Taxpayers' Tax and Financial Reporting and Auditing in a Game Theoretical Model

Wilfrid Laurier University 2000

40 Pages Posted: 27 Aug 2001

See all articles by Tao Zeng

Tao Zeng

Wilfrid Laurier University - Lazaridis School of Business and Economics

Date Written: December 2000

Abstract

In a game theoretical model, the paper analyses taxpayers' decisions on reporting both financial income and taxable income to the tax authority, and the tax authority's strategic auditing. It extends the previous research in three ways. First, we incorporate taxpayers' financial reporting decision into the model. Second, we examine taxpayers' trade-off between tax costs and non-tax costs such as the financial reporting cost. Third, we use a more general assumption on the correlation between true taxable income and underlying accounting income.

The theoretical analysis leads to three conclusions: (1) the tax authority is more likely to audit the taxpayers who are reporting high accounting income but low taxable income than those who are reporting no accounting-tax difference. (2) The tax authority is more likely to audit the taxpayers reporting low taxable income and low accounting income if they have low financial reporting costs than if they have high financial reporting costs. (3) The degree of connection between the true taxable income and the underlying accounting income affect taxpayers' reporting strategies. All the conclusions have promising implications for future empirical tests.

Keywords: Game theory, Accounting income, Taxable income, Strategic auditing, Financial reporting cost

JEL Classification: M41, H25, M49

Suggested Citation

Zeng, Tao, Taxpayers' Tax and Financial Reporting and Auditing in a Game Theoretical Model (December 2000). Wilfrid Laurier University 2000, Available at SSRN: https://ssrn.com/abstract=277901 or http://dx.doi.org/10.2139/ssrn.277901

Tao Zeng (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

250 University Avenue West
Waterloo, Ontario N2L 3C5
Canada
519-884-0710, ext. 256 (Phone)
519-884-0201 (Fax)

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