Non-Cooperative Compliance in the Corporate Tax Audit

AuthorBret N. Bogenschneider
PositionPhD, JD, LLM; Assistant Prof. of Accounting & Taxation, Indiana University, East
A substantial academic literature exists on the theory of the tax audit
under the methodological framework of “cooperative compliance.”
term refers to a type of responsive tax audit originating in sociological
and as now implemented by many taxing authorities around the
world, including in the United States, Australia, the United Kingdom,
Sweden, and the Netherlands.
Such programs can be thought of as a type
* Bret N. Bogenschneider, PhD, JD, LLM; Assistant Prof. of Accounting & Taxation,
Indiana University, East; Thank you to Benjamin Walker for helpful
comments. Any errors are those of the author.
See OECD, Co-operative Compliance: A Fr amework: From Enhanced Relationship to
Co-operative Compliance 3 (2013),
compliance-a-framework_9789264200852-en#page1. [].
Valerie Braithwaite, Responsive Regulation and Taxation: Introduction, 29 L. & POLY
3, 9 (2007); John Braithwaite, The Essence of Responsive Regulation, 44 U.B.C. L. REV. 475,
47576 (2011); see also Sjoerd Goslinga, Maarten Siglé & Robbert Veldhuizen, Cooperative
Compliance, Tax Control Frameworks and Perceived Certainty About the Tax Posit ion in
Large Organisations, 5 J. TAX ADMIN. 41, 4243 (2019) (citing Valerie Braithwaite, A New
AND TAX EVASION 1, 1–11 (Valerie Braithwaite ed., 2003), ht tp://
[]); Valerie Braithwaite, Kristina Murphy & Monika Reinhart,
Taxation Threat, Motivational Postures and Responsive Regulation, 29 L. & POLY 137
(2007); Eric Kirchler, Christoph Kogler & Stephan Muehlbacher, Cooperative Tax
Compliance: From Deterrence to Deference, 23 CURR. DIR. PSYCH. SCIENCE 87 (2014);
Dennis J. Ventry, Jr., Cooperative Tax Regulation, 41:2 CONN. L. REV. 433 (2008))
(“Cooperative compliance programmes also fit in with the broader literature on tax
compliance, in which it is recognized that the relationship between tax authority and taxpayer
is not adversarial per se, and that trust and cooperation can increase voluntary compliance.”).
Judith Freedman, Responsi ve Regulation, Risk, and Rules: Applying the Theory to
Practice, 44 U.B.C. L. REV. 627, 640–41 (2011), https://pdfs.
cd18/c6d00c4f33d87b0b1b5eeb0e305068f1ea4f.pdf [] (“The
[OECD] framework was informed by the experiences of jurisdictions which have already
established such cooperative relationships such as Ireland, the Netherlands, and the
of “tax incentive”
made available exclusively to large corporate taxpayers
providing limits on how the corporate tax audit will, or more aptly, will not,
be conducted.
Perhaps the most conspicuous examples of these types of
collaborative tax enforcement programs are here in the United States and
include the (i) IRS’s CAP Program,
and (ii) IRS’s FIN 48 “Policy of
Restraint” initiative.
Since an extensive literature already exists on the topic
of cooperative compliance, this article will focus on recent evidence, the
U.S. . . . [T]he Dutch horizontal monitoring system does require that the tax authority is
satisfied with the company´s tax control framework and that the audit committee of the
company is obliged to review the companys strategy for tax planning.”); Lotta Björklund
Larsen, What Tax Morale? A Moral Anthro pological Stanc e on A Failed Cooperative
Compliance Initiative, 5 J. TAX ADMIN. 26, 26(2019) (discussing the failure of the cooperative
compliance initiative in Sweden); L. van der Hel-van & T. Poolen, Horizontal Monitoring in
the Netherlands: At the Crossroads. 67 BULL. INTL TAX. 673, 674 (2013).
Alicja Majdanska & Jonathan Leigh Pemberton, Different Treatment, Same Outcome:
Reconciling Cooperative Compliance with the Principle of Legal Equality, 5 J. TAX ADMIN.
111, 114 (2019),
ebc54bcce.pdf [] (“[Cooperative compliance] is not based on
deterrence but aims instead t o encourage voluntary compliance. It can be thought of as a
form of tax incentive, under which taxpayers obtain some benefits in exchange for greater
Id. (“The essence of the co-operative compliance model is an exchange of transparency
for certainty. The taxpayer is expected to offer full disclosure in respect of its tax position,
while the tax administration should provide the taxpayer with certainty about its tax treatment,
ideally in advance and certainly earlier than might otherwise be the case.”).
See Dennis de Widt et al., The US Compliance Assurance Proc ess: A Relational
Signalling Perspective, 5 J. TAX ADMIN. 145, 151–55 (2019).
Memorandum for LB&I Employees, Uncertain Tax Positions - Modified Policy of
Restraint, I.R.S. (Marc h 23, 2011),
tax-positions-modified-policy-of-restraint []. See also Internal
Revenue Service, Announcement 2010-76, Requests for Documents Provided to Independent
Auditors, Policy of Restraint and Uncertain Tax Positions, www.i
76.pdf [] (citing Financial Accounting Standards Board (FASB)
ASC 740-10) (“The Internal Revenue Service is exp anding its policy of restraint in
connection with its decision to require certain corporations to file Schedule UTP [Uncertain
Tax Positi ons], Uncertain Tax Position Statement, and will forgo see king particular
documents that relate to uncertain t ax positions and the workpapers that document the
completion of Schedule UTP.); see also Bret Wells, Voluntary Compliance: This Return
Might Be Correct but Probably Isn’t, 29 VA. TAX REV. 645, 656 (2010).
respective policy effects of such programs, and propose an alternative realist
model of the corporate tax audit.
By way of background, many large corporations have applied for and
been granted access to the CAP Program, including Wal-Mart Stores, Inc.
(hereafter “Wal-Mart”) resulting in tax avoidance benefits that are alleged
by an insider to exceed $2.6 billion to that company.
Notably, that figure
is attributable solely to that one corporate taxpayer from just one overseas
Yet, this affiliate represents merely one of perhaps hundreds
within the corporate structure of Wal-Mart many of which might also have
been similarly designed to achieve hidden tax avoidance benefits. Such a
high degree of tax avoidance should be expected more widely in respect of
the other approximately 180 corporate participants in the CAP program,
meaning that high-dollar figures of tax avoided may be considered typical
for program participants.
An estimate of the amount of aggregate tax
The realist model discussed here is based on: Russell J. Leng, Influence Techniques in
Militarized Crises: R ealpolitik versus Reciprocity, in RECONSTRUCTING REALPOLITIK 125,
126 (Frank W. Wayman & Paul F. Diehl eds., 1994). (“Classical realism assumes t hat
political action is the manifestation of an ongoing struggle for power, a struggle that has its
roots in human nature. Politics consists of the pursuit of interests defined as power. At the
international level, the realist views states as unitary actors who base their actions on a
calculation of national interest in terms of their relative power.”).
Max de Haldevang Quartz, Walmart Dodged up to $2.6 Billion in US Tax Through a
“Fictitious” Chinese Entity, Former Executive Says, YAHOO! FINANCE (Sep. 5, 2019),
Id. Wal-Mart defended the position on the grounds that it was enrolled in the CAP
Program. Id. (“Walmart rejected that as sessment. These issues wer e raised years ago,
independently and thoroughly investigated at the time and the tax year covering the matter
has been closed by the IRS,a company spokesman said in an emailed statement. The IRS
also has an on-site office at Walmart full-time, year-round. Through our participation in th e
IRS Compliance Assurance Process [CAP] program, we have open and transparent
discussions, proactively share information about corporate structures as they occur, including
this matter, and provide other materials the IRS requests.Walmart has been in the voluntary
CAP program since 2005.”).
de Widt et al., supra note 6, at 151 (“As of August 2016, there were 181 taxpayers
participating in the permanent CAP programme . . . .”).
See generally Wells, supra note 7, at 65960. (“Thus, the environment today is that
companies are required to document on an issue-by-issue basis their uncertain tax positions,
to provide this self-assessment analysis to their external auditors, and then to disclose the

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