No. 101: How does technological and human controversy expertise affect tax disputes?

Abstract

Given the rising number, magnitude and harshness of tax disputes between firms and tax authorities, firms increasingly use controversy expertise as a remedy. This study investigates how two types of tax controversy expertise affect the resolution of tax disputes and compliance incentives. We distinguish between technological expertise provided by the firm’s Tax Risk Management System (TRMS) and human expertise of internal tax controversy managers or external experts. Using a game-theoretic model, we derive equilibrium strategies for a tax manager’s compliance effort, a controversy manager’s dispute resolution effort and a tax authority’s litigation decision. Absent of a controversy manager, we find that improving a firm’s TRMS quality unambiguously decreases the litigation probability. However, in the presence of a controversy manager, we surprisingly find that improving the TRMS quality crowds out compliance efforts and thereby can increase the litigation probability. Overall, we identify conditions under which additional human expertise and higher levels of technological expertise are detrimental to dispute resolution.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, ESMT Berlin, Goethe University Frankfurt and Carl von Ossietzky University Oldenburg who share the same research agenda.