research topics in tax law

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• PRACTICE & PROCEDURES

Practical highlights of recent tax research

• Individual Income Taxation
• Personal Financial Planning
• Tax Planning
• Practice Management & Professional Standards
• Client communications
• IRS Practice & Procedure
• Collections, Liens & Levies
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Perhaps more than ever, recent years demonstrate the increasing importance of taxation for both businesses and individuals. This article distills research published in tax and accounting journals of interest to tax practitioners. The first study presents evidence on the importance of training for tax professionals in dealing with contentious client interactions. The next three studies provide insights on taxpayer responses to tax incentives and government efforts to increase tax compliance and awareness. A final study examines how companies adjust their tax planning decisions in response to those of their competitors. Collectively, these studies have been published in The Journal of the American Taxation Association , National Tax Journal ,and Journal of Accounting and Economics.

A recent study in The Journal of the American Taxation Association examines the relationship between tax professionals and their clients when a disagreement occurs due to a controversial tax position. 1 In contrast to the frequently researched subject of auditor - client relationships, tax professional - client interactions are seldom examined. Phase one of the two - phase study surveyed public accounting professionals to gather information about the types of contentious client situations that occur, the persuasion tactics used, and the relationship status between tax professional and client after resolution of the issue. Based on information gathered in phase one, the authors created a second survey to analyze details about the nature of contentious interactions, persuasion tactics used, negotiation training received, and recommendations from survey respondents.

Authors Donna Bobek, Derek Dalton, Amy Hageman, and Robin Radtke sent 5,200 emails to a list of South Carolina CPAs for phase one and 4,260 emails from the same list for the follow - up survey. The 140 respondents averaged over 25 years of experience, with the majority serving as partner or equivalent, and were employed by a variety of firm types and sizes.

Survey results show that the most challenging interactions occurred when a client demanded an overly aggressive position to reduce taxes. Professionals with less experience, and concerned about client retention, felt the most pressure. While most respondents indicated the need for training in the areas of negotiation, persuasion, and interpersonal skills, only 10% of professionals in the study had such a program in their firm.

The authors of the research, titled "An Experiential Investigation of Tax Professionals' Contentious Interactions With Clients," conclude with several recommendations. Firms need to develop formal training and mentoring relationships. Professionals should be clear in their communications with clients and should maintain detailed documentation of contentious conversations. The survey revealed that the most effective tactic to persuade a contentious client is to express concerns over penalty exposure. The authors suggest that less - experienced professionals should seek advice from those with more experience. Finally, the study showed the value of remaining objective and composed throughout all client interactions.

Individual retirement accounts (IRAs) play an important role for U.S. retirement savings. One - third of U.S. households (over 40 million) owned at least one IRA in 2018, and the total asset value of these IRAs was approximately $9.5 trillion, or about 33% of total U.S. retirement assets. Traditional IRAs defer taxation on contributions and gains until funds are withdrawn. To prevent taxpayers from living off of other income and never taking taxable withdrawals, the required minimum distribution (RMD) rules force account holders to begin withdrawing a minimum amount each year, beginning the year after which they reach age 72 (age 70½ if born before July 1, 1949). These distributions are taxed as ordinary income.

The RMD amount varies each year and is based on the IRA account balance and the taxpayer's age. The RMD is about 3.9% of the IRA account balance at age 72 and gradually increases to about 8.8% at age 90. Taxpayers must take RMDs from each IRA account owned, as well as from certain other retirement plans (e.g., 401(k) plans). Penalties for not taking RMDs are substantial — a 50% penalty tax on the undistributed required amount, in addition to the regular income tax that is due.

While tax - deferred IRA accounts are an effective tool to incentivize taxpayers to save for retirement, policymakers must weigh this benefit against the cost of forgone government tax revenues — approximately $17.8 billion in fiscal year 2018. The RMD rules are designed, in part, to ensure the government begins collecting its tax revenues sooner rather than later. But do the RMD rules actually cause taxpayers to withdraw more than they otherwise would? It is important for policymakers to understand how the RMD rules affect taxpayers so they can adjust the rules and help incentivize the desired behavior.

Authors Jacob Mortenson, Heidi Schramm, and Andrew Whitten used administrative tax data collected by the IRS, consisting of 1.8 million IRA holders from 2000 to 2013. They found that the RMD rules are strongly binding. 2 For every age group above 70½ years, distributions are concentrated at the RMD amount. This suggests that a significant portion of taxpayers are withdrawing only the amount required to avoid the penalty and would prefer to withdraw less. Overall, the authors estimate that about 50% of individuals would prefer to withdraw less than their RMD and that this percentage increases with age. For example, the authors estimate that between 60% to 70% of the oldest taxpayers (ages 85-100) would prefer to withdraw less. The authors also found that people tend to close their IRA accounts when they turn 70½ and the RMD rules begin, especially when their account balance is small. This suggests that some IRA holders view the hassle of complying with the RMD rules as outweighing any benefits from their IRA's tax deferral.

