE 54.31 45.69
65
constructs identified as external costs (variance explained
is 35.18%) and internal costs (variance explained is
29.59%). Since neither alpha nor theta coefficients are
appropriate to use in scales with less than three items, no
reliability estimate is reported for either scale.
The risk of audit adjustment is a formative scale
consisting of three scale items. No items were deleted
during the purification process. The principal components
factor analysis (presented in Table 4-8) extracted one
factor which explained 46.26% of the total variance. The
calculated theta was .4191.
The Compliant Individual Profile construct was measured
using a formative scale. The purpose of this nine item
scale was to determine if the corporate tax executive's
perception of the tax reporting behavior of his corporation
was affected by how well the professional fit the profile of
a compliant individual as reflected in the individual
compliance literature. Four factors were identified by the
principal components analysis. The interfactor correlations
were quite low, ranging from .007 to .14. The full factor
analysis is included in Appendix C.
The first factor identified is composed of three items
dealing with the risk preference of the corporation and of
the individual (see Table 4-9). This factor will be
66
Table 4-8
Factor Analysis of Chance of Audit Adjustment Construct
ITEM FACTOR 1
AUDRSK1 Confidence in technical accuracy .6758

AUDRSK2 Expect audit adjustments if examined .7970
AUDRSK3 Likely to be audited by IRS .5439
EIGEN VALUE 1.3877

% OF TOTAL VARIANCE 46.26
Table 4-9
Factor Analysis of Compliant Individual Profile Factor
PROF1 Corp.'s risk preference .7371

PROF2 Personal risk preference .8038
PROF4 Trust in government .7047
PROF5 Corp income tax is fair .8134
PROF9 Aggressive on personal return .5388

67
referred to as the risk factor. The risk factor explains
16.98% of the total variance and has a theta value of .5128.
The second factor identified is composed of two items
dealing with trust in the government and fairness of the
income tax. This factor will be labeled as the trust factor
and explains 14.82% of the total variance. Since this scale
contains only two items, no reliability measure is
calculated.
Only two items loaded on each of the third and fourth
factors (not shown on Table 4-9). The items that loaded
heavily on these two factors did not intuitively describe
any identifiable construct. For example, the third factor
loaded heavily on a question dealing with audit contact and
belief that corporations pay their fair share of taxes.
Absent any ability to find common ground between the scale
items, the third and fourth factors were omitted from the
analysis (Churchill 1979).
Level of Reporting Aggressiveness
Level of reporting aggressiveness is measured by a
formative scale consisting of four items. No items were
deleted during scale purification. The principal components
analysis extracted two factors (see Table 4-10). The first
factor consists of two items describing reporting behavior
when the Code is unambiguous. The second factor consists of
two items describing reporting behavior when the Code is
ambiguous. The interfactor correlation between these two
68
Table 4-10
Factor Analysis of Level of Reporting Agressiveness

Construct
UNAMB1 Complete info, code clear .8598

UNAMG2 Incomplete info, code clear .8854
AMB1 Complete info, code unclear .7425
AMB2 Incomplete info, code unclear .8021

69
factors was only .009. The second of these factors,
reporting behavior when the Code is ambiguous, will be used
in the OLS model since more opportunity for aggressive
behavior exists under this condition, thus maximizing
experimental variance (Kerlinger 1986). This factor will be
termed Reporting Under Ambiguity and explains 30.29% of the
total variance.
Descriptive Statistics on Selected Variables
This section first presents descriptive statistics on
the nine independent variable constructs and on the one
dependent variable construct (Table 4-11). Descriptive
statistics on the other two single item measures of the
dependent variable will be presented in Table 4-12.
Appendix D includes a list of all questionnaire items and
their respective means and coefficients of variation.
Generally, respondents indicated that they perceived a
greater amount of complexity originating from the structural
aspects of the code (CPLX1 mean = 5.32) than from the
legislative process (CPLX2 mean = 4.79), where a one
indicates strong disagreement and a seven indicates strong
agreement. In both cases, the mean value over 4.0 indicates
that complexity in the tax law is considered to be present.
Most respondents felt that their corporations supported
them through resources and training. A mean value of 5.20
was reported for ENV with a rather small coefficient of
variation (the standard deviation divided by the mean
Table 4-11
Summary Statistics for Measurement Scales
N MIN MAX MEAN COVAR
SCALE
STRUCTURAL COMPLEXITY (CPLX1) 471 1.00 7.00 5.33 21.90
LEGISLATIVE COMPLEXITY (CPL2) 471 1.33 7.00 4.79 21.44
SUPPORTIVE CORP ENVIRONMENT (ENV) 471 1.86 7.00 5.20 18.45
FINANCIAL STRESS (STRESS) 471 1 .0 0 7.00 3.47 52.36
EXTERNAL COSTS (EXTCST) 471 1.50 7.00 5.53 21.38
INTERNAL COSTS (INTCST) 471 1.00 7.00 4.11 32.86
CHANCE OF AUDIT ADJUSTMENT (AUD) 471 1.67 7.00 4.95 32.59
RISK PREFERENCE (RISK) 471 1.00 7.00 3.92 28.91
EQUITY (EQTY) 471 1.00 7.00 3.57 33.18
AGGRESSIVENESS UNDER AMBIGUITY (AMBG)471 1.00 7.00 4.23 35.17
•vl
o
Table 4-12
Descriptive Statistics for Single Item Dependent Variable Measures
MEASURE N MIN MAX MEAN COVAR
UNQST Percentage of return that 471 0 100 75.95 21.19

is unquestionable
LESS50 Percentage of return that 471 0 70 13.54 77.95

is questionable and has
less than 50% chance of
audit adjustment
MORE50 Percentage of return that 471 0 75 10.74 94.25

is questionable and has
less than 50% chance of
audit adjustment
AGGRESS I would characterize the 471 1 7 4.16 35.84

