Tài liệu Taxation without Representation in Contemporary Rural China ppt

CONTENTS

LIST OF CONTRIBUTORS vii

EDITORIAL BOARD ix

AD HOC REVIEWERS xi

AIT STATEMENT OF PURPOSE xiii

MAIN ARTICLES

PROFESSIONAL LIABILITY SUITS AGAINST TAX

ACCOUNTANTS: SOME EMPIRICAL EVIDENCE

REGARDING CASE MERIT

Donna D. Bobek, Richard C. Hatfield and Sandra S. Kramer 3

AN EMPIRICAL ASSESSMENT OF SHIFTING THE

PAYROLL TAX BURDEN IN SMALL BUSINESSES

Ted D. Englebrecht and Timothy O. Bisping 25

AN EMPIRICAL EXAMINATION OF INVESTOR OR DEALER

STATUS IN REAL ESTATE SALES

Ted D. Englebrecht and Tracy L. Bundy 55

CHARITABLE GIVING AND THE SUPERDEDUCTION:

AN INVESTIGATION OF TAXPAYER PHILANTHROPIC

BEHAVIOR FOLLOWING THE MOVE FROM A TAX

DEDUCTION TO A TAX CREDIT SYSTEM

Alexander M. G. Gelardi 73

v

vi

HOW ENGAGEMENT LETTERS AFFECT CLIENT LOSS

AND REIMBURSEMENT RISKS IN TAX PRACTICE

Lynn Comer Jones, Ernest R. Larkins and Ping Zhou 95

THE ALTERNATIVE MINIMUM TAX: EMPIRICAL

EVIDENCE OF TAX POLICY INEQUITIES AND A RAPIDLY

INCREASING MARRIAGE PENALTY

John J. Masselli, Tracy J. Noga and Robert C. Ricketts 123

AN EMPIRICAL INVESTIGATION OF FACTORS

INFLUENCING TAX-MOTIVATED INCOME SHIFTING

Toby Stock 147

RESEARCH NOTES

ACADEMIC TAX ARTICLES: PRODUCTIVITY AND

PARTICIPATION ANALYSES 1980–2000

Paul D. Hutchison and Craig G. White 181

EDUCATORS’ FORUM

EXPORT INCENTIVES AFTER REPEAL OF THE

EXTRATERRITORIAL INCOME EXCLUSION

Ernest R. Larkins 201

LIST OF CONTRIBUTORS

Timothy O. Bisping Department of Economics and Finance, Louisiana

Tech University, USA

Donna D. Bobek School of Accounting, University of Central

Florida, USA

Tracy L. Bundy School of Professional Accountancy, Louisiana

Tech University, USA

Ted D. Englebrecht School of Professional Accountancy, Louisiana

Tech University, USA

Alexander M. G. Gelardi College of Business, University of St. Thomas,

St. Paul, MN, USA

Richard C. Hatfield Department of Accounting, University of Texas at

San Antonio, USA

Paul D. Hutchison Department of Accounting, University of North

Texas, USA

Lynn Comer Jones Department of Accounting and Finance,

University of North Florida, USA

Sandra S. Kramer Fisher School of Accounting, University of

Florida, USA

Ernest R. Larkins School of Accountancy, Georgia State University,

USA

John J. Masselli Area of Accounting, Texas Tech University, USA

Tracy J. Noga Department of Accounting, Suffolk University,

USA

Robert C. Ricketts Area of Accounting, Texas Tech University, USA

Toby Stock School of Accountancy, Ohio University, USA

vii

viii

Craig G. White Area of Accounting, University of New Mexico,

USA

Ping Zhou Stan Ross Department of Accountancy, City

University of New York – Baruch College, USA

EDITORIAL BOARD

EDITOR

Thomas M. Porcano

Miami University

Kenneth Anderson

University of Tennessee, USA

Caroline K. Craig

Illinois State University, USA

Anthony P. Curatola

Drexel University, USA

Ted D. Englebrecht

Louisiana Tech University, USA

Philip J. Harmelink

University of New Orleans, USA

D. John Hasseldine

University of Nottingham, England

Peggy A. Hite

Indiana University-Bloomington,

USA

Beth B. Kern

Indiana University-South Bend,

USA

Suzanne M. Luttman

Santa Clara University, USA

Gary A. McGill

University of Florida, USA

Janet A. Meade

University of Houston, USA

Charles E. Price

Auburn University, USA

William A. Raabe

Columbus, USA

Michael L. Roberts

University of Alabama, USA

David Ryan

Temple University, USA

Dan L. Schliser

East Carolina University, USA

Toby Stock

Ohio University, USA

ix

AD HOC REVIEWERS

James R. Hasselback

Florida State University, USA

Ernest R. Larkins

Georgia State University, USA

Cherie J. O’Neil

Colorado State University, USA

Robert C. Ricketts

Texas Tech University, USA

Janet W. Tillinger

Texas A&M – Corpus Christi, USA

Patrick J. Wilkie

George Mason University, USA

xi

ADVANCES IN TAXATION

EDITORIAL POLICY AND

CALL FOR PAPERS

Advances in Taxation (AIT) is a refereed academic tax journal published

annually. Academic articles on any aspect of federal, state, local, or international

