Tax partners matter more than firms when it comes to corporate taxes

Accounting firms are less important than the individual partner leading the engagement team working on a corporate tax client in terms of the impact on the business’s effective tax rate and the probability it will face an audit from the Internal Revenue Service, according to a recent study.

The study, which appears in the Journal of Accounting and Economics, drew on proprietary IRS data for public and private companies to identify the top executives, accountants, accounting firms and individual tax preparers and their impact on corporate tax outcomes.

The study found that the partner overseeing the tax prep work has twice the impact on the company’s effective tax as their firm and were a bigger factor in determining the likelihood of an IRS audit.

“We asked ourselves why some corporations pay more taxes and some pay less,” said Jaron Wilde, associate professor of accounting at the University of Iowa’s Tippie College of Business, in a statement. “The answer is that it’s the partner that matters much more than the accounting firm.” He co-authored the study with Andrew Belnap of the University of Texas and Jeffrey Hoopes of the University of North Carolina.

The researchers analyzed over 94,000 tax returns of U.S. companies with $10 million or more in assets that used an outside tax preparer between 2005 and 2016. The vast majority (91%) of the businesses were private. The professors created a model to see which of four people had the largest impact on the taxes paid by the company: the CEO, the CFO or chief accounting officer, the tax preparer partner, or the preparer’s firm. The CFO and CAO had the most impact, as it oversees the company’s financial records and hires and fires the accounting firm. But of the external parties, the individual partner at the firm had a far greater impact than the firm. The array of services promoted by firms mattered less than the individual partner who’s actually managing the tax prep process.

The researchers also looked at the partners’ demographics and found income and gender were the most significant factors. Partners who earned larger incomes had a bigger impact on their clients’ tax returns, and male partners tended to be associated with a higher likelihood of an IRS audit. On the other hand, characteristics such as age, marital status, job title or whether the partner was also an attorney had little to no impact on the outcome.