the last FIT return filed
by my corporation as
aggressive
72
multiplied by 100) of 18.45. Financial stress (STRSS) was
not felt by most participants as indicated by a mean score
of 3.47 although the coefficient of variation was rather
large (52.36), indicating a relatively low degree of
consensus. The external costs of noncompliance (EXTCST mean
= 5.53) were perceived to be much higher than the internal
costs of noncompliance (INTCST mean =* 4.11).
A high numerical score on the risk of audit adjustment
(AUD) indicates a perception that an audit adjustment is
likely. The mean score on this construct was 4.95 (cov =
32.59) indicating that most respondents felt audit
adjustments were probable.
The compliant individual profile was split into the
risk preference (RISK) and Equity (EQTY) factors. On a
seven point Likert scale, a seven would indicate a high risk
preference and a high level of trust in government. The
means for these factors were very close to a neutral score
of four. Respondents showed a slight propensity for risk
aversion with a mean score of 3.92. In addition, they
showed a slight distrust of government with a mean score of
3.57.
Finally, the dependent variable of tax reporting
aggressiveness under ambiguity had a mean score of 4.23
indicating slightly aggressive behavior when the tax code is
unclear. The coefficient of variation for this factor was
relatively large at 35.17.
73
Table 4-12 presents summary statistics for the single
item dependent variable measures. In addition, information
on the other categories queried relating to the percentages
assigned to different levels of aggressiveness on returns
(i.e., UNQST and LESS50) are also reported.
The average percentage assigned to the part of the
corporate return that is most questionable (MORE50) was
10.74. Note the high coefficient of variation of 94.25
indicating a great deal of variability among firms in their
level of aggressiveness. The single item seven point Likert
scale item regarding aggressiveness (AGGRESS) indicated only
slightly conservative behavior with a mean of 3.84 and
coefficient of variation of 35.84.
Model Testing
Before model testing was performed, diagnostic
procedures were performed on the data to insure that the
data met the assumptions of the OLS model. First, outliers
were identified by three different methods: studentized
residuals, DFITTS, and the PRESS statistics. The few
outliers that were identified through the preceding
procedures were investigated for data entry error. In
addition, the models were run without the outliers to
determine if deletion of the outliers had a significant
impact on the results. None of the outliers were
influential and none were due to data error. All outliers
were retained in the data set.
74
Next, to check for nonconstant variance and other
undesirable patterns in the data set, the residuals were
plotted against the predicted y's (Montgomery and Peck
1982). All plots appeared normal and exhibited no patterns
that would be of concern in an OLS model.
When two or more independent variables are highly
correlated, multicollinearity may exist. To check for
multicollinearity, variance inflation factors (VIF) were
calculated for each model. Montgomery and Peck (1982)
suggest that a variance inflation factor greater than five
may indicate multicollinearity exists. All VIF's for the
models tested in this research were less than two.
An ordinary least squares regression analysis was
performed for each of the three dependent variable measures:
AMBG, AGGRESS, and MORE50. The independent variables
included the nine scales described in the section on
construct evaluation. In addition, age, gender, and
presence of a net operating loss were included as
independent variables bringing the total number of
predictors to twelve. The final model tested was:
Yi - a + B^CPLXl + B 2 CPLX2 + B 3ENV + B 4 STRSS - B 5 EXTCST
- B 6INTCST - B 7 AUD + B 8RISK - BgEQTY - B 10AGE
— B llG E N + B 32 N O L
The first regression analysis used the two item scale
indicating reporting aggressiveness under conditions of
75
ambiguity (AMBG) as the dependent variable. Table 4-13
presents the results of this regression analysis (hereafter
referred to AMBG model). The model proved to be highly
significant. The model F value was 10.894 which has a p
value of .0001. The adjusted R-square was .2023.
Significant factors included the supportive corporate
environment, financial stress, risk preference, and presence
of an NOL. Legislative complexity was marginally
significant with a p value of .0724.
The second regression analysis used a single seven
point Likert scale item (Part I, question 38) as the
dependent variable. This question asks the respondent if he
would characterize the last Federal income tax return filed
by the corporation as aggressive. This measure represents
aggressiveness in a global setting rather than just under
conditions of ambiguity as in AMBG. The results of this
regression are presented in Table 4-14 (hereafter referred
to as the AGGRESS model)
The model is highly significant with a p value of .0001
(F = 9.148). The adjusted R-square of the model is .1728.
Highly significant factors included Internal Costs, Risk
Preference, and Age. Presence of an MOL is marginally
significant at the .07 level.
The final model is presented in Table 4-15. This model
used the percentage assigned to the most questionable part
of the corporate income tax return as the dependent variable
(hereafter referred to as the MORE50 model) This model is
76
Table 4-13
OLS Model vith Reporting Aggressiveness construct as the

Dependent Variable (AMBG)
INDEPENDENT VARIABLE BETA T VALUE P VALUE
CODE COMPLEXITY -.0213 -.436 .6631
LEGISLATIVE COMPLEXITY -.0411. -1.801 .0724
CORPORATE ENVIRONMENT .4953 8.045 .0001
FINANCIAL STRESS .0952 2.534 .0116
EXTERNAL COSTS .0513 1.036 .3005
INTERNAL COSTS -.0326 -.747 .4554
RISK OF AUDIT ADJUSTMENT -.0042 -.073 .9417
RISK PREFERENCE .2774 5.735 .0001
EQUITY .0037 .077 .9388
AGE -.0125 -.340 .7341
SEX .0914 .589 .5560
NOL .3452 2.265 .0240
Model F Value = 10.894 p = .0001

Adjusted R-square = .2023
77
Table 4-14
OLS Model vith Single Item Reporting Aggressiveness Global

Measure as the Dependent Variable (AGGRESS)
CODE COMPLEXITY -.0796 -1.531 .1263
LEGISLATIVE COMPLEXITY .0981 1.599 .1106
CORPORATE ENVIRONMENT .0569 .072 .3839
EXTERNAL COSTS -.0320 -.610 .5419
INTERNAL COSTS -.0986 -2.132 .0335
RISK OF AUDIT ADJUSTMENT -.0609 -.990 .3225
RISK PREFERENCE .4175 8.138 .0001
EQUITY -.0199 -.391 .6960
AGE .1141 2.919 .0037
SEX .0442 .269 .7883
NOL .2933 1.814 .0703
Model F Value = 9.148 p = .0001

78
Table 4-15
OLS Model with MoreSO* as the Dependent Variable
CODE COMPLEXITY -.8147 -2.017 .0443
LEGISLATIVE COMPLEXITY .0001 .000 .9998
CORPORATE ENVIRONMENT .1067 .210 .8336
EXTERNAL COSTS 1.1419 2.800 .0053
INTERNAL COSTS -.1612 -.448 .6542
RISK OF AUDIT ADJSTMNT -1.7684 -3.071 .0002
RISK PREFERENCE -.1299 -.326 .7448
EQUITY -.7582 -1.918 .0558
AGE -.7679 -2.528 .0118
SEX 2.96424 2.317 .0209
NOL -.3929 -.313 .7547
Model F Value = 4.461 p = .0001

MORE50 = Referring to the last Form 1120 filed by your

corporation, please assign a percentage you feel is
questionable, that if examined by an agent, will have
greater than a 50% chance of resulting in an audit
adjustment at the field agent level.
79
also highly significant with a p value of .0001 (F = 4.461).
The adjusted R-square of the model is .0815. Significant
factors in this model include Code complexity, External
Costs, Risk of Audit Adjustment, Age, and Sex. Equity was
marginally significant at the .06 level.
Application of the Results to the Stated Hypotheses
The following section applies the results of the
regression analysis to the nine hypotheses presented in
Chapter 111.
Hypothesis 1
Evidence from the regression analyses supports the
theory that tax reporting behavior is affected by the tax
professional's perception of tax law complexity. Structural
complexity was a significant factor in the MORE50 model (p =
.04) and legislative complexity was a marginally significant
factor in the AMBG model (p = .07).
The sign of the coefficient was not in the predicted
direction however. It was predicted that due to the tax
executives' familiarity with the law, that the complexity of
the law would allow them to take advantage of gray areas and
be more aggressive in their tax reporting. This model shows
the opposite effect. The higher their perception of tax law
complexity, the more conservative tax professionals are in
their tax reporting.
This finding has some support in the individual
compliance literature. Westat, Inc. (1980) argued that
80
complexity acts as a deterrent for individual taxpayers
since it creates taxpayer uncertainty. In addition,
Milliron (1985) found that in some instances, an increase in
complexity resulted in increased individual compliance.
The results of this study indicate that, surprisingly,
corporate tax executives and individuals are similarly
affected by complexity. Although it was expected that tax
law complexity would affect corporate tax executives
differently because of the additional resources available to
them and the level of knowledge they possess, the findings
of this research are consistent with the finding of the
individual compliance literature.
Hypothesis 2
Hypothesis 2 is based on the prediction that tax
reporting behavior is affected by the corporate environment
of the tax professional. The data from the AMBG model
support this theory (p = .0001). The relationship is in the
expected direction. The more supportive the corporate
environment, the more aggressive the corporate tax
professional is in his reporting behavior. The availability
of corporate resources helps to mitigate the uncertainty
inherent in the tax law and therefore, congruent with the
findings from Hypothesis 1, when uncertainty is reduced,
behavior will be more aggressive.
81
Hypothesis 3
As expected, the data from the AMBG model supports the
third hypothesis and suggests that tax reporting behavior is
affected by financial stress (p - .0001). The relationship
is in the predicted positive direction. As firms experience
more financial stress, income tax reporting becomes more
aggressive. This also supports positive accounting theory
that accounting managers' decisions are influenced by
financial condition.
Hypothesis 4
The fourth hypothesis predicts that tax reporting
behavior will be affected by the external and internal costs
of noncompliance. The data support the hypothesis, and I
conclude such a relationship does exist. The MORE50 model
shows External Costs to be a significant factor at the .0053
level. The AGGRESS model indicates that Internal Costs is a
significant factor at the .0335 level.
The signs of the coefficients of EXTCST and INTCST are
in opposite directions. As predicted, when internal costs
of noncompliance increase, aggressiveness decreases.
However, as external costs of noncompliance increase,
aggressiveness increases. Several studies have failed to
support the hypothesis that higher penalty rates encourage
compliance (Spicer and Lundstedt 1976; Witte and Woodbury
1985). The results for the EXTCST variable in this study
are supported by Cuccia's (1994) findings. Cuccia found
82
that CPA's became more aggressive under increasing
penalties, a behavior predicted by psychological reactance
theory.
Hypothesis 5
The fifth hypothesis suggests that reporting behavior
will be affected by the corporate tax professional's
perceived risk of audit adjustment. The results of the
regression analysis support the hypothesis. The MORE50
model suggests that Risk of Audit Adjustment is a
significant factor in predicting reporting aggressiveness (p
= .0002 ).
As predicted, the relationship is an inverse one. As
the perceived risk of audit adjustment increases,
aggressiveness decreases.
Hypothesis 6
During the scale purification process, the compliant
individual profile factor was disaggregated into two
factors— risk preference (RISK) and perception of equity
(EQTY). This gives rise to two new hypotheses:
Ha 6 A: Tax reporting aggressiveness will increase as

