The Influence of Client Preferences on Tax Professionals' Search for Judicial Precedents, Subsequent Judgments and Recommendations

Abstract

Tax professionals provide valuable services to clients by reducing uncertainty about how clients should report transactions on their tax returns. To reduce uncertainty, tax professionals research applicable authorities (e.g., judicial precedents) and provide assessments to clients of the level of authoritative support for client-favorable positions. Tax professionals have strong incentives to make accurate assessments of the strength of client-preferred positions so that clients will understand the level of risk associated with the reporting position. Further, tax professionals must make accurate assessments of authoritative support in order to maintain compliance with tax professional standards and Federal income tax regulations. Incentives notwithstanding, psychological research on confirmation bias suggests that tax professionals' client advocacy role may inhibit professionals' ability to search objectively for relevant tax authority which, in turn, might inhibit their ability to accurately assess authoritative support. We report the results of two studies that examine causes and effects of confirmation bias in tax information search. In study 1, we find that subjects' information searches emphasized cases with conclusions consistent with the client's desired outcome (i.e., positive cases) over cases inconsistent with the client's desired outcome (i.e., negative cases), despite the fact that positive cases were no more similar to the client's facts. Additional analyses indicate that the extent of this confirmation bias was positively related to their assessments of the likelihood that a neutral court would resolve the issue in the client's favor and this in turn increased the strength with which they recommended the client's preferred tax position. Results of study 2 indicate that confirmation bias induced by client preferences can be strong enough to not only result in inaccurate assessments of authoritative support for the client-favored position, which is problematic in and of itself, but also to lead tax professionals to make overly aggressive recommendations.