Early Evidence on the Determinants of Unrecognized Tax Benefits

42 Pages Posted: 30 Mar 2010  

Richard A. Cazier

University of Texas at El Paso - Department of Accounting

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Xiaoli (Shaolee) Tian

Ohio State University (OSU) - Fisher College of Business

Ryan J. Wilson

University of Oregon - Lundquist College of Business

Date Written: September 14, 2009

Abstract

This study examines the association between disclosures of unrecognized tax benefits made under FASB Interpretation No. 48 and existing measures of tax avoidance. Prior research suggests managers use discretion in accounting for income tax contingencies to meet key earnings targets. It is not clear however, whether such opportunism mitigates the signal about tax avoidance activity provided by these contingencies or whether the opportunistic use of these reserves continued following the adoption of FIN 48. We find that both the level of unrecognized tax benefits at fiscal year-end and changes in the liability linked to current year tax positions are related to firm characteristics that prior research has found to be associated with tax avoidance activity. Further, we document a significant and negative association between firms’ cash effective tax rates and the ending balance of unrecognized tax benefits. We believe this analysis will be useful to researchers and financials statement users that rely on financial statement-based measures of tax avoidance to evaluate corporate tax planning.

Keywords: Unrecognized tax benefits, FIN 48, tax contingency, tax cushion, tax avoidance

JEL Classification: M40, M41, M49

Suggested Citation

Cazier, Richard A. and Rego, Sonja O. and Tian, Xiaoli (Shaolee) and Wilson, Ryan J., Early Evidence on the Determinants of Unrecognized Tax Benefits (September 14, 2009). Available at SSRN: https://ssrn.com/abstract=1578485 or http://dx.doi.org/10.2139/ssrn.1578485

Richard A. Cazier

University of Texas at El Paso - Department of Accounting ( email )

500 W University Ave
El Paso, TX 79902
United States
915-747-7755 (Phone)

Sonja O. Rego (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

Xiaoli (Shaolee) Tian

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Ryan J. Wilson

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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