the risk preference of the corporate tax
professional increases.
Ha 6 B: Tax reporting aggressiveness will increase as

the corporate tax professional's perception
of tax law equity decreases.
The data support both hypotheses. Both the AGGRESS
model and the AMBG model were significant at the .0001 level
83
for Ha 6 A. As expected, as risk preference increases,
aggressive behavior increases.
The MORE50 model was marginally significant at the .06
level for H 6 B. When the corporate tax professional
perceives that the tax law is inequitable, his
aggressiveness will increase. This finding has been
supported in other individual compliance studies. For
example, Spicer and Lundstedt (1976) found tax resistance
scores to be positively related to scores on an inequity
index. Using survey data from different sources, Etzioni
(1986) found that tax evasion increased during a period of
time when perception of equity decreased.
Hvrothesis 7
The data support a significant relationship between age
and corporate tax reporting behavior. As expected, the
MORE50 model found an inverse relationship between age and
noncompliance (p = .0118). Recall that the MORE50 dependent
variable is the percentage assigned to the most questionable
part of the corporation's last Federal income tax return and
is noncompliance as defined by the IRS. The AGGRESS model,
however, found a positive relationship between age and the
aggressiveness of the corporate tax professional. The
AGGRESS dependent variable is the global measure of
aggressiveness. The difference in direction between the two
models could be that aggressiveness and noncompliance are
84
two distinct behaviors that age affects these two types of
behaviors in opposite manners.
Hypothesis 8
Previous studies have found that women are more
compliant than men (Tittle 1980). This study found support
for the hypothesis that tax reporting behavior is affected
by gender but the relationship was not in the expected
direction.
The MORE50 model showed a positive relationship between
gender and noncompliance (p - .0209). Since men were coded
as a "one" and women coded as a "two," this translates to
women being more aggressive than men. One explanation is
that women may be less confident in their reporting
decisions and therefore reported a greater percentage of
their return as being very questionable.
Hypothesis 9
This hypothesis predicts that tax reporting behavior
will be affected by the presence of a net operating loss
position. Results from the regression analysis supports
this hypothesis. The AGGRESS model shows a marginally
significant relationship (p = .0703) and the AMBG model
shows a relationship at the .0240 level. Both models
indicate a positive relationship meaning that when an NOL
does not exist, corporate tax professionals will be more
aggressive.
85
Summary
Support was found for all hypotheses in at least one of
the three models. However, relationships were not always in
the expected direction. Table 4-16 summarizes the findings
of the three models.
It is not unexpected that the three models would
produce different results since each dependent variable
measures a different aspect of overall aggressiveness.
Since this is an exploratory study and the first of its kind
in corporate compliance research, it is appropriate that the
dependent variable would be measured in alternative ways.
This study argues that the differences in results are
due to the measurement of different types of reporting
behavior, and that the posited factors affect the different
behaviors in dissimilar fashions. Since the AMBG and
AGGRESS measures of reporting aggressiveness are proxies for
aggressive but not noncompliant behavior (as defined by the
IRS), then we can say that most of the factors that affect
that type of behavior are related to the corporate
environment. The corporate environment encourages the
corporate tax professional to be aggressive in his tax
reporting decisions but the internal costs imposed by the
corporation keeps that behavior from becoming noncompliant.
Financial stress experienced by a company may cause the
corporate tax professional to be more aggressive, but that
aggressiveness is mitigated if a net operating loss is
present. Risk propensity of both the corporation and the
86
Table 4-16
Summary of All Regressions
FACTOR AMBG AGGRESS MORE50
CMPLXl -2.017
.0443
CMPLX2 -1.801
.0724
ENV 8.045
.0001
STRSS 2.534
.0116
EXTCST 2.80
.0053
INTCST -2.132
.0335
AUD -3.071
.0002
RISK 5.735 8.138

.0001 .0001
EQTY -1.918
.0558
AGE 2.919 -2.528

.0037 .0118
SEX 2.317
.0209
NOL 2.265 1.814

.0240 .0703
R2 .2023 .1728 .0815
Note: The F value is reported on the first line with the p

