The Effect of Increased Private Tax Disclosure on the Relevance of Reserves for Uncertain Tax Positions
Author | : Adam Manlove |
Publisher | : |
Total Pages | : 0 |
Release | : 2022 |
ISBN-10 | : 9798841729105 |
ISBN-13 | : |
Rating | : 4/5 (05 Downloads) |
Book excerpt: This study examines whether private disclosure to the tax authority improves the relevance of publicly disclosed reserves for uncertain tax positions. Schedule UTP increases private disclosure to the IRS about uncertain federal tax positions for which companies accrue and publicly disclose financial statement reserves. Prior to Schedule UTP, reserves for uncertain tax positions were overstated and lacked predictive ability for future tax cash flows. Schedule UTP increases regulatory scrutiny of tax positions underpinning the financial statement reserves and improves the IRS's detection of uncertain tax positions by providing the IRS with superior information relative to financial statements disclosures. Based on theory that managers improve financial reporting in anticipation of greater scrutiny, I predict and find that Schedule UTP improves the predictive ability of financial statement reserves for uncertain tax positions for future settlements with tax authorities. Although the objective of Schedule UTP is to improve IRS enforcement, my results are consistent with its implementation creating a positive externality in the form of more relevant accounting for uncertain tax positions. These findings have implications for the effect of private disclosure on managers' financial reporting behavior. As tax authorities continue to demand expanded private disclosures to improve tax compliance, this study provides timely evidence of how such disclosures affect accounting quality.