IRS Enforcement and Voluntary Tax Disclosure
Journal of the American Taxation Association, forthcoming
59 Pages Posted: 31 Jul 2017 Last revised: 3 Apr 2024
Date Written: October 1, 2023
Abstract
Although voluntary tax disclosures can improve firms’ information environments and reduce financial statement users’ costs of processing complex tax information, they can also inform tax authorities about tax avoidance strategies. This study explores the content of voluntary tax disclosures during quarterly earnings announcements and conference calls to examine the effect of IRS enforcement on managers’ voluntary tax disclosure decisions. We estimate a negative relation between IRS enforcement and voluntary tax disclosures that is concentrated in the subset of firms with high levels of tax avoidance. These results are consistent with managers having concerns about the potential costs of voluntary disclosures to tax authorities. In supplemental analysis, we find results consistent with voluntary tax disclosures benefiting analysts, but at the cost of increasing IRS attention. Collectively, our results suggest an unintended negative effect of IRS enforcement on the information environment.
Keywords: Tax enforcement; Voluntary disclosure; Tax avoidance; Proprietary costs
JEL Classification: H25, M41, M48
Suggested Citation: Suggested Citation