value reported directly under it for all models significant
at the .10 level.
87
individual will play heavily into the tax reporting
decisions.
An item on a tax return that has a greater than 50%
chance of resulting in an audit adjustment is, by
definition, noncompliance in the eyes of the IRS. The
factors that affect this level of reporting behavior are
generally different from those affecting aggressive (but
compliant) type of behavior (AMBG and AGGRESS). The factors
seem to be more governmental in nature as opposed to
corporate environment in nature. For example, the Internal
Revenue Code complexity, the penalties and interest imposed
by the IRS, and the IRS watchdog function of audit were
significant factors affecting the MORE50 responses.
Only one factor, AGE, affected both the "aggressive"
and "noncompliant" reporting behaviors, but did so in
opposite ways. Age was seen as having a positive
relationship with the aggressive type of behavior while
having an inverse relationship with noncompliant behavior.
One explanation is that the inverse relationship is support
for previous research findings that older taxpayers are more
compliant, while the positive relationship with the
aggressive behavior is a function of knowledge and
experience. In other words, older corporate tax
professionals are more experienced and can better determine
the line between compliant and noncompliant behavior.
88
Components of complexity
Part II of the questionnaire asked respondents to rank
order nine items according to their contribution to tax law
complexity. These items were developed from findings in the
literature and from comments made during the personal
interviews with corporate tax executives. A summary of the
distribution of the rank orders is presented in Table 4-17.
Frequent law changes was cited most often as the top
contributor to complexity, followed by cumbersome
regulations, the complexity of corporate transactions, and
ambiguity in the application of the law. The most
frequently cited items as the lowest contributors to
complexity were administrative requirements, information
requirements, and the retroactive application of new laws.
Summary
This chapter has presented the results of the study.
Results of the factor analysis were reported along with the
corresponding reliability statistics. The complexity factor
was determined to be multidimensional and resulting in
creation of two factors, complexity due to the structure of
the Code and complexity due to the legislative process. The
environmental factor was determined to be multidimensional
but was treated as one factor due to high interfactor
correlation. Costs of noncompliance was separated into two
factors— external costs and internal costs. Finally, the
compliant individual profile was divided into two factors
Table 4-17
Frequency Distribution for Components of Complexity (Part II)
PERCENT RANKED AS
ITEM 1 2 3 4 5 6 7 8 9
READABILITY OF CODE 11.7 9.6 9.8 9.8 12.4 9.6 8.3 14.1 14.7
FREQ LAW CHANGES 7.0 6.2 7.9 10.0 13.0 11.1 12.2 11.1 21.5
CUMBERSOME REGS 3.4 6.8 5.1 6.2 10.7 10.9 18.3 19.6 19.0
DELAYED REGS 4.7 7.7 9.6 13 .2 10.9 14.3 16.6 14.3 8.9
ADMIN REQUIREMENTS 11.7 16.4 16.8 13 .2 10.4 9.8 9.8 7.0 4.7
INFO REQUIREMENTS 15.1 19.6 14.1 7.2 8.7 9.8 8.3 9.0 8.1
COMPLEX CORP TRANS 11.7 7.7 12.4 12.2 12.8 15.8 9.8 9.0 8.7
RETRO APPLICATION 24.0 13.2 12.8 11.9 8.3 6.0 8.9 6.2 8.7
AMBIGUITY 4.7 7.9 8.3 12.2 13.9 13.4 13.6 12.4 13.6
oo
VO
90
representing risk preference and equity perception. In
addition to the nine constructs, age, sex, and NOL were
included in a least squares regression model. Three
measures of the dependent variable were used.
All independent variables proved significant in at
least one model. All hypotheses were supported although the
direction of the relationship was opposite to the predicted
direction for the complexity factors and the external costs
factor.
Frequent law changes and cumbersome regulations were
clearly the most cited contributors to tax law complexity.
Information requirements and retroactive application of the
tax law were most often cited as the lowest contributors to
tax law complexity.
Accordingly, this study provides evidence that several
corporate environmental and governmental factors have a
significant effect on tax reporting behavior. The effect of
these factors will vary according to the type of reporting
behavior measured.
CHAPTER V
SUMMARY
Corporate compliance research is in its infancy. Only
a handful of studies have considered this topic despite the
fact that corporate compliance is a growing problem in the
United States. IRS commissioners complain that compliance
is down, and corporations complain that it is impossible to
totally comply with the law. The compliance problem is
exacerbated by a growing federal deficit, reduced corporate
staffs (tax departments included), and tax simplification
that seems to be illusive. The compliance problem can only
be solved when policymakers have a better understanding of
the factors that affect corporate compliance. This study is
the first step toward that understanding.
Research Objectives
Factors that affect compliance are often latent and
cannot be directly observed. Because of the complexity of
these latent traits, multiple item scales are considered
better measures than single item questions. This study:
(1 ) identifies the factors that affect corporate tax
compliance, (2 ) develops scales to measure these factors,
and, (3) tests the relationship of these factors to
corporate tax compliance behavior.
91
92
The first phase of this research used a grounded theory
approach. In-depth personal interviews were conducted with
corporate tax executives to obtain their input on corporate
tax compliance. Through this interview process, several
preliminary factors were identified that might be
determinants of corporate tax reporting behavior. The
relevant literature was then reviewed to ascertain if any
existing theory would support the findings of the field
research. Chapter II details relevant literature for each
factor identified in the first stage of research: tax
complexity, supportive corporate environment, financial
stress, costs of noncompliance, and compliant individual
profile.
A questionnaire was then developed and piloted with a
sample of 400 corporate tax executives. The scales were
purified using exploratory factor analysis and also
considering written statements provided by the respondents.
The final study consisted of a sample of 775 corporate tax
executives from a cross section of industries and sizes,
with a response rate of sixty one percent. Methodology is
detailed in Chapter III.
The two main objectives of the questionnaire analyses
were to evaluate the latent construct measures and perform a
regression analyses using those constructs as independent
variables to predict compliance behavior. The results of
these analyses are detailed in Chapter IV.
93
Contributions of the Research
The contributions of this research are twofold. One
contribution is that this is the initial work in developing
scales to measure the factors predicted to influence
corporate tax compliance. The second contribution is to
provide evidence on how these factors affect corporate tax
compliance behavior.
The research found that complexity in the eyes of
corporate tax professionals is a multidimensional construct
with at least two dimensions— structural complexity of the
code and complexity resulting from the legislative process.
The costs of compliance also seemed to be multidimensional—
one dimension being the external costs to the corporation
and the other dimension being the internal costs imposed by
the corporation on the corporate tax professional. Four
factors were extracted in the compliant individual profile
analysis, only two of which were identifiable. It appears
as though a scale to measure a compliant individual in a
corporate setting may be difficult to develop and that
perhaps scales to measure individual traits of a compliant
individual will meet with more success.
Scale development for several of the constructs was
quite successful. In particular, the scales for structural
complexity, corporate environment, and financial stress were
well developed and had high reliability scores.
The regression analyses included each of the nine
constructs emerging from the factor analysis and three
94
demographic variables— age, sex, and NOL. Three measures of
the dependent variable, aggressive reporting, were tested.
The three measures included a global measure of
aggressiveness (AGGRESS), aggressiveness under law ambiguity
(AMBG), and noncompliance as defined by the IRS (MORE50).
Every factor was significant in at least one of the models
and all models were significant at the .0001 level.
Corporate environmental factors were significant in the
aggressiveness models while governmental factors were
significant in the noncompliance model.
Finally, empirical evidence is gathered as to what
corporate tax executives perceive to be the contributors to
tax complexity. The three items ranked most frequently as
the top contributor to tax complexity were the frequency of
tax law changes, cumbersome regulations, and delayed
issuance of regulations.
This research provides evidence to corporate senior
management that the corporate environment is instrumental in
enabling the corporate tax professional to minimize the
corporate tax liability. This research also provides
evidence to tax enforcement agencies that the audit function
is effective in deterring noncompliant tax reporting
behavior. In addition, tax policymakers are given the clear
message that much of tax law complexity is due to the ever
changing tax code. The corporate tax professional is ready
for stability in the tax law.
95
Limitations
Since this is compliance research with self reported
compliance behavior, the primary limitation of this research
is the possibility that the self reports are not accurate.
There is evidence to believe that the measures are fairly
accurate, though. The MORE50 measure (where the respondent
assigns a percentage to the part of the corporate return
that is very likely to result in an audit adjustment) had a
mean of about 11%. Using TCMP data, Rice (1992) found that
median unreported profits in small corporations averaged 12 %
of their reported median profits. In addition, the very
last item on the questionnaire regarding comfort level in
completing the return indicated that the respondents were
generally very comfortable in dealing with these sensitive
issues.
A second limitation is that this research is the
initial attempt to develop scales for these independent
variable constructs. Reliability estimates were not
calculated for several of the scales due to the limited
number of scale items. In addition, the AUD variable had
only a marginal theta (.4191). Subsequent testing and
development of these scales must continue in order to
establish their validity.
As with any mail survey, the researcher had no control
over the conditions under which the survey was actually
administered. In addition, the researcher has no assurance
whether the person to whom the questionnaire was directed
96
actually completed the questionnaire or passed it along to a
subordinate. However, the questionnaire did inquire as to
the respondent's knowledge about the corporate return and
influence on reporting decisions, with positive responses
observed.
The sample used in this survey consisted of corporate
tax executives in relatively large firms, predominantly
manufacturing. The generalizability of these findings to
smaller firms in different industries is questionable.
Additional research will be needed to determine if the
findings hold for other groups of corporate tax
professionals.
Implications for Future Research
This research can be a springboard for much needed
study in the area of corporate tax compliance. It is an
area of interest for both policymakers and corporate tax
professionals. The interest of the latter group is
evidenced by the fact that over forty percent of the
respondents requested a summary of the results from this
study. Several are impatiently awaiting the results.
The factors used in this study need to be further
developed and tested. In addition, scales for other
dimensions of complexity need to be constructed. The
compliant individual profile factor analysis indicated that
developing scales for the individual traits (e.g., trust in
government) will be more successful rather than developing
97
one scale for the profile in its entirety. Scales for the
other predominant findings in the individual literature,
particularly moral character, need exploration.
This study concentrated on only nine constructs. The
respondents also suggested looking at the effect of salary,
motivation, position, and recent mergers/acquisitions on
corporate tax compliance. Future research should continue
to use both existing theory and input from corporate tax
professionals to investigate the determinants of corporate
tax reporting behavior.
APPENDIX A
INTERVIEW GUIDE
99
INTERVIEW GUIDE
The purpose of this research is to investigate the factors

