The Income Tax Compliance Cost of Big Business
Special Academic Paper
Executive Summary This study reports the results of a survey taken to determine the annual incremental cost to big business of corporate income taxation at both the federal and state/local levels. That is, companies were asked how much money they could save over the long run if these taxes were eliminated, other than the tax liability itself. The 365 companies responding to the survey came from the 1,329 companies active in the Coordinated Examination Program (CEP) of the Internal Revenue Service — a program that includes mostly large companies, often with an unusually complex income tax situation.
The survey results clearly reinforce a standard finding of tax studies: There are economies of scale in tax compliance. As companies get larger, their total cost of tax compliance increases, but it increases at a rate less than proportional to the increase in company size.
The estimated total annual cost of income tax compliance for the Fortune 500 amounts to $1.055 billion. That total corresponds to a per company average of $2.11 million. About 69.5 percent of that cost results from federal income taxation. The total estimated cost for all companies in the CEP equals $2.08 billion, resulting in a per company average of $1.57 million. About 69 percent of that cost results from federal income taxation. For the Fortune 500, an estimated 45.5 percent of the cost of federal compliance results from foreign-source income alone. The same figure for the CEP is 39.1 percent.
Most of the survey respondents strongly believed that the Tax Reform Act of 1986 increased the complexity of the federal tax code. Of the respondents that voiced an opinion, 35 .9 percent cited the AMT as the tax feature contributing most to compliance costs. Indeed, being subject to the alternative minimum tax adds 16.9 percent to incremental compliance costs.
Other key findings are as follows: Research and planning to cope with the complex and volatile tax code accounts for about 25.6 percent of Fortune 500 personnel-related compliance costs (23.2 percent for CEP companies). In addition, for each additional subsidiary or branch a company adds to its operations, incremental compliance costs increase 0.5 percent. Being subject to California income tax increases costs by nearly a third (prior to unitary tax reform). Finally, having an ongoing tax appeal adds 18.8 percent to cost; and having ongoing tax litigation adds 28.4 percent to cost.