The use of tax preparation software to meet federal tax-reporting requirements has dramatically increased in the last decade. The general assumption is that such software improves the accuracy of taxpayers' returns, in part because embedded intelligent agents identify potential form errors, provide interpretations of tax laws, and highlight potential IRS audit flags. However, it is possible that these intelligent agents may have other, unintended effects as well. In particular, it is likely that the audit warnings embedded in many of these products may cause many taxpayers to take more conservative positions in their tax returns. Taxpayers most likely to be affected in this way are those who are relatively less knowledgeable about tax laws and reporting requirements. This study presents the results of a computerized tax experiment that are consistent with the above expectations. For novice taxpayers, the audit flags embedded in the software led to conservative adjustments that are rather extreme, resulting in significantly higher reported taxable incomes relative to their counterparts who did not have access to the embedded audit flags. Knowledgeable taxpayers, in contrast, maintained essentially the same level of taxable income and corresponding tax liability despite software warnings of potential audit.
Treasury Decision (TD) 8002 significantly relaxed the substantiation requirements for deducting noncash charitable contributions under $501 for tax years 1985 and after. We present evidence that TD 8002 caused a significant change in taxpayer behavior. Specifically, the relatively stable percentage of taxpayers who claimed zero noncash charitable deductions in years prior to TD 8002 decreased consistently and significantly after TD 8002's implementation. The decrease in zero noncash deduction taxpayers was largely replaced by taxpayers who reported noncash charitable deductions for amounts just under TD 8002's relaxed substantiation requirement (i.e., amounts just under $501). We present a series of tests supporting the contention that the increase in reported noncash charitable deductions is largely attributable to more aggressive reporting behavior rather than increased charitable giving.
This study examines investor reaction to the reduction in federal income tax rates on dividends resulting from passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA or the Tax Act). We investigate the existence of a clientele shift associated with the JGTRRA by examining trading volume in dividend-paying stocks surrounding passage of the Tax Act. Also, we examine changes in shareholder composition of firms over the period between announcement in the press and final passage of the plan. We find dividend yield to be a significant predictor of abnormal trading volume around key dates, including the date the plan to reduce dividend taxes was first covered in the press. Furthermore, we find a large and statistically significant negative relationship between dividend yield and the change in institutional ownership. Taken as a whole, our results are consistent with expectations that investor clienteles form around tax characteristics associated with particular firms and the ways that those firms structure investor returns. In particular, our results suggest that passage of the JGTRRA resulted in observable shifts in shareholder clienteles for dividend-paying firms.
Purpose This study aims to determine whether financial statement users suffered a significant loss of information when, in November 2007, the SEC dropped the requirement for foreign private issuers using International Financial Reporting Standards (“IFRS firms”) to reconcile their financial statements to US generally accepted accounting principles (GAAP). Design/methodology/approach The study investigates whether analyst forecast errors and forecast dispersion increased for IFRS firms to a greater extent than for US GAAP firms after the Securities and Exchange Commission (SEC) dropped the reconciliation requirement. Using a treatment group comprised of IFRS firms and a matched sample of US GAAP firms, this study uses regression analyses to compare forecast errors and dispersion for the last fiscal year the reconciliation was available and the first fiscal year during which the reconciliation was unavailable to analysts. Findings The study finds evidence that forecast errors for IFRS firms exhibited no systematic change after the reconciliation was no longer available for analysts covering those firms. Thus, it does not appear that dropping the reconciliation requirement was associated with a change in forecast accuracy. However, the study does find evidence of increased dispersion in the IFRS firms’ forecasts relative to their US GAAP counterparts after the reconciliation requirement was dropped. Practical implications These findings have implications for evaluating the Securities and Exchange Commission’s 2007 decision to eliminate the reconciliation for IFRS firms. Specifically, the Securities and Exchange Commission’s decision does not appear to have significantly altered analysts’ information environments. Originality/value This paper contributes to the understanding of how a group of sophisticated financial statement users adapt to different sets of accounting standards.
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