that affect corporate tax compliance. The first phase of
this research project consists of a series of indepth
interviews with tax professionals. The following guidelines
will be used:
1. Your responses will remain completely confidential. In

any manuscript developed from this research, your
responses will never be connected with your name or the
name of your company.
2. The use of a tape recorder facilitates the interview

process. If the tapes are transcribed by someone other
than myself, all references to your name or your
company's name will be deleted before the transcription
takes place.
3. You may turn off the tape recorder at any time.
PERSONAL BACKGROUND
1. How did you get interested in a tax career?
2. Describe your professional experience.
3. Describe your education.

What is your highest degree earned?
Did your education give you the tools you need to
perform your job adequately?
4. Do you ever think about the equity of tax policy?
PROFESSIONAL BACKGROUND AT THIS COMPANY
1. Describe the company (assets, revenues, number of

employees)
2. What is the size and organization of the current tax

staff?
3. What are your specific job responsibilities?
4. To what extent do you use outside tax professionals?
5. What is your experience with the IRS and with state and
local auditors?
6 . Describe your continuing education efforts.
100
7. Does your company actively lobby for tax legislation?
COMPLIANCE
1. What type of transactions or what areas give you the

most compliance problems?
2. What is it about these areas that are difficult?
3. Do you feel that the problem is increasing or

decreasing? Why?
4. What factors affect the difficulty of the compliance

task?
5. How do you draw the line between aggressive tax

behavior and evasion?
6 . How do you think other corporate tax professionals

define this line?
7. Consider the last audit where the IKS wanted to make

adjustments - either positive or negative. What
percentage of those adjustments do you think were due
to voluntary noncompliance? Involuntary noncompliance?
8 . Peter Scott, a former acting chief counsel of the IRS,

contends that the complexity of the tax law almost
prohibits a corporation from filing a 1 0 0 % accurate
return. Do you agree?
9. What accuracy percentage would you assign to the last

federal income tax return filed by your corporation?
10 What effect does your compliance burden have upon your

ability to perform tax planning?
APPENDIX B
SURVEY MATERIALS
102
SAMPLE QUESTIONNAIRE
FE DERAL T A X A T IO N A N D CORPORATIONS
A Survey of Corporate Tax Professionals
School of Accountancy
Auburn University
301 College of Business Building
Auburn, Alabama 36849*5247
103
PAR TI
The following questions u k jour opinions about factors that m i; be related to the preparation of the Federal corporate
Income tax return for jour corporation. Please circle jour response on the scale, with a *1* Indicating strong
disagreement and a *7' Indicating strong agreement with the statement There are no right or wrong answers. We are
interested onlj in your opinions.
Strongly Strongly
Disagree Neither Agree
1. Tax law changes occur too frequently. 1 2 3 4 S 6 7
2. The sentence structure of the Internal Revenue Code makes it difficult

to read. 1 2 3 4 5 6 7
3. The vocabulary of the Internal Revenue Code makes it difficult to read. 1 2 3 4 S 6 7
4. In the IRC, the cross references to other code sections make it difficult
to understand. 1 2 3 4 5 6 7
J. Tax regulations that affect my company are generally clear and unambiguous. 1 2 3 4 5 6 7
6. Tax law does not impose an excessive amount of administrative requirements 1 2 3 4 5 6 7
7. Over the past decade, technical errors have contributed to uncertainty

in the tax law. 1 2 3 4 5 6 7
8. Major tax acts tend to make too many changes in the tax law at one time. 1 2 3 4 5 6 7
9. The IRS imposes unreasonable timetables for compliance with new

regulations. 1 2 3 4 5 6 7
10. Sometimes the tax treatment for transactions in which my corporation

engages is not clear cut. 1 2 3 4 5 6 7
11. The number of tax professionals employed by my company is less than

adequate for the workload. 1 2 3 4 5 6 7
11 I receive adequate continuing education in taxation. 1 2 3 4 5 6 7
13. My staff receives adequate continuing education in taxation. 1 2 3 4 5 6 7
14. 1am unable to use outside consultants when needed. 1 2 3 4 5 6 7
15. Senior management at my company consults the corporate tax staff on

strategic planning issues. 1 2 3 4 S 6 7
16. The tax library at my company is adequate. 1 2 3 4 5 6 7
17. My corporation does not support my participation in professional

organizations. 1 2 3 4 5 6 7
18. 1can easily obtain information needed to file my corporation's

tax return from my corporation's information systems. 1 2 3 4 5 6 7
19. My office space affords me a quiet work environment. 1 2 3 4 5 6 7
20. Over the past five years, my company has maintained a satisfactory
level of profitability. 1 2 3 4 S 6 7
104
Strongly Strongly
Disagree Nell er Agree
21. My company's level of cash (low is unsatisfactory. I 2 3 5 6 7
22. My company has maintained a positive earnings trend over the past
five years. 1 2 3 5 6 7
23. ! (eel that senior management of my company think that any penalties
imposed by the IRS would be my (auti. 1 2 3 5 6 7
24. Corporate tax penalties are too high. 1 2 3 5 6 7
25. When making reporting decisions, one of the factors I consider is the
cost of compliance (e.g., the cost of retrieving the information) relative
to the cost of noncompliance (e.g., magnitude of the item and
penalty/interest considerations). 1 2 3 5 6 7
26. The enhanced rate of interest (two percentage points higher than the
regular rate on tax deficiencies) imposed on large corporate
underpayments is unfair. 1 2 3 5 6 7
27. My company directly or indirectly rewards measures I take to minimize

the Federal income tax liability. 1 2 3 5 6 7
28. Across the organization, I would characterize my corporation's

philosophy as low risk. 1 2 3 5 6 7
29. 1consider myself to be a risk averse person. 1 2 3 5 6 7
30. 1believe that most corporations sometimes deliberately ignore what is

mandated by tax law. 1 2 3 5 6 7
31. I have a high level of trust in the United States government. 1 2 3 5 6 7 I
32. I believe that, overall, the current Federal corporate income tax is a fair tax. 1 2 3 5 6 7
33. The Federal corporation income tax sometimes does not treat corporations
equally who are in similar tax situations. 1 2 3 5 6 7
34. During my years as a corporate tax professional, 1have had substantial

