This study investigates the factors associated with firms' decisions to outsource corporate tax‐planning and ‐compliance activities. The results indicate that transaction costs relating to human‐asset specificity, proprietary technology, and economies of scale, along with the status of firms' top tax professionals and recent growth, are factors that help explain variation in the proportion of 1997 tax‐planning expenditures made to external service providers. In contrast, only firm size and growth help explain variation in the proportion of tax‐compliance activities outsourced. Finally, the results indicate that firms with more of a tax‐planning focus outsource greater (lesser) proportions of their tax‐planning (‐compliance) activities. These results provide the first empirical evidence relating to the economic motivations behind tax function outsourcing.

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