taxation will be considered. These include, but are not limited to, compliance,

computer usage, education, law, planning, and policy. Interdisciplinary research

involving, economics, finance, or other areas also is encouraged. Acceptable

research methods include any analytical, behavioral, descriptive, legal, quantita￾tive, survey, or theoretical approach appropriate for the project.

Manuscripts should be readable, relevant, and reliable. To be readable, manuscripts

must be understandable and concise. To be relevant, manuscripts must be directly

related to problems inherent in the system of taxation. To be reliable, conclusions

must follow logically from the evidence and arguments presented. Sound research

design and execution are critical for empirical studies. Reasonable assumptions

and logical development are essential for theoretical manuscripts.

AIT welcomes comments from readers.

Editorial correspondence pertaining to manuscripts should be forwarded to:

Professor Thomas M. Porcano

Department of Accountancy

Richard T. Farmer School of Business Administration

Miami University

Oxford, Ohio 45056

Phone: 513 529 6221

Fax: 513 529 4740

E-mail: [email protected]

Professor Thomas M. Porcano

Series Editor

xiii

PROFESSIONAL LIABILITY SUITS

AGAINST TAX ACCOUNTANTS:

SOME EMPIRICAL EVIDENCE

REGARDING CASE MERIT

Donna D. Bobek, Richard C. Hatfield

and Sandra S. Kramer

ABSTRACT

As with most professional service occupations, liability claims are a major

concern for accounting professionals. Most of the academic research on

accountants’ professional liability has focused on audit services. This study

extends research on accountants’ professional liability by examining liability

claims arising from the provision of tax services. In addition to a descriptive

analysis, the current study explores the role of merit in tax malpractice

litigation. Hypotheses are developed based on the legal construct of claim

merit, which requires the presence of accountant error and damages as a

result of that error for a claim to be considered meritorious. The hypotheses

are tested using logistic and OLS regression of 89 actual claims filed with

an insurer of tax professionals. The results suggest that the components

of merit are significant in determining both the presence of compensatory

payments to the client and the dollar amount of those payments, although

the hypothesized interaction effect is only significant for the dollar amount of

compensatory payments.

Advances in Taxation

Advances in Taxation, Volume 16, 3–23

Copyright © 2004 by Elsevier Ltd.

All rights of reproduction in any form reserved

ISSN: 1058-7497/doi:10.1016/S1058-7497(04)16001-8

3

4 DONNA D. BOBEK ET AL.

INTRODUCTION

This study examines the relationship between merit and outcome in tax malprac￾tice claims. Although this relationship seems intuitive, prior research focusing

on accountant liability in an audit setting has been unable to find a significant

link. The role of merit is of importance to accounting firms who have a vested

interest in legal reform. For example, the large accounting firms have stated

that unwarranted litigation (i.e. lacking merit) and coerced settlements are the

“principal cause” of the profession’s liability problems (Arthur Andersen & Co.

et al., 1992). Using detailed claim files from an accountant insurance company,

we explore this issue in the tax accounting profession.

Palmrose (1997) undertook a review of the audit malpractice literature in an

effort to answer the question, “do the merits of a case matter with regards to bring￾ing and resolving claims against auditors?” Kinney (1993) asserts that meritorious

claims against independent auditors require three elements: substandard financial

statements, substandard audits, and compliance with relevant legal standards

(e.g. detrimental reliance on the financial statements). However, Palmrose (1997)

suggests that the low probability of bringing a claim to court actually severs

the theoretical tie between merits and outcome. The empirical data drawn from

several studies (e.g. Dunbar et al., 1995; Palmrose, 1994) suggest that the role

of merit is inconclusive (particularly with regard to outcome). This result is due

in part to the fact that prior research generally does not undertake the question

of merit directly, and has been unable to find an adequate proxy for claim merit.

Palmrose (1997) concluded her study with a call for research that examines the

role of merit in accountant malpractice claims.

