More Taxation through Eroded Tax Avoidance

It all makes sense now.

The US government expects to generate increased corporate tax revenue this year. Much more.

How is this possible without a tax hike?

Well, it could be possible through an increase in corporate revenues. Business growth leads to the collection of more taxes. Maybe in 1999 – but the world is different now.

Instead, the source of this new revenue is a bit more subtle. Needless to say, the Treasury Department has four holiday cards to mail this year: Deloitte, E&Y, KPMG, and PwC.

Increased audit requirements, under the Sarbanes-Oxley Act of 2002, have resulted in increased audit fees and a decline in auditor tolerance for aggressive tax avoidance programs. The loss of tax advisory fees by the Big Four is only part of the story. More profound is the fact that fewer tax avoidance schemes result in higher corporate taxes.

This makes the Treasury Department quite happy.

It’s all really straightforward.

Auditors have become less tolerant of aggressive approaches to tax and accounting practices since SOX was passed. Tax reduction programs are only effective if they push the envelope. They involve risk. Auditors were once willing to let companies accept the risk necessary to implement meaningful tax avoidance programs.

Not any more.

There are two reasons for the auditors’ newfound aversion to this risk. Obviously, auditors are sensitive to anything that looks or smells like impropriety in the wake of this decade’s major corporate governance scandals. They are gun shy. Exacerbating this timidity is the recent pursuit of KPMG by the Justice Department for its sale of allegedly abusive tax shelters.
This is a pretty nice trick. Implicitly, the government has implemented a subtle tax hike through SOX. Auditors, unwilling to approve bold tax avoidance schemes, appear to have been deputized by the IRS.