contact with IRS auditors. 1 2 3 5 6 7
35. I believe that most large corporations pay their fair share of Federal
income tax. 1 2 3 e 6 7
36. When the opportunity is available, I usually choose not to uke an
aggressive position on*my personal income tax return. 1 2 3 5 6 7
37. I am completely confident in the technical accuracy of the last

return filed by my corporation. 1 2 3 5 6 7
38. I would characterize the last Federal income tax return filed by my
corporation as aggressive. 1 2 3 5 6 7
39. If the last tax return filed by my corporation was examined by a competent
auditor. 1would not expect any audit adjustments at the field agent leveL 1 2 3 5 6 7
105
Strongly Strongly
Disagree Neither Agree
40. In instances where I have complete Information (i.e., company records

provide adequate information) and the Code and Regs are unambiguous,
the tax position taken by my company could be characterized
as aggressive. 1 2 3 4 5 6 7
41. In instances where I do not have complete information but the Code and
Regs are unambiguous, the tax position generally taken by my
company could be characterized as aggressive. 2 3 4 5 6 7
42. in instances where 1have complete Information and the Code and Regs are
ambiguous, the tax position generally taken by my corporation could be
-haracterized as aggressive. 3 4 5 6 7
43. In instances where 1do not have complete information and the Code and
Regs are ambiguous, ihe tax position generally taken by my corporation
could be characterized as aggressive. 1 2 3 4 5 6 7
44. My corporation is likely to be audited by the IRS. 1 2 3 4 5 6 7
45. I have confidence in the ability of an IRS agent to identify

valid audit issues. 1 2 3 4 5 6 7
PART II
The follow ing section asks fo r your opinions about the contributions o f different factors to tax law complexity. Please
RANK ORDER the following nine items by assigning a different number between T and *9* to Item. The single
highest co n trib u to r to complexity would be assigned a *9' while the single lowest co n trib u to r to com plexity would be
assigned a *1*.
A Readability of Code (includes sentence structure, vocabulaty and use of cross references)
B. Frequency of tax law changes
C Cumbersome regulations (includes excessive length and lack of clarity)
D. Delayed issue of regulations
E. Administrative requirements (filinp/communications between the IRS andthe corporation)
F. Information requirements (retrieval of corporate financial information required to file return)
C. Complexity of corporate transactions
H. Retroactive application (of new tax law)
I. Ambiguity in the appbeation of tax law
106
PART III
In the next section, you are asked to assign a number between I (low) and 100 (high) that reflects your familiarity with a
specific code section, and a number between 1 and 100 that reflects your opinion about how complex that code section Is.
For example, a code section that you are m y knowled(cable about but that you do not consider very complex might
receive a familiarity rating of 80 and a complexity rating of 30. In addition, using the contributors to complexity listed in
Part II, please Indicate the soureefs) of any perceived complexity. For instance. If you believed the source of complexity
was the frequency of law changes, you would place a *B’ in the third column.
Source of the
Familiarity Complexity Complexity
( 1 - 100) ( 1 - 100) (A -H )
Passive Foreign Investment Company Provisions

Code Sections 1291-1296
Alternative Minimum Tax

Code Sections 55-59
Foreign Tax Credit

Code Sections 901-908
Capitalization of Inventory Costs

Code Section 263A
Controlled Foreign Corporations

Code Section 952
Allocation of Income and Deductions

Among Taxpayers Code Section 482
Please indicate any other Code sections

you feel are particularly burdensome.
PART IV
Referring to the last Form 1120 filed by your corporation, please assign percentages (based on dollars of total tax liability)
to each of the following categories (the percentages should total 100%):
Percentage you feel is unquestionable (the law is unambiguous

and the information set is complete) and strongly feel would not be
questioned by an IRS agent %
Percentage you feel is questionable, but if examined by

an agent, will have less than a 50% chance of resulting
in an audit adjustment at the field agent level %
Percentage you feel is questionable, that if examined

by an agent, will have greater than a 50% chance of resulting
in an audit adjustment at the field agent level %
100%
107
Referring to the lest 1120 (lied by your corporation, please assign ■ percentage (based on dollars of toul tax liability) Tor
each category listed below.
Complete information was available and the tax law application was clear %
Complete information was available and the tax law application was not clear %
Complete information was not available and the tax lawapplicalion was dear %
Complete information was not available and the tax law application was not clear _______ %
100%
P A R T V - Dem ographics
This questionnaire Is anonymous and confidential. The following Items arc not intended to Identify you in any stay. This
Information Is used only to provide meaningful analysis of the previous sections.
1. Please indicate your age
under 25 46-50
25-30 51-55
31-35 56-60
36-40 61-65
41-45 over65
2. Your sex:
M ALE
FEM ALE
3. What is your highest level of education achieved?
H IG H SCHOOL DIPLOMA
BACHELOR'S DEGREE
MASTER'S DEGREE
PH.D.
J.D.
O TH ER (PLEASE SPECIFY)
4. Which professional certifications/licenses do you hold? I
CPA j
CMA
CIA
ATTO RNEY i
OTHER - PLEASE INDICATE______________ !
NO NE i
5. How many yean o f tax experience do you have? {

I
YEARS
6. Is your corporation privately held o r publicly held
108
7. Your corporation's primary business j

AGRICULTURE. FORESTRY AND FISHING
FINANCIAL. INSURANCE AND REAL ESTATE
CONSTRUCTION
MANUFACTURING
M INING
PUBLIC UTILITIES AND TRANSPORTATION
SERVICES
W H O LESA LE/RETAILTRA DE
OTHER - PLEASE DESCRIBE___________________
8. Approximate Tout Assets of your corporation
9. Annual Gross Revenue of your corporation for the last fiscal year
10. Is your corporation currently in an NOL position?
Yes No
11. Please check >11categories that describe the compliance activity of your corporation's tax department
LESS TH A N 50% OF T H E COMPLIANCE W ORK IS DONE BY T H E CORPORATE T A X STAFF

______ 50% OR MORE OF THE COMPLIANCE W ORK IS DONE BY THE CORPORATE T A X STAFF
THE CORPORATE TA X RETURN IS REVIEW ED BY A CPA FIRM
LESS THAN 50% OF T H E T A X PLANNING IS DONE BY T H E CORPORATE T A X STAFF
50% OR MORE O FT H E TA X PLANNING IS DONE BY T H E CORPORATE T A X STAFF
LITTLE OR NO TA X PLANNING IS PERFORMED EITHER BY THE CORPORATION'S T A X
DEPARTMENT OR BY OUTSIDE CPAs
12. How familiar arc you with your corporation’s Federal income tax compliance function?
Not Very FamlUar Very Familiar

1 2 3 4 5 6 7
1 1 1 1 1 1 1
13. How much influence do you have on your corporation's Federal income tax reporting decisions?
Not Very Influential Very Influential

1 2 3 4 5 6 7
1
1 I 1 1 1 1 1 !
14. How comfortable were you with answering the questions on this survey?
Very Uncomfortable Very Comfortable

1 2 3 4 5 6 7
1 I I I I I
PLEASE T U R N T H E PAGE
109
PLEASE USE THE SPACE BELOW TO MAKE ANY A D D ITIO N A L COMM ENTS
ABOUT ITEMS IN TH IS SURVEY OR ABOUT CORPORATE TAX C O M P LIA N C E
IF Y O U WISH TO OBTAIN A COPY OF TH E RESULTS WRITE 'RESULTS* A N D Y O U R NAME

