Negotiating with the tax auditor: Determinants of tax auditors' negotiation strategy choice and the effect on firms' tax adjustments

Using a survey of tax auditors, we investigate which factors determine tax auditors' choice of negotiation strategies during tax audits and analyze the effect of their chosen strategy on audit outcomes. The results show that, compared to a cooperative auditor negotiation strategy, a competitive auditor negotiation strategy is associated with significantly higher additional assessed taxes. However, the competitive strategy is associated with a lower probability that the negotiation partners will reach an agreement. These findings indicate an advantage of combining competitive and cooperative tactics (i.e., using a "mixed strategy"). We find that although this mixed strategy does not lead to significantly fewer additional taxes, it results in a higher agreement probability. Moreover, we show that the probability of using a mixed strategy increases with audit expertise and time pressure, whereas the use of a competitive (cooperative) strategy increases with the availability of higher authority (the quality of the taxpayer's financial accounting system) and a perceived competitive (cooperative or mixed) negotiation strategy of the tax advisor. In sum, our study provides new insights into how firms' tax burden is affected by negotiations between tax auditors and firms' tax advisors. The way these negotiations affect firms' tax burden is relevant for both tax policy and firms. (C) 2021 Elsevier Ltd. All rights reserved.