Determinants and Consequences of Tax Provider Choice in the Not-for-Profit Sector

This study examines the determinants and consequences of tax service provider choice among not-for-profit (NFP) organizations. Understanding how clients choose among professional services firms for tax services is important both because of the economic significance of tax service revenues to public accounting firms and regulatory changes to the tax services market following the Sarbanes-Oxley Act. Because public accounting firms compete with law and consulting firms for tax clients, we investigate whether factors that influence the organizational structure of professions – client proximity and knowledge availability – influence clients' decisions to purchase tax services. We examine the U.S. NFP sector because the decision to purchase tax services is observable for all organizations. Furthermore, the NFP tax preparer plays a significant role in the financial reporting process because the IRS Form 990 is the primary document NFPs use to provide financial and operating information to interested parties. We find that NFPs are less likely to retain their auditor for tax services as distance to the auditor and knowledge availability increase. We document that self-preparing NFPs are more likely to misreport executive compensation on their return, and we find no differences in misreporting between auditor and non-auditor paid preparers. Finally, we find that NFPs receive lower donor contributions after changing from paid preparers to self-preparing the Form 990. Our findings should be useful to practitioners competing for potential NFP clients, regulators concerned about Form 990 disclosure quality, and NFPs concerned with the costs and benefits of purchasing external tax services versus self-preparing the Form 990