Last, the authors examined the effects of a 2009 temporary suspension of the RMD rules, passed by Congress in response to the financial crisis and depressed asset values. Interestingly, they found that about 26% of individuals made a withdrawal in 2009 that closely approximated what their RMD would have otherwise been, even though no distribution was required, and only 35% of those who took RMDs in 2008 suspended them for 2009. The authors discuss that this possibly occurred for several reasons. Taxpayers could have been inattentive to the temporary suspension, thought it was too much trouble to change the RMD for one year, or may have believed the RMD amounts provided reasonable guidance on withdrawals. The study's results on the 2009 temporary suspension are especially informative and timely given that the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116 - 136 , waived taxpayer RMDs for 2020 in response to the coronavirus pandemic.

A field experiment conducted with the Colorado Department of Revenue (DOR) investigated the wording on delinquent income tax notices to see if specific variations could affect tax collections. The over - 90 ,000 households analyzed in the study owed more than $85 million in state income tax. Typically, only 34% of taxpayers receiving delinquency notices made full payment by the deadline. Researchers Taylor Cranor, Jacob Goldin, Tatiana Homonoff, and Lindsay Moore conducted the study to examine the change in compliance based on modifications to one sentence in the standard tax delinquency notice. 3

Four tax notice versions were sent randomly to delinquent taxpayers. One version provided greater details about late - payment penalties, stating the specific interest rate and highlighting that the penalty would increase for each month not paid until the "statutory maximum is reached." A second letter discussed penalties, including an incentive to make payment to avoid the interest rate doubling after 30 days. The third delinquency notice stated the interest rate effective for 30 days and included an appeal to social norms, stating that 90% of Colorado taxpayers pay their taxes on time. Finally, the control version, sent by the DOR in prior years, stated that the delinquent taxes included interest and penalties according to state law but indicated nothing specific about further penalties.

Results showed that the notice containing detailed wording about increasing penalties improved compliance by 4.1% compared with the control notice, as measured by the fraction of taxpayers creating a payment plan or making a full payment before the statutory deadline. The notice reminding taxpayers of increasing penalties that omitted specific details other than the avoidance of future interest increases improved compliance by approximately 2%. Finally, the notice appealing to social norms resulted in the same compliance rate as the control/standard notification. The compliance rates across notices were similar at low (under $95), medium ($95 to $433), or high (over $433) balances of tax due. The authors suggest that emphasizing delinquency penalties through relatively minor wording changes could result in increased collection and a reduced need for more extensive tax collection actions.

Numerous tax policies are put in place to help low - income households; however, these policies are only effective in achieving their goals if they are used as intended to benefit qualifying taxpayers. The earned income tax credit (EITC), established in 1975, is a refundable tax credit meant to subsidize low - income working families. The credit amount depends on a household's income, filing status, and number of qualifying children. The credit rises with earned income until it reaches a maximum level and then begins to phase out at higher income levels. For 2019, the maximum credit ranged from $529 for a single taxpayer with no qualifying children, to $6,557 for a married couple with three or more children. The maximum income at which married taxpayers with three or more children could claim an EITC was $55,950, although the credit is quite small ($6) at this income level. In 2016, over 27 million households claimed the EITC; about 20% of all U.S. taxpayers. However, data shows that 20% of eligible households (about 5 million) do not take advantage of the credit.

In an effort to increase taxpayer EITC claims, seven states and one city implemented a variety of laws requiring employers to inform their employees about the EITC, either through mailings, annual notifications, or posted notices in the workplace. Using IRS data from 2000-2014, authors Taylor Cranor, Jacob Goldin, and Sara Kotb examined the effectiveness of the government - mandated taxpayer notifications. 4

Results reveal that while approximately 5 million qualifying U.S. households do not take the credit, a minimal increase (0.3%) occurred in states or jurisdictions that provided notification compared with states that did not notify employees. The study suggests several reasons for the ineffectiveness, including taxpayers who do not use tax software for filing, taxpayers who do not file a return and thus are unaware of the refundable nature of the credit, a failure to read or understand the notifications, and noncompliance by employers. The authors recommend that notifications should focus on the EITC's benefits rather than laws, encourage taxpayers to use tax preparation software, and educate taxpayers about the EITC for childless taxpayers.

Evidence shows that corporate decisions on research and development (R&D), advertising, and capital expenditures are influenced by management's expectations of how their peers will behave. For example, if a firm's competitors are investing in R&D, then firm management may choose to increase or decrease R&D to a comparable level. In this instance, the firm is strategically reacting to its competitors' behavior. Authors Christopher Armstrong, Stephen Glaeser, and John Kepler examined whether strategic behavior also occurs when firms make tax planning decisions. 5 Specifically, does a firm's management adjust its own tax planning decisions in response to their competitors' tax planning decisions?