Although most research examining the issue of malpractice liability in the

accounting profession deals with auditor liability, the issue of tax professional

liability is also of concern. Several different sources have quantified the fact that

tax accounting engagements result in more claims brought by clients than any

other area of accounting practice (although audit claims are higher in total costs).

In fact, the AICPA reports that 60% of all accountant malpractice claims in the

AICPA Professional Liability Insurance program arise from tax engagements

(Anderson & Wolfe, 2001). This is up from 43% ten years ago. Donnelly et al.

(1999) note that the frequent enactment of tax law changes and the relatively

recent inclination of the IRS and the Tax Court to hold practitioners responsible

for client information has put additional pressure on small and midsize accounting

firms. This pressure, they add, has led to “more frequent and more severe mal￾practice claims arising from tax planning and preparation” (p. 59). Although the

occurrence of tax malpractice claims is quite high, the research regarding this issue

has been limited.

Professional Liability Suits Against Tax Accountants 5

This study extends prior research in both auditing and tax litigation. Tax

research in this area is fairly new and has yet to address the important relationship

between claim merit and claim outcome. And, although some audit research has

directly addressed the issue of merit (e.g. Carcello & Palmrose, 1994; Dunbar

et al., 1995), audit researchers typically have a difficult time finding an adequate

proxy for claim merit. We begin by developing a definition of claim merit based

on case law (Anderson, 1991; Rockler vs. Glickman, 1978). Specifically, we define

a meritorious case as one that contains both tax professional error and damages

occurring as a result of that error. We also hypothesize that meritorious claims

should be more likely to result in compensation being paid to the client, as well as

larger payment amounts. We examine these hypotheses with data from the files of

an insurance company (the files contain good proxies for these two components

of merit).

As prior audit research has suggested, it appears that a claim does not have to

meet the strict legal criteria of a meritorious claim in order to result in a compen￾satory payment to the client. Our results suggest that the existence of either error

on the part of the tax professional or damages incurred by the client is enough to

result in compensatory payments. However, there is a fairly large and significant

difference in the magnitude of payments for claims with both error and damages

compared to all other claims, after controlling for the overall size of the claim.

In fact, claims with both components of merit resulted in average compensatory

payments that were more than four times larger than other claims in our sample

($62,921 vs. $15,284).1 Thus, we conclude that the effect of the components of

claim merit, as suggested by case law, are a significant determinant of both the like￾lihood of compensatory payments being made, and the amount of those payments.

The remainder of this article is organized as follows. In the next section, prior

research regarding professional liability of accountants is discussed; followed by

a definition of claim merit and development of the hypotheses. This is followed

by a description of the variables and descriptive data regarding the sample. In

the next section, results are reported and discussed. Finally, conclusions and

opportunities for future research are discussed.

PRIOR RESEARCH

There are two streams of research on which this study draws. First, there is

some prior research that deals directly with tax accountant liability, although

this research does not address the issue of claim merit. Second, there is a larger

body of research regarding audit litigation. The audit environment shares some

key characteristics with the tax environment. For example, both originate from

6 DONNA D. BOBEK ET AL.

accounting firms that may have relatively deep pockets. Second, the rate at which

tax claims are brought to trial is similarly low (11% for our sample vs. 10% for

Palmrose (1991)). However, there also are differences. The key difference is that

tax professionals serve as paid advocates of the client, while auditors work for the

shareholders and are required to be independent of the client’s managers. Further,

in the current study we focus on tax professionals from small firms, while most

audit research has examined Big 5 accountants. Russell (2002) presents survey

results demonstrating that the median firm size of CPAs in private practice focused

on tax work is just one or two professionals, while the average firm size is around

four professionals.

Prior Tax Research

The literature on tax practitioner liability is in the early stages and primarily de￾scriptive in nature. Prior descriptive research has addressed issues such as: which

areas of tax planning/compliance are more likely to result in malpractice claims

(e.g. Anderson & Wolfe, 2001; Demery, 1995; Donnelly & Miller, 1990, 1995;

Donnelly et al., 1999), and tips for avoiding malpractice claims (e.g. Anderson,

1991; Bandy, 1996; Holub, 2001; Kahan, 1999; Yancey, 1996). Areas that were

repeatedly identified as problem areas include S Corp elections, complex areas

such as estate tax and partnership taxation, like-kind exchanges, and filing errors

(Anderson & Wolfe, 2001; Donnelly & Miller, 1995; Donnelly et al., 1999). Com￾mon tips for avoiding malpractice problems include the use of engagement letters,

avoiding “problem” clients and situations (e.g. divorce), proper documentation

of procedures, proper communications with the client, and adequate malpractice

insurance coverage (Anderson, 1991; Bandy, 1996; Holub, 2001; Yancey, 1996).

