Highlights of key findings:

• The differences between book and tax income for the companies studied increased from $10 billion in 1991 to over $150 billion in 1998. Not surprisingly, each year's total book income exceeds its total tax income – a finding that would be consistent with the growing use of tax shelters.
  
• By 1998, differences between book and tax assets amounted to $1.9 trillion while differences in liabilities were $900 billion. The tax total exceeds the book total for both assets and liabilities. This finding is seen as more surprising. The researchers expected book and tax balance sheets would be about the same. Or, if they differed at all, the book assets would be higher than the tax assets – a relationship that would be consistent with the reporting of book income in excess of taxable income.

Preliminary investigations into the balance sheet differences indicate they may be attributable to a wide range of factors, including double counting of intercompany transactions, industry-specific accounting issues that involve netting of certain assets and liabilities for financial reporting purposes while showing them gross for tax purposes, and off-balance sheet transactions in connection with special purpose entities (SPEs).

Open Questions

The IRS said it provided tax data for the researchers to use in the study, but it left the conclusions to the researchers and others. The researchers, Assistant Professor Lillian Mills and Associate Professor Kaye Newberry, both of the University of Arizona Accounting Department, and IRS Senior Economist William B. Trautman, explained that they plan to work with industry experts to provide additional insights into the reasons for the data. Professor Mills said the IRS intends to post an electronic version of the paper to the Digital Daily (tax stats) part of its Web site, though it may be available sooner at the SSRN Electronic Library. Comments, suggestions and questions can be sent to Professors Mills and Newberry.

Tax Analysts published an interpretation offered by one panelist at the conference that helps justify some of the skepticism about corporate reporting today. In the past, he said, he always suspected that corporations fudge when they're talking to the IRS, but told the truth when talking to investors. Based on the research results, he says, he now wonders if companies are telling the truth to anyone. Several Treasury units plan to follow up on the study with their own reconciliations of tax-book differences. These include a research unit from the IRS's large and midsize business division and the Treasury’s Office of Tax Analysis.