The Effects of Financial Accounting Conformity on Recommendations of Tax Preparers.

When the "correct" tax and financial accounting treatments of a transaction are ambiguous, the choices of each may be interrelated because of the perception that aggressive (e.g., taxable income decreasing) tax positions are strengthened by conforming financial accounting treatments. From the tax preparer's perspective, the costs and benefits associated with recommending a particular tax position are partly determined by the client's intended financial accounting treatment, as well as the client's attitude toward risks resulting from aggressive tax return positions. This study reports the results of an experiment designed to document the existence of the aforementioned perception among tax preparers and to investigate the impact of financial accounting conformity with aggressive tax treatments and client risk attitude on the strength with which tax preparers recommend aggressive tax return positions. This study also raises the possibility that tax preparers may influence firms' financial accounting choices related to such transactions.