Unintended Consequences of Linking Tax Return Disclosures to Financial Reporting for Income Taxes: Evidence from Schedