41 Pages Posted: 23 Sep 2011 Last revised: 1 May 2013
Date Written: March 2013
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.
Keywords: state taxation, tax reserves, tax avoidance, uncertain tax benefits, ASC 740-10, FIN 48
JEL Classification: H25, H26, M41
Suggested Citation: 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: https://ssrn.com/abstract=1931930 or http://dx.doi.org/10.2139/ssrn.1931930