Book-Tax Differences and Internal Revenue Service Adjustments

Abstract

*University of Arizona. This paper comprises a portion of my dissertation from the University of Michigan, entitled Essays in Corporate Tax Compliance and Financial Reporting. I appreciate the guidance of my committee: Russell Lundholm and Joel Slemrod (cochairs), and Roger Gordon and Douglas Skinner. I am grateful for financial support from the Deloitte and Touche Foundation and the Paton Foundation of the University of Michigan. This paper has been improved through many helpful comments by workshop participants at the University of Arizona, the University of Chicago, the University of Georgia, the University of Iowa, the Massachusetts Institute of Technology, the University of North Carolina, Northwestern University, and the University of Southern California. I also appreciate the assistance of an anonymous reviewer, whose suggestions improved the paper immensely. Confidential data were provided by the Internal Revenue Service Coordinated Examination Program, Office of Special Studies. All opinions expressed are the opinions of the author solely and do not reflect any views of the Internal Revenue Service. 1 Most of the intertemporal or cross-jurisdictional income-shifting research on the Tax Reform Act of 1986 assumes that book income shifting is equivalent to, or at least a necessary condition for, taxable income shifting. See Scholes, Wilson, and Wolfson [1992], Guenther [1994], Maydew [1997], Klassen, Lang, and Wolfson [1993], and Harris [1993]. In addition, the earnings management literature in accounting often includes a measure of potential tax savings, such as a dummy variable for tax-paying status, or an estimate of the