SEC Comment Letters Spur Corporate Tax Compliance

Register now

The Securities and Exchange Commission’s comment letters to public companies on their tax disclosures are prompting better tax compliance, according to a new study.

The study analyzed the impact of SEC comment letters on corporate financial statements and found that after companies received letters dealing with their taxes, a sample of nearly 500 companies increased their provision for income taxes by approximately 1.4 percentage points and their actual cash payments by 1.5 percentage points. Since the sample of firms receiving the letters had mean effective tax rates of close to 30 percent, those amounted to around 5 percent increases.

The nearly 500 companies in the sample averaged around $5.6 billion in assets, and the one-year increase in taxes they paid to federal, state and foreign governments totaled $3 billion. The study suggests the SEC and the Internal Revenue Service should coordinate their efforts and share more data to encourage better tax compliance. However, with the departure of SEC chair Mary Jo White once the new administration takes office, any attempts at better coordination with the IRS will have to wait.

“While the agencies are not prohibited from coordinating their efforts and sharing data, in point of fact they don’t,” said one of the co-authors of the study, Thomas C. Omer of the University of Nebraska-Lincoln, in a statement. “Given the results of our study, maybe they ought to consider doing so more than the minimal amount they now do.”

His co-authors on the study were Thomas R. Kubick of the University of Kansas, Daniel P. Lynch of the University of Wisconsin-Madison, and Michael A. Mayberry of the University of Florida. It appears in the November/December issue of The Accounting Review, published by the American Accounting Association.

For reprint and licensing requests for this article, click here.