To examine whether firms exhibit strategic behavior in tax planning decisions, the authors examined two different tax settings and attempted to isolate corporations' strategic reactions to the tax planning choices of their competitors. The first setting is the reduction in corporate tax rates in Ireland, where tax rates decreased from 32% to 12.5% between 1998-2003. The second setting is the staggered adoption by different states of tax policies designed to limit interstate income shifting to Delaware, a state that does not tax income earned from intangible assets.

In both the Irish and Delaware settings, the authors found that a firm's tax planning decisions appear to be influenced by the choices of their competitors. In the Irish setting, firms not directly benefiting from the tax rate decreases made other tax planning choices that lowered their tax liabilities. This suggests that these firms strategically responded to their competitors by changing their own tax planning decisions. Conversely, firms not negatively impacted by the limits on shifting income to Delaware responded by making choices that increased their state taxes. The authors attribute these reactions to firms not wanting to appear more aggressive than their competitors, since this could bring unwanted attention from tax agencies and other stakeholders. The study also found that firms adjust their own tax planning as they learn from the tax planning decisions of their industry competitors.

Overall, the research suggests that policymakers should consider both direct and indirect effects of policy choices on firms' tax planning behavior to avoid underestimating the potential effect on a government's tax revenues.

1 Bobek, Dalton, Hageman, and Radtke, "An Experiential Investigation of Tax Professionals' Contentious Interactions With Clients," 41 - 2 The Journal of the American Taxation Association 1 (Fall 2019).

2 Mortenson, Schramm, and Whitten, "The Effects of Required Minimum Distribution Rules on Withdrawals From Traditional IRAs," 72 - 3 National Tax Journal 507 (September 2019).

3 Cranor, Goldin, Homonoff, and Moore, "Communicating Tax Penalties to Delinquent Taxpayers: Evidence From a Field Experiment," 73 - 2 National Tax Journal 331 (June 2020).

4 Cranor, Goldin, and Kotb, "Does Informing Employees About Tax Benefits Increase Take - Up ? Evidence From EITC Notification Laws," 72 - 2 National Tax Journal 397 (June 2019).

5 Armstrong, Glaeser, and Kepler, "Strategic Reactions in Corporate Tax Planning," 68 - 1 Journal of Accounting and Economics (August 2019).

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• 15 Dec 2020
• Working Paper Summaries

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• 31 Aug 2020
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• 12 May 2020

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• 01 Apr 2019
• What Do You Think?

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• 20 Mar 2019

In the Shadows? Informal Enterprise in Non-Democracies

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• 30 Jan 2019

Understanding Different Approaches to Benefit-Based Taxation

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• 02 Jul 2018

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• 13 May 2018

Corporate Tax Cuts Increase Income Inequality

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• 08 Feb 2018

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• 24 Oct 2017

Tax Reform is on the Front Burner Again. Here’s Why You Should Care

As debate begins around the Republican tax reform proposal, Mihir Desai and Matt Weinzierl discuss the first significant tax legislation in 30 years. Open for comment; 0 Comments.

• 08 Aug 2017

The Role of Taxes in the Disconnect Between Corporate Performance and Economic Growth

This paper offers evidence of potential issues with the current United States system of taxation on foreign corporate profits. A reduction in the US tax rate and the move to a territorial tax system from a worldwide system could better align economic growth with growth in corporate profits by encouraging firms to invest domestically and repatriate foreign earnings.

• 07 Nov 2016

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• 18 Apr 2016

Popular Acceptance of Morally Arbitrary Luck and Widespread Support for Classical Benefit-Based Taxation

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• 20 Nov 2015

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• 07 May 2014

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SUMMING UP James Heskett's readers weigh in on Thomas Piketty and how wealth disparity is burdening society. Closed for comment; 0 Comments.

• 08 Sep 2009

The Height Tax, and Other New Ways to Think about Taxation

The notion of levying higher taxes on tall people—an idea offered largely tongue in cheek—presents an ideal way to highlight the shortcomings of current tax policy and how to make it better. Harvard Business School professor Matthew C. Weinzierl looks at modern trends in taxation. Key concepts include: Studies show that each inch of height is associated with about a 2 percent higher wage among white males in the United States. If we as a society are uncomfortable taxing height, maybe we should reconsider our comfort level for taxing ability (as currently happens with the progressive income tax). For Weinzierl, the key to explaining the apparent disconnect between theory and intuition starts with the particular goal for tax policy assumed in the standard framework. That goal is to minimize the total sacrifice borne by those who pay taxes. Behind the scenes, important trends are evolving in tax policy. Value-added taxes, for example, are generally seen as efficient by tax economists, but such taxes can bear heavily on the poor if not balanced with other changes to the system. Closed for comment; 0 Comments.

• 02 Mar 2007

What Is the Government’s Role in US Health Care?

Healthcare will grab ever more headlines in the U.S. in the coming months, says Jim Heskett. Any service that is on track to consume 40 percent of the gross national product of the world's largest economy by the year 2050 will be hard to ignore. But are we addressing healthcare cost issues with the creativity they deserve? What do you think? Closed for comment; 0 Comments.