Do IRS Audits Deter Tax Avoidance?

RES 351
July 14, 2014 r

Research is done for many reasons. It can be used to solve problems or issues that a business is having. Research can be used by business to determine if making certain changes will yield the results the company desires. Many businesses use research when developing new products to determine what consumers think of the product. They are trying to determine if consumers will purchase the product if they continue with development. This particular essay is focusing on the IRS auditing of business and how they may or may not take aggressive approaches in order to avoid those audits. Three different universities compiled the research article used for this paper. It focuses on corporate tax avoidance and whether strict IRS monitoring deters corporate tax avoidance. When reviewing this article, it is apparent that they used the reporting study method for their research. This method uses previous data and data sources to reiterate the data for a better understanding. This article uses data from the TRAC (Transactional Records Clearinghouse), that the IRS provides data directly too. Next we will be discussing how the research is providing insight into the research question. There are many factors that the researchers took into consideration. Some factors include the perception of management; whether stricter IRS monitoring constrains some business' aggressive tax planning, and management's role in exploiting tax planning. Some of the data used was a survey that they conducted regarding managements perception of audits, rather than actual occurrence of audits. This survey showed that managers perceived that audits occurred more frequently than they actually did. Researchers also analyzed data from 1992-1980 that suggested that the occurrence of an audit has been declining through the years, with the rise in stricter enforcement. They also analyzed whether stricter monitoring changed the aggressiveness of a businesses' tax strategies. The findings reveal that self-dealing managers can exploit tax planning, under the pretext of lowering tax benefits, thus increasing shareholder equity, to hide their diversionary tactics by hiding information necessary for monitoring. This leads to evidence that poorly governed firms have more occurrences of tax evasion and therefore, an audit will have a greater impact on these businesses. As you would expect in these instances, research showed that these companies overall have higher incidences of audits by the IRS. There were many surveys and a lot of data that was analyzed in order to make these determinations. Many factors played into the findings. In this case it is not 100% percent conclusive due to the variations in the data examined, it is pretty accurate based on the analyses of the data presented that the incidences of audits is higher in poorly managed companies. The rate of overall audits has been reduced by stricter enforcement by the IRS. Business research can be used in every aspect of a business and the IRS is no different. The IRS has many different divisions for tax regulation of businesses and individuals. If you have ever had to deal with the IRS it is not an easy process. The forms are confusing and trying to get to someone on the phone is a huge hassle. If you ever receive letter from the IRS you know how confusing they can be to understand. While I am sure that this is true for businesses as well as individuals; I have no knowledge of the business side of taxes, only individual. I have been doing taxes for individuals for many years, so I am used to the language and am able to decode their letters. However, the individual taxpayer doesn’t have a background that allows them to understand the language of taxes. If processes and languages were streamlined and put into language individuals could understand, there would be less mistakes made, which would lead to less work for the IRS. The IRS could benefit from more research in the area of tax language and streamlining of their processes. While tax codes are complex, with research and analyses they could make it less daunting to understand and make interaction with them easier on the general population and businesses alike. The evidence suggests that the lax governance by the IRS, management's ability to manipulate the aggressiveness of the company's tax strategies and the aggressive tax diversionary measures taken by management, all prove that firms exhibit less tax avoidance when the IRS imposes tougher enforcement. Business research is an important part of any business, which can lead the businesses' to assess internal controls and be used to solve many issues or answer question about which direction a business should take.

References
Cooper, D. R., & Schindler, P. S. (2014). Business research methods (12th ed.). Boston: McGraw-Hill/Irwin.
Hoopes, J. L., Mescall, D., & Pittman, J. A. (2012). Do IRS Audits Deter Corporate Tax Avoidance?. The Accounting Review, 87(5), 1603–1639. Retrieved July 10, 2014, from http://media.proquest.com.ezproxy.apollolibrary.com/media/pq/classic/doc/2787470771/fmt/pi/rep/NONE?hl=&cit%3Aauth=Hoopes%2C+Jeffrey+L%3BMescall%2C+Devan%3BPittman%2C+Jeffrey+A&cit%3Atitle=Do+IRS+Audits+Deter+Corporate+Tax+Avoidance%3F&cit%3Apu==The+Acco