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Tax Uncertainty and Voluntary Real-Time Tax Audits

46 Pages Posted: 15 Feb 2011 Last revised: 8 May 2015

Paul J. Beck

University of Illinois at Urbana-Champaign - Department of Accountancy

Petro Lisowsky

University of Illinois at Urbana-Champaign - Department of Accountancy; Norwegian Center for Taxation

Date Written: November 13, 2013

Abstract

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.

Keywords: Compliance Assurance Process, CAP audit, FIN 48, ASC 740-10-25, tax reserve

JEL Classification: M41, M42, M48, H25

Suggested Citation

Beck, Paul J. and Lisowsky, Petro, Tax Uncertainty and Voluntary Real-Time Tax Audits (November 13, 2013). Accounting Review, Vol. 89 No. 3 2014: 867-901. Available at SSRN: https://ssrn.com/abstract=1761343 or http://dx.doi.org/10.2139/ssrn.1761343

Paul J. Beck

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
293 Commerce West
Champaign, IL 61820
United States
217-333-4563 (Phone)
217-244-3118 (Fax)

Petro Lisowsky (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

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