Entity structure and taxes: An analysis of embedded pass-through entities

Ashish Agarwal, Shannon Chen, Lillian F. Mills

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

We examine the effect of pass-Through entities embedded in corporate structures on tax avoidance, tax uncertainty, and tax noncompliance using unique, confidential tax return data that link corporations and pass-Through entities together through Schedules K-1. We develop measures of the use of pass-Through entities such as the number and connectedness of pass-Throughs within the structure, the presence of loss pass-Throughs or asymmetric allocations of such losses, and connections to entities external to the firm. We predict and find that these features are associated with lower effective tax rates, higher current-year additions to tax reserves, and larger amounts of proposed IRS audit adjustments, controlling for probability of audit selection. This large-sample evidence could help the IRS understand how pass-Throughs affect compliance and financial statements users anticipate the tax effects related to entity structure.

Original languageEnglish (US)
Pages (from-to)1-27
Number of pages27
JournalAccounting Review
Volume96
Issue number6
DOIs
StatePublished - Apr 2022
Externally publishedYes

Keywords

  • Entity structure.
  • Tax avoidance
  • Tax noncompliance
  • Tax uncertainty

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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