Book-Tax Differences and Internal Revenue Service Adjustments

In this paper, it is shown that IRS proposed audit adjustments increase as the excess of book income over taxable income increases. Prior research on earnings management has sometimes assumed that taxable income shifting can be discerned from financial accounting numbers. This paper provides the fir...

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Bibliographic Details
Published in:Journal of accounting research 1998-10, Vol.36 (2), p.343-356
Main Author: Mills, Lillian F.
Format: Article
Language:English
Subjects:
Accounting policies
Audits
Business structures
Compensation plans
Confidentiality
Conformity
Corporate income taxes
Corporate taxes
Cost control
Creative accounting
Deferred income
Deferred income taxes
Deferred taxes
Earnings management
Expected utility
Federal taxes
Financial reporting
Financial statements
GAAP
Hypotheses
Income shifting
Income taxes
Internal audits
Losses
Noise
Public companies
Research Reports
Studies
Tax audits
Tax incentives
Tax increases
Tax rates
Tax returns
Tax revenues
Taxable income
Variables
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Summary:In this paper, it is shown that IRS proposed audit adjustments increase as the excess of book income over taxable income increases. Prior research on earnings management has sometimes assumed that taxable income shifting can be discerned from financial accounting numbers. This paper provides the first explicit evidence that firms cannot costlessly maximize financial reporting benefits and tax savings independently. This evidence justifies the general assumption in financial accounting research that firms face a trade-off between book and tax incentives for earnings management, so that researchers' use of financial data to estimate tax-planning behavior is reasonable.
ISSN:0021-8456
1475-679X
DOI:10.2307/2491481