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The Effect of Mandatory Financial Statement Disclosures on Tax Reporting and Collections: The Case of FIN 48 and Multistate Tax Avoidance


Sanjay Gupta


Michigan State University - Eli Broad College of Business

Lillian F. Mills


University of Texas at Austin - McCombs School of Business

Erin Towery


University of Georgia

March 2013

McCombs Research Paper Series No. ACC-04-11

Abstract:     
This study investigates the effect of accounting measurement and disclosure requirements on multistate income tax avoidance. The accounting standards contained in Financial Interpretation 48 (FIN 48) require firms to record and disclose liabilities for uncertain income tax benefits based on a more-likely-than-not merit threshold of each tax position, assuming tax authorities have full information. Theoretical work and initial practitioner claims suggested the accounting standards would increase reported tax expense and tax payments. The proliferation of sophisticated state tax planning techniques combined with the complexity of varying state tax regimes make multistate taxation an area rampant with uncertainty. Consistent with this, we find that state taxes contribute substantially to reserves for uncertain tax positions. We further find that both firm-level state income tax expense and aggregate state-level income tax collections increased surrounding adoption of FIN48, providing first-time evidence of the association between mandatory financial reporting disclosures and tax compliance behavior.

Number of Pages in PDF File: 41

Keywords: state taxation, tax reserves, tax avoidance, uncertain tax benefits, ASC 740-10, FIN 48

JEL Classification: H25, H26, M41

working papers series





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Date posted: September 23, 2011 ; Last revised: May 1, 2013

Suggested Citation

Gupta, Sanjay and Mills, Lillian F. and Towery, Erin, The Effect of Mandatory Financial Statement Disclosures on Tax Reporting and Collections: The Case of FIN 48 and Multistate Tax Avoidance (March 2013). McCombs Research Paper Series No. ACC-04-11. Available at SSRN: http://ssrn.com/abstract=1931930 or http://dx.doi.org/10.2139/ssrn.1931930

Contact Information

Sanjay Gupta
Michigan State University - Eli Broad College of Business ( email )
Department of Accounting & Information Systems
N270 Business College Complex
East Lansing, MI 48824
United States
517-432-6488 (Phone)
HOME PAGE: http://www.bus.msu.edu/
Lillian F. Mills
University of Texas at Austin - McCombs School of Business ( email )
Austin, TX 78712
United States
Erin Towery (Contact Author)
University of Georgia ( email )
Terry College of Business
Athens, GA 30602-6254
United States
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