Bridging the reporting gap: A proposal for more informative reconciling of book and tax income

Sep 19, 2026

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A draft academic paper reviews the history and purpose of the corporation income tax return’s Schedule M-1 in the context of modern corporate reporting issues. It argues that, while Schedule M-1 traditionally supported audits, its existing form offers insufficient detail for complex reconciliation between book and tax accounting numbers. The paper proposes a modified M-1 to improve reconciliation and evaluates benefits and drawbacks of public disclosure of such data.

LanguageEnglish

CategoryGeneral

FormatPDF

Pages52

Reading Time18 min

AccessFree to download

Introduction

Differences between book and tax income

Historical context and Tax Reform Act of 1986 (TRA86)

Shift to concerns about tax shelters and structured arrangements

Calls for public disclosure and policy debate

Bridging the reporting gap: a proposal for more informative reconciling of book and tax income Lillian F. Mills University of Arizona George A. Plesko Massachusetts Institute of Technology Draft 1: January 17, 2003 Current: April 2, 2003 Draft manuscript for the April 25, 2003 conference on"Public Disclosure of Corporate Tax Returns: An Academic Look at How (and Whether) It Would Work,"To be hosted by the Brookings Institution and sponsored by the UNC Tax Center, Urban-Brookings Tax Policy Center, and the National Tax Association In this paper we review the history and purpose of the corporation income tax return’s Schedule M-1 in light of recent attention to corporate reporting issues. Although the traditional role for the schedule has been to assist the audit process, the reconciliation of book to tax accounting numbers also provides information that is useful to tax analysts. We find the existing tax return Schedule M-1, largely unchanged since its introduction in 1963, provides insufficient detail for complex reconciliation issues. We propose a modified M- 1 to achieve better reconciliation, and discuss the advantages and disadvantages of public disclosure of such data. We appreciate comments from Rosanne Altshuler, Charles Boynton, Merle Erickson, Jeff Gramlich, Michelle Hanlon, Alvin Knott, Jay Levinsohn, Ed Outslay, Gil Manzon, Gary McGill, Kaye Newberry, John Phillips, Sonja Rego, Richard Sansing, Doug Shackelford, Terry Shevlin, Joel Slemrod and Connie Weaver. Lillian F. Mills University of Arizona 301N McClelland Hall Tucson AZ 85721 520-621-3786 (voice) 520-621-3742 (fax) [lmills@u.arizona.edu](lmills@u.arizona.edu) George A. Plesko Sloan School of Management, MIT 50 Memorial Drive, E52-325 Cambridge, MA 02142 617-253-2668 (voice) 617-253-0603 (fax) [gplesko@mit.edu](gplesko@mit.edu) Bridging the reporting gap: A proposal for more informative reconciling of book and tax income Introduction A spate of high-profile cases involving profitable corporations reporting little or no taxable income, or engaging in transactions that increased their financial income without affecting their current tax liabilities, have drawn attention to the sources and magnitudes of differences between tax and book income.1 The Wall Street Journal (January 29, 2003,“The Corporate Reform Tax Cut”) critiques current financial reporting disclosures as follows: Ending the double taxation of dividends would also bring more transparency to corporate accounting. Currently it is almost impossible to know a firm's tax bill by looking at its financial statements, and thus it is impossible to figure out what actual profits are. Profits reported to the IRS, where firms have less discretion in making calculations, are considered to be closer to the truth, but they are confidential and unavailable to investors. Book profits and tax profits can be wildly different--a divergence, by the way, that increased markedly in the 1990s. Such press reports are reminiscent of the mid-1980s, when, during the development of the Tax Reform Act of 1986 (TRA86), part of the motivation for the Alternative Minimum Tax was reports of large firms paying little or no income taxes regardless of their level of reported income. In contrast to the widespread popular press view above that taxable income is now the new standard for “actual profits,” book-tax differences were previously viewed as indicators of tax aggressiveness. In an often-quoted passage, the Joint Committee on Taxation’s staff report on TRA86 states: 1 See, for example, U. S. Treasury (1999), Plesko (2000b, 2002), Desai (2002), Manzon and Plesko (2002), Mills, Newberry and Trautman (2002) Mills and Plesko 1 5/8/2003 In particular, Congress concluded that both the perception and the reality of fairness have been harmed by instances in which corporations paid little or no tax in years when they reported substantial earnings, and may even have paid substantial dividends,

FAQs

What problem does the paper address about corporate reporting?

It examines differences between financial (book) income and taxable (tax) income, especially in cases where firms report little or no taxable income despite profitable financial reporting or transactions affecting financial income without corresponding tax liabilities.

Why focus on Schedule M-1?

The paper reviews Schedule M-1’s original purpose and shows that, although it assists audits, its largely unchanged design since 1963 provides insufficient detail for complex reconciliation between book and tax accounting numbers.

What does the paper propose and what trade-offs does it discuss?

It proposes modifying Schedule M-1 to improve reconciliation and then discusses potential advantages and disadvantages of publicly disclosing the related data.

Sep 19, 2026

Upload by Miles