A N D ADDRESS ON T H E BACK O FT H E REPLY ENVELOPE OR ENCLOSE A BUSINESS CARD.
PLEASE DO NOT PUT YO U R NAME ON T H E QUESTIONNAIRE
THANK YO U FOR YOUR COOPERATION
110
Auburn University
Auburn University. Alabam a 36849-5247
Scnooi or Accountancy _
301 College of Business Cass,e Bfadley
December 1,1992 205-344-6215
Mr. Joel Dalton

The Coleman Corporation
123 Matrimony Way
Atlanta, G A 30300
Dear M r. Dalton:
The tax compliance burden of corporations is a matter of growing concern for policymakers and
corporate tax professionals. Former IRS Commissioner Goldberg stated at a House subcommittee
hearing that he believed most nor.compliance was not intentional but was attributable to the complexity
of the tax laws. To date, however, the factors that either facilitate or impede a corporation’s ability to
comply with tax provisions have not been carefully examined. We believe that this information is vital to
effective tax reform.
You are one o f a small number of corporate tax executives selected to give opinions on this subject. To
ensure that the results truly represent the consensus of the tax professional community, it is important
that each questionnaire be completed and returned. The questionnaire solicits opinions only and does
not require you to gather any additional information from your records.
You may be assured of complete confidentiality. The questionnaire has an identification number for
mailing purposes only, enabling us to check your name off the mailing list when your questionnaire is
returned. Your name will never be placed on the questionnaire itself. Data will be reported in summary
form only.
The results of the research will be made available to the AICPA, T E I, the A B A and other interested
groups. You may receive a summary of the results by writing "results" on the back of the envelope or
enclosing a business card. Do not put your name on the questionnaire.
I will be happy to answer any questions you might have. Please write or call collect. The telephone
number is (205) 844-6215.
Thank you fcr your time and effort.
Sincerely,
Cassie F. Bradley
Project Director
Ill
FOLLOWUP POSTCARD
December 10,1992
Last week a questionnaire seeking your opinion about the tax compliance burden of
corporations was mailed to you. Your name was drawn from a random sample of the
tax professional community.
If you have already completed and returned it to us, please accept our sincere thanks.
If not, please do so today. Because the questionnaire has been sent to only a small,
but representative, sample of tax professionals, it is extremely important that your
response be included in the study.
If by some chance you did not receive the questionnaire, or the questionnaire got
misplaced, please call me right now, collect (205-844-6215) and I will get another one
in the mail to you today.
Sincerely, »
Cassie F. Bradley
Project Director
112
FOLLOWUP LETTER
Auburn University
Auburn University. Alabam a 36849-5247
School of Accountancy
Cassie Brocley
301 College of Business
205-3Aa-62i5
January 6,1993
Mr. Joel Dalton

The Coleman Corporation
123 Matrimony Way
Atlanta, G A 30300
Dear M r. Dalton:
About four weeks ago I wrote to you seeking your opinion on the factors that
affect a corporation s ability to comply with tax provisions. As of today, we have
not received your completed questionnaire.
This study was undertaken because we believe that corporate tax professionals’
opinions on the tax environment are vital to effective tax reform.
I am writing to you again because of the significance each questionnaire has to

the usefulness of this study. Your name was selected through a scientific
sampling process. In order for the results of this study to be truly representative
of the opinions of all corporate tax professionals, it is essential that each person in
the sample return their questionnaire. If you feel that you are not familiar
enough with the Federal income tax compliance function to complete the
questionnaire, please forward the questionnaire to a more appropriate individual
in your company.
In the event that your questionnaire has been misplaced, a replacement is

enclosed.
Your participation in this research is greatly appreciated.
Sincerely,
CkUM. i
G u jj i i . a . u iu u f b jr
Project Director
APPENDIX C
FACTOR LOADINGS ON ALL SCALE ITEMS
114
FACTOR LOADINGS ON ALL SCALE ITEMS
ITEM FACTOR1 FACTOR2
FACTOR = COMPLEXITY
Cl Frequency of law changes .2733 .3870

C2 Sentence structure of the Code .7581 .1203
C3 Vocabulary of the Code .7169 .2324
C4 Cross references in Code .6614 .0757
C5 Clear and unambiguous Regs .2803 .0737
C6 Excessive admin requirements .2512 .0896
C7 Technical errors due to legislation .0065 .4168
C8 Too many tax law changes at once .1846 .6574
C9 Unreasonable timetables to
comply with new laws .0882 .5110
CIO Tax treatment is not clear cut .1477 .2829
FACTOR = SUPPORTIVE CORPORATE ENVIRONMENT
El Adequate staff .0383 .2321

E2 Adequate continuing education .8441 .2294
E3 Adequate staff continuing education .8407 .2566
E4 Able to use outside consultants .1924 .4505
E5 Tax staff consulted on issues .1686 .4161
E6 Adequate tax library .1039 .5378
E7 Participate in professional orgs .2072 .5121
E8 Info for return is available .0879 .2783
E9 Quiet work environment .1243 .3638
FACTOR = FINANCIAL STRESS
FI Level of profitability last 5 yrs .9228

F2 Level of cash flow .8302
F3 Earnings trend over last 5 yrs .8823
FACTOR = COSTS OF NONCOMPLIANCE
COST1 Mgt blame me for penalties .0151 .7127

COST2 Tax penalties too high .8323 .0180
COST3 Consider costs of compliance
vs. costs of noncompliance .1605 .4059
COST4 Enhanced rate of interest on
large corp underpayments unfair .8311 .0776
COST5 Rewards for minimizing tax .0804 .7427
115
ITEM FACT0R1 FACT0R2
FACTOR = AUDRSK
AUDRSK1 Confidence in technical accuracy

of last return filed .6758
AUDRSK2 Expectation of audit adjustments .7970
AUDRSK3 Likely to be audited by IRS .5439
FACTOR - AMBIG
Aggressiveness under:
AMBIG1 Complete info, Code, and Regs
are unambiguous .8597 .0746
AMBIG2 Incomplete info, Code, and Regs
are unambiguous .8853 .1064
AMBIG3 Complete info, Code, and Regs
are ambiguous .4384 .7425
AMBIG4 Incomplete info, Code, and Regs
are ambiguous .3692 .8021
FACTOR ANALYSIS USING ALL SCALE ITEMS
FACTOR = COMPLIANT INDIVIDUAL PROFILE FACTOR 1 FACTOR 2 FACTOR 3 FACTOR
PROF1 Corporation's risk preference .7371 .1094 .3923 .0525

PROF2 Personal risk preference .8038 .0975 .0928 .0199
PROF3 Most corporations ignore law .1697 .1166 .2618 .7502
PROF4 Trust in U.S. government .0623 .7047 .1349 .1277
PROF5 Corporate income tax is fair .0294 .8134 .0135 .0537
PROF 6 Corporations is similar tax
situations treated equally .1137 .2059 .2420 .6992
PROF7 Contact with IRS auditors .0400 .0177 .7844 .1660
PROF 8 Large corps pay fair share .0079 .1882 .6148 .2 2 / 1
PROF9 Aggressive on personal return .5388 .2494 .3475 .0470
116
APPENDIX D
DESCRIPTIVE STATISTICS FOR SELECTED QUESTIONNAIRE ITEMS
118
DESCRIPTIVE STATISTICS FOR SELECTED QUESTIONNAIRE ITEMS
Coef
QUESTION Mean Var
PART I
1. Tax law changes occur too frequently. 5.77 21.70

