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

44 Pages Posted: 23 Sep 2011 Last revised: 12 Oct 2017

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

Date Written: March 1, 2013

Abstract

This study investigates the effect of accounting measurement and disclosure requirements on multistate income tax avoidance. 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. The accounting standards contained in FASB Interpretation No. 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 that the accounting standards would increase reported tax expense and tax payments. Consistent with this, we find that both firm-level state income tax expense and aggregate state-level income tax collections increased surrounding adoption of FIN 48, providing evidence of the association between mandatory financial reporting disclosures and tax compliance behavior.

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

JEL Classification: H25, H26, M41

Suggested Citation

Gupta, Sanjay and Mills, Lillian F. and Towery, Erin, The Effect of Mandatory Financial Statement Disclosures of Tax Uncertainty on Tax Reporting and Collections: The Case of FIN 48 and Multistate Tax Avoidance (March 1, 2013). Journal of American Taxation Association, Vol. 36, No. 2, 2014. Available at SSRN: https://ssrn.com/abstract=1931930 or http://dx.doi.org/10.2139/ssrn.1931930

Sanjay Gupta

Michigan State University - Eli Broad College of Business ( email )

632 Bogue Street, 520 BCC
East Lansing, MI 48824
United States
517-432-6488 (Phone)

HOME PAGE: http://www.broad.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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