Although there has been some research considering factors that influence

the decision to file a claim against a tax professional (Krawczyk & Sawyers,

1995; Schisler & Galbreath, 2000), research has not yet addressed which factors

influence whether a filed claim will result in the tax professional actually making

compensatory payments. Krawczyk and Sawyers (1995) report the results of an

experiment that varied the nature of the engagement letter and the magnitude of

the IRS assessment. As hypothesized, the magnitude of the IRS assessment was

positively associated with both the likelihood of filing suit and the dollar amount

requested. Further, an engagement letter that included a statement limiting the

preparer’s financial liability to the amount of the fees paid had the expected

effect of decreasing the dollar amount requested in the suit. However, it had

the surprising effect of increasing the probability of filing a suit. Schisler and

Galbreath (2000) found that relative to non-involved observers, subjects who were

Professional Liability Suits Against Tax Accountants 7

placed in the perspective of the taxpayer were more likely to hold tax preparers

responsible for bad outcomes, while taking credit for positive outcomes.

Prior Audit Research

Palmrose (1997) reviewed the relevant audit literature in an attempt to answer

the question “does merit matter” in malpractice litigation. Her motivation for

the study was to provide input for the ongoing debate over legal reform and the

reduction of auditor liability. For example, she cites a Statement of Position by the

Big Six (Arthur Andersen & Co. et al., 1992, p. 1) which claims that “the principal

causes of the accounting profession’s liability problems are unwarranted litigation

and coerced settlements.” Palmrose’s ultimate conclusion was that the evidence

to date was not conclusive, particularly with regard to the outcome of filed claims.

Alexander (1991) provides a rationale for why merit may not be important in secu￾rities litigation. The involvement of insurance companies, officers and directors as

defendants, and certain rules of law combined to make the likelihood of carrying

such cases to court very small. Alexander argued that once the option of trial is

virtually eliminated, the outcome of malpractice claims is no longer a function

of claim merit.

Although Alexander’s conclusion may seem disturbing to the accounting

profession, it appears to be consistent with audit research involving the outcome

of audit malpractice claims. Carcello and Palmrose (1994) and Dunbar et al.

(1995) were unable to find significant results when regressing claim merit on

settlement amount. In addition to the theoretical reasons why merit may not

“matter enough” (Palmrose, 1997, p. 365), there also has been the issue of finding

an adequate proxy for claim merit.

While not satisfactorily addressing the issue of claim merit, prior research on

auditor liability has identified a number of factors that were related to litigation

outcomes. The first is characteristics of the auditor. Research has found that

firm size, experience, and number of years on the particular engagement are

significantly related to litigation outcome (Palmrose, 1988; St. Pierre & Anderson,

1984). Second, characteristics of the client, such as industry membership, financial

condition, market value, variability of return, bankruptcy, and size have been

related to audit litigation outcome (Lys & Watts, 1994; Palmrose, 1994; Stice,

1991). Third, research also has examined the event that triggered the error search.

For example, negative financial signals from the client and the client’s industry

and regulatory reviews (e.g. SEC action) have been determined to prompt the

search for errors (St. Pierre & Anderson, 1984). Finally, characteristics of the

audit also may influence the outcome (e.g. structure of the audit, portion of total

8 DONNA D. BOBEK ET AL.

revenues/independence, report type given, error type). Several of these variables

(e.g. firm size, experience, client relationship) also may be related to tax mal￾practice litigation. While we consider these variables in our “additional analyses”

section of our results, the purpose of the current study is to focus on the definition

of claim merit in a tax setting and to assess its effect on the outcome of tax

malpractice claims.

DEFINING MERIT IN A TAX SETTING

The focus of this study is to examine the relationship between the merit of a

malpractice claim and the likelihood that compensatory payments are made by

the accounting firm (or their insurance provider). Accountants are held to the

same standards of care as lawyers, doctors, and other professionals (Rockler vs.

Glickman, 1978). Anderson (1991) details the extensive malpractice case law

precedent directly related to lawyers and accountants. This case law requires both:

(1) an actual breach of duty by the professional; and (2) damages to the client

because of that breach of duty, before there can be a holding of malpractice.2

These two factors3 should be the hallmarks of a meritorious case and should be

the distinguishing factors between the group of claims for which compensatory

payments are made and the group of claims where there are no compensatory

payments.

