TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, March 14, 2017

Public Company Proximity To IRS Office Increases Audit Risk And Tax Avoidance

JournalThomas R. Kubicka (Kansas), G. Brandon Lockhart (Clemson), Lillian F. Mills (Texas & John R. Robinson (Texas A&M), IRS and Corporate Taxpayer Effects of Geographic Proximity, 60 J. Accounting & Econ. ___ (2017):

We investigate whether geographic proximity between corporate headquarters and IRS regional offices affects corporate tax avoidance and the likelihood and productivity of IRS examinations. Using geographic distance to represent information asymmetry, we find that corporations avoid more tax when located closer to the IRS unless they are close to an IRS industry specialist. This finding is consistent with taxpayers believing proximity provides them with an information advantage over the IRS.

From the perspective of the IRS, we find that the Service is more likely to audit nearby companies and to assess more tax per hour from nearby taxpayers, except during constrained budget years. IRS audit likelihood and productivity are unaffected by the presence of nearby industry specialists, consistent with industry specialist proximity already constraining avoidance. Our tax compliance setting provides dual-party evidence on the proximity-information asymmetry hypothesis.

University of Kansas, Companies Located Near an IRS Office More Likely to Face an Audit and Avoid More Taxes:

Geographic proximity to Internal Revenue Service offices make it more likely public companies will face an audit, but those companies also engage in greater tax avoidance, according to a study led by a University of Kansas accounting researcher.

"The intuition is that when two parties operate in close proximity there is more information on both sides. I know more about you. We may not have met, but we have mutual friends. And people I know may have dealt with you," said Tom Kubick, assistant professor of accounting in the KU School of Business.

Kubick and his co-authors had their findings published recently in the Journal of Accounting and Economics. They examined tax records of public companies from fiscal years 1996 to 2012 and found a positive association between a company's geographic proximity to an IRS territory manager’s office and IRS audit likelihood as well as tax avoidance.

They found one exception. There is less tax avoidance when companies are also in close proximity to an IRS industry specialist, who has specialized expertise in industry-specific tax issues. For example, oil and gas companies in Texas or technology companies in California would generally be more likely to be near industry specialists because those regions are hubs for those types of companies. ...

The study could provide insight for the IRS in how it organizes regional enforcement and deploys industry specialists, and how geographic proximity influences corporate taxpayer behavior. "For policymakers and perhaps even investors," Kubick said, "documenting this dual-party relationship that distance matters even in the information age is interesting."

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As a young lad, I worked in large case. We called it the large case retirement program. We got our own offices and life was good. Most of the adjustments came from the engineers blowing out real estate for the investment tax credit.

Posted by: Dale Spradling | Mar 14, 2017 6:52:41 AM