2. The sentence structure of the Internal
Revenue Code makes it difficult to read. 5.62 22.83
3. The vocabulary of the Internal Revenue
Code makes it difficult to read. 4.87 30.87
4. In the IRC, the cross references to
other code sections make it difficult
to understand. 5.51 24.34
5. The regulations that affect my company
are generally clear and unambiguous. 2.77 54 .53
6 . Tax law does not impose an excessive
amount of administrative requirements. 2.07 73.56
7. Over the past decade, technical errors
have contributed to uncertainty in the
tax law. 4.58 29.74
8 . Major tax acts tend to make too many
changes in the tax law at one time. 5.13 27.56
9. The IRS imposes unreasonable timetables
for compliance with new regulations. 4.67 29.47
10. Sometimes the tax treatment for
transactions in which my corporation
engages is not clear cut. 5.80 19.27
11. The number of tax professionals
employed by my company is less than
adequate for the workload. 5.21 31.11
12. I receive adequate continuing education
in taxation. 5.16 29.90
13. My staff receives adequate continuing
education in taxation. 4.80 32.74
14. I an unable to use outside consultants
when needed. 2.68 58.45
15. Senior management at my company
consults the corporate tax staff on
strategic planning issues. 4.71 36.31
16. The tax library at my company is
adequate. 5.40 26.28
17. My corporation does not support my
participation in professional
organizations. 2.15 68.30
18. I can easily obtain information needed
to file my corporation's tax return from
my corporation's information systems. 3.68 46.21
19. My office space affords me a quiet
work environment. 5.13 33.42
119
Coef
QUESTION Mean Var
20. Over the past five years, my company

has maintained a satisfactory level of
profitability. 4.35 48.26
21. My company's level of cash flow is
unsatisfactory. 3.11 61.05
22. My company has maintained a positive
earnings trend over the past five years. 4.35 50.27
23. I feel that senior management of my
company think that any penalties
imposed by the IRS would be my fault. 4.23 40.38
24. Corporate tax penalties are too high. 5.26 26.44
25. When making reporting decisions, one
of the factors I consider is the cost
of compliance (e.g., the cost of
retrieving the information) relative
to the cost of noncompliance (e.g.,
magnitude of the item and
penalty/interest considerations). 5.01 31.56
26. The enhanced rate of interest (two
percentage points higher than the
regular rate on tax deficiencies)
imposed on large corporate
underpayments is unfair. 5.80 24.34
27. My company directly or indirectly
rewards measures I take to minimize
the Federal income tax liability. 4.02 54.53
28. Across the organization, I would
characterize my corporation's
philosophy as low risk. 4.34 37.63
29. I consider myself to be a risk
averse person. 3.90 40.47
30. I believe that most corporations
sometimes deliberately ignore what is
mandated by tax law. 3.39 56.23
31. I have a high level of trust in the
United States government. 3.25 45.04
32. I believe that, overall, the current
Federal corporate income tax is a fair
tax. 3.89 38.65
33. The Federal corporation income tax
sometimes does not treat corporations
equally who are in similar tax
situations. 5.03 28.29
34. During my years as a corporate tax
professional, I have had substantial
contact with IRS auditors. 5.62 27.02
35. I believe that most large corporations
pay their fair share of Federal income
tax. 4.94 29.98
120
Coef
QUESTION Mean Var
36. When the opportunity is available,

I usually choose not to take an
aggressive on my personal income
tax return. 3.97 44.73
37. I am completely confident in the
technical accuracy of the last
return filed by my corporation. 4.97 32.09
38. I would characterize the last Federal
income tax return filed by my
corporation as aggressive. 3.84 35.84
39. If the last tax return filed by my
corporation was examined by a
competent auditor, I would not
expect any audit adjustments at
the field agent level. 2.66 58.80
40. In instances where I have complete
information (i.e., company records
provide adequate information) and the
Code and Regs are unambiguous, the tax
position taken by my company could be
characterized as aggressive. 4.26 34.64
41. In instances where I do not have
complete information but the Code and
Regs are unambiguous, the tax position
generally taken by my company could be
42. In instances where I have complete
information and the Code and Regs
are ambiguous, the tax position
43. In instances where I do not have
complete information and the Code and
Regs are ambiguous, the tax position
characterized as aggressive. 4.73 41. 08
44. My corporation is likely to be
audited by the IRS. 6.48 18.52
45. I have confidence in the ability of
an IRS agent to identify valid audit
issues. 3.56 45.13
121
PART IV
Referring to the last 1120 filed by your corporation, please
assign a percentage (based on dollars of total tax liability)
for each category listed below.
Complete information was available and the

tax law application was clear 71.83 25.87
Complete information was available and the

tax law application was not clear 13.76 86.50
Complete information was not available and

the tax law application was clear 7.45 102.17
Complete information was not available and

the tax law application was not clear 6.96 106.72
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An Empirical Investigation of Factors Affecting Corporate Tax Compliance Behavior

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A n em pirical investigation of factors affecting corporate tax

B radley, Cassie Frances, P h .D .

The University of A labam a, 1994

C o p y rig h t © 19 9 4 b y B ra d le y , C assie F ra n c e s. A ll rig h ts re se rv e d .

FACTORS AFFECTING CORPORATE

TAX COMPLIANCE BEHAVIOR

CASSIE FRANCES BRADLEY

Submitted in partial fulfillment of the requirements

ALL RIGHTS RESERVED

fulfillment of the requirements for the degree of Doctor of

Philosophy specializing in Accounting.

Accepted on behalf of the Faculty of the Graduate

School by the dissertation committee:

Oma Lee Cathey

who made pursuit of this doctorate possible.

I wish to acknowledge the invaluable contributions of

my dissertation committee members, Dr. Michael L. Roberts,

Dr. Barney Cargile, Dr. George Klersey, Dr. Elizabeth

Ferrell, and Dr. William Woodall. Their willingness to

invest time in this project is greatly appreciated.

I wish to thank the following faculty who assisted me

throughout my doctoral program: Mike Dugan whose enthusiasm

helped me survive my coursework; Mike Roberts who made sure

my graduate assistantship was a valuable learning experience

and who directed this dissertation from a distance of 1,060

miles; and Liz Ferrell whose technical and emotional support

throughout my program were invaluable. Her friendship is

I am most grateful for family and friends who supported

me in so many ways over the past four years. Thanks to my

sisters and my mother who made me believe that I could do

it. I would also like to express gratitude to my late

father for giving me a sense of humor that has so enriched

I wish to thank my wonderful daughters Allison, Ginny,

and Chelsea who loved me when I needed it most. Finally, I

Without his love, understanding, and ability to cook, this

work would not have been possible.

Motivation for this Research................... 2

II. THEORY DEVELOPMENT AND RELATED RESEARCH....... 7

III. RESEARCH DESIGN................. 25

Development of Compliance Behavior Framework... 25

Complexity of the Tax Law................... 28

Presentation of the Model...................... 34

Measurement of the Dependent Variables........ 35

IV. ANALYSIS OF RESULTS............................ 52

Complexity of the Tax Law................... 59

Descriptive Statistics on Selected Variables... 69

B. SURVEY MATERIALS................................ 101

Sample Questionnaire........................ 102

C. FACTOR LOADINGS FOR ALL SCALEITEMS............. 113

D. DESCRIPTIVE STATISTICS FOR SELECTED

REFERENCES ........................................... 122

3-1 Summary of Factors and Their Expected

4-1 Respondent Characteristics— Age and Sex

4-2 Respondent Characteristics— Education

4-3 Respondent Characteristics— Primary

4-4 Factor Analysis of Complexity Construct ...... 60

4-5 Factor Analysis of Supportive Corporate

4-6 Factor Analysis of Financial Stress