Breach of duty or error(s) on the part of the tax professional include at least

two broad categories. First, the tax professional may provide inaccurate planning

advice or may inaccurately complete the tax return. Second, the tax professional

may inappropriately file a tax return or other tax related document (e.g. elections).

Although legally, the tax professional should not be liable unless he/she makes an

error resulting in damages to the client, the client may incur tax related damages

for reasons other than error on the part of the accountant. For example, the client

may provide inaccurate or incomplete information to the tax preparer or may

not completely follow the tax professional’s advice/instructions. Any resulting

damages would not be due to the work of the tax professional.

An error on the part of the tax accountant is only the first requirement for a

meritorious malpractice claim. The client also must incur financial damages as

a result of the error. Unfavorable consequences can originate with the IRS when

it assesses penalties for late or procedurally deficient filings or selects the return

for audit. If the return is audited, additional taxes, penalties and interest may be

assessed or the IRS may determine the return is correct as filed. While additional

taxes, penalties and interest assessed by a tax authority are likely to be the major

source of financial damage, there certainly are other tax-related damages that can

Professional Liability Suits Against Tax Accountants 9

occur as the result of an incorrect tax return. For example, missing the required date

for filing an S election could mean a firm had to file as a C corporation. If the error

was found and the proper C corporation return filed, there would be no IRS penalty

but the corporation would still suffer financial damages in the form of an increased

tax liability.

Theoretically speaking, only meritorious claims should result in compensatory

payments to the client. However, prior audit research, as well as anecdotal obser￾vation, shows that there are other reasons, including the cost involved in defending

a claim, the low likelihood of the case ending up in court, and the uncertainty

involved in proving that a claim is not meritorious, that may lead accountants (and

their insurance company) to make some form of compensatory payment even

though the merits of the claim are not completely clear. Thus, we hypothesize that

claims filed against tax professionals that are meritorious are more likely to result

in compensatory payments by the tax professional (or their insurance company)

to the client. Additionally, the compensatory payments should be, on average,

larger for claims that are meritorious than for non-meritorious claims. This leads

to the following two hypotheses, stated in alternative form:

Hypothesis 1. Claims where both tax professional error and tax-related

damages (i.e. claim merit) are present will result in a greater frequency of

compensatory payments to the client than will claims where both of these

characteristics are not present.

Hypothesis 2. Claims where both tax professional error and tax-related

damages (i.e. claim merit) are present will result in a larger dollar amount of

compensatory payments to the client, than will claims where both of these

characteristics are not present.

DATA

An insurance firm that provides liability insurance to accountants in local and

regional accounting firms with 1–100 professionals provided access to all the tax

malpractice claim files that were closed during the period of January 1994 to March

1997. All cases were no longer active (dropped, settled, or litigated) by May 1998.

The insured accounting firms are required to report to the insurer any situation

in which the accountant thinks a claim may be filed. If a claim of malpractice

is filed, the insurance company hires a tax expert to gather the facts, assess the

situation, and to recommend action to the CEO of the insurance firm. The claim

can be settled by the insurance company, dropped by the client, or litigated. The

insurance company files included the facts as set out by the tax expert, information

10 DONNA D. BOBEK ET AL.

Table 1. Descriptive Data about the Claims.

Claim Information

Number of claims in sample 89

Range of dates of incident 1989–1996

Average # of months claim opened 18 months

Who identified the issue

IRS 44%

Client 29%

CPA 11%

Other/don’t know 16%

Outcome (%)

Droppeda 44%

Settled 42%

Judge/Jury verdict 11%

Claim denied by Ins. Co. 3%

Financial Detail

All Claims Only Claims with Payments

Damage payments

Number 89 43

% of total with payments 48%

Mean payment/claim $24,811 $49,047

Legal expenses

Number 89 48

% of total with legal expenses 54%

Mean legal expense/claim $13,700 $25,116

a Includes claims where CPA was concerned about a malpractice claim and notified the insurance

company, but client never followed up.

about the accounting firm involved, and information about compensatory payments

and costs paid by the insurance company.4

Tables 1 and 2 present descriptive information about the claims, the accountants

and the clients. The dates the claims were reported to the insurance company

range from 1989 to 1996. The average amount of time it took these claims to be

closed was 18 months (considerably shorter than the 4.3 years Palmrose (1997)

reported for the non-payment auditing claims). Forty-four percent of the claims

were eventually dropped, 42% were settled and only 11% were the result of a

judge or jury verdict. Forty-eight percent of the claimants received some amount

of compensatory payment. This is similar to the percentage reported for audit

claims by Palmrose (1997). For those 43 claims that resulted in compensatory