The CPA's role in income tax compliance: an empirical study of variability in recommending aggressive tax positions

The primary research objective of this study was to examine whether certain variables, descriptive of the tax professional (CPA) and the objective situation, are related to the decision to recommend aggressive tax positions to clients. Based on prior research in the tax compliance area, a model was specified that hypothesized a relationship between situational factors, sanction attitudes, and locus of control (LOC) and the aggressive tax position recommendation decision (as well as certain moderating effects of LOC). To test these relationships, a research instrument containing hypothetical tax decision issues was administered in the field to 119 employees or partners of the tax department of an international CPA firm.

The resulting analysis supported the situational factor/aggressive position decision linkage. Size of tax savings, probability of audit, probability of position examination (given audit), and client importance were all associated with the subjects' willingness to recommend aggressive tax positions, with the client factor only important at certain levels of the other factors. Additionally, the analysis indicated that the situational factor/aggressive position linkage was not contingent on relative LOC classification. The direct relationship between attitude toward sanctions and the aggressive position decision was supported. Subjects who indicated a greater belief in the deterrence value of the tax practice sanctions were less willing to recommend the aggressive tax position. The direct linkage between LOC and the aggressive position decision was not supported. However, LOC did moderate the strength of the relationship between sanction attitude and the aggressive position decision, with sanction attitude providing greater predictive ability for the recommendation decisions of externals.

The study's findings suggest that CPAs do not make simple normative decisions regarding the correctness of a particular tax position. Rather, CPAs may consider other factors-and their effect on perceived benefits and costs for the CPA and/or client-when faced with ambiguous tax issues. On a prescriptive note, however, the results indicate a positive role for tax practice sanctions in deterring the recommendation of aggressive positions by CPAs.