Contemptuous Tax Reporting

The use of self-reporting and self-assessment principles in the collection of corporate income tax means that companies are not subject to administrative tax assessment and ex-ante examination of tax positions taken, but rather to infrequent ex-post examination of tax returns submitted by their managers. Thus, while acting as the government’s agents for the purpose of assessing corporate taxes, managers can engage in contemptuous self-reporting that involves knowingly reporting tax positions that do not conform to the tax code and prevailing tax doctrines. According to estimates provided by Congress, US companies will enjoy more than 25 billion dollars of R&D incentives in 2019 & 2020. The majority thereof will come from self-reported R&D credits claimed on companies’ tax returns. While being one of the most expensive tax expenditures claimed by corporations in the federal budget, this article argues that R&D tax incentives provide a prominent example of contemptuous tax reporting in which managers knowingly take positions that contradict prevailing tax doctrines. This article presents a novel conceptualization of contemptuous tax reporting along with empirical findings that point to the tremendous loss of tax revenues resulting from such abusive tax behavior by S&P 500 companies. Moreover, the article overcomes the challenges existing scholars face when empirically analyzing corporate tax behavior as a single homogenous phenomenon even though, normatively speaking, it encompasses both legal tax avoidance and illegal tax evasion. Following the analysis of additional empirical findings, showing a significant positive correlation between R&D expenditures and contemptuous tax reporting, this article further contributes by proposing measures for minimizing contemptuous tax reporting with respect to inflated or intentionally miscategorized R&D expenditures