Tax Uncertainty and Voluntary Real-Time Tax Audits
Paul J. Beck
University of Illinois at Urbana-Champaign - Department of Accountancy
University of Illinois at Urbana-Champaign - Department of Accountancy; Norwegian Center for Taxation; Massachusetts Institute of Technology (MIT) - Sloan School of Management
November 13, 2013
Accounting Review, Vol. 89 No. 3 2014: 867-901
This study examines the empirical relation between voluntary participation in the Internal Revenue Service’s (IRS) Compliance Assurance Process (CAP) audit program, and tax uncertainty disclosed in financial statements pursuant to Financial Interpretation No. 48 (FIN 48). Based on the findings of prior analytical and empirical research, we formulate and test hypotheses about the likelihood of voluntary CAP participation and the resulting effect on FIN 48 tax reserves. We find that firms with moderate-sized FIN 48 reserves are more likely to participate in CAP than firms with either small or large reserves, indicating an inverted U-shaped relation between CAP participation rates and firms’ tax reserves. After controlling for non-random sample selection, we find that CAP firms significantly reduce their FIN 48 reserves by about 16.5% relative to non-CAP firms. However, this reduction is concentrated among firms with moderate-sized FIN 48 reserves. These cross-sectional differences are consistent with FIN 48 reserves reflecting both tax uncertainty and tax aggressiveness.
Number of Pages in PDF File: 46
Keywords: Compliance Assurance Process, CAP audit, FIN 48, ASC 740-10-25, tax reserve
JEL Classification: M41, M42, M48, H25
Date posted: February 15, 2011 ; Last revised: May 8, 2015
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