Non-Cooperative Compliance in the Corporate Tax Audit

• Author: Bret N. Bogenschneider
• Position: PhD, JD, LLM; Assistant Prof. of Accounting & Taxation, Indiana University, East
• Pages: 67-117

NON-COOPERATIVE COMPLIANCE

IN THE CORPORATE TAX AUDIT

BRET N. BOGENSCHNEIDER*

I. INTRODUCTION

A substantial academic literature exists on the theory of the tax audit

under the methodological framework of “cooperative compliance.”

1

This

term refers to a type of responsive tax audit originating in sociological

theory,

2

and as now implemented by many taxing authorities around the

world, including in the United States, Australia, the United Kingdom,

Sweden, and the Netherlands.

3

Such programs can be thought of as a type

* Bret N. Bogenschneider, PhD, JD, LLM; Assistant Prof. of Accounting & Taxation,

Indiana University, East; bnbogens@iu.edu. Thank you to Benjamin Walker for helpful

comments. Any errors are those of the author.

1

See OECD, Co-operative Compliance: A Fr amework: From Enhanced Relationship to

Co-operative Compliance 3 (2013), https://read.oecd-ilibrary.org/taxation/co-operative-

compliance-a-framework_9789264200852-en#page1. [https://perma.cc/4CRX-K9H3].

2

Valerie Braithwaite, Responsive Regulation and Taxation: Introduction, 29 L. & POL’Y

3, 9 (2007); John Braithwaite, The Essence of Responsive Regulation, 44 U.B.C. L. REV. 475,

475–76 (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, 42–43 (2019) (citing Valerie Braithwaite, A New

Approach to Tax Compliance, in TAXING DEMOCRACY: UNDERSTANDING TAX AVOIDANCE

AND TAX EVASION 1, 1–11 (Valerie Braithwaite ed., 2003), ht tp://regnet.anu.edu.au/

sites/default/files/publications/attachments/2015-05/BraithwaiteV_TaxDem-Ch1_0.pdf

[https://perma.cc/JE6H-D46Q]); Valerie Braithwaite, Kristina Murphy & Monika Reinhart,

Taxation Threat, Motivational Postures and Responsive Regulation, 29 L. & POL’Y 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.”).

3

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. semanticscholar.org/

cd18/c6d00c4f33d87b0b1b5eeb0e305068f1ea4f.pdf [https://perma.cc/UP3F-PHQT] (“The

[OECD] framework was informed by the experiences of jurisdictions which have already

established such cooperative relationships such as Ireland, the Netherlands, and the

352 CAPITAL UNIVERSITY LAW REVIEW [48:351

of “tax incentive”

4

made available exclusively to large corporate taxpayers

providing limits on how the corporate tax audit will, or more aptly, will not,

be conducted.

5

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,

6

and (ii) IRS’s FIN 48 “Policy of

Restraint” initiative.

7

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 company’s 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. INT’L TAX. 673, 674 (2013).

4

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), https://pdfs.semanticscholar.org/ec7d/41ff63382fcd9ec0387d12b4aec

ebc54bcce.pdf [https://perma.cc/3CZ5-HGFN] (“[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

transparency.”).

5

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.”).

6

See Dennis de Widt et al., The US Compliance Assurance Proc ess: A Relational

Signalling Perspective, 5 J. TAX ADMIN. 145, 151–55 (2019).

7

Memorandum for LB&I Employees, Uncertain Tax Positions - Modified Policy of

Restraint, I.R.S. (Marc h 23, 2011), https://www.irs.gov/businesses/corporations/uncertain-

tax-positions-modified-policy-of-restraint [https://perma.cc/V4B5-XN8T]. See also Internal

Revenue Service, Announcement 2010-76, Requests for Documents Provided to Independent

Auditors, Policy of Restraint and Uncertain Tax Positions, www.i rs.gov/pub/irs-drop/a-10-

76.pdf [https://perma.cc/6SK8-4QPB] (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).

2020] NON-COOPERATIVE COMPLIANCE 353

respective policy effects of such programs, and propose an alternative realist

model of the corporate tax audit.

8

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.

9

Notably, that figure

is attributable solely to that one corporate taxpayer from just one overseas

affiliate.

10

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,

11

meaning that high-dollar figures of tax avoided may be considered typical

for program participants.

12

An estimate of the amount of aggregate tax

8

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.”).

9

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),

https://finance.yahoo.com/news/walmart-dodged-2-6-billion-151531554.html.

[https://perma.cc/6GCL-X9D4].

10

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.”).

11

de Widt et al., supra note 6, at 151 (“As of August 2016, there were 181 taxpayers

participating in the permanent CAP programme . . . .”).

12

See generally Wells, supra note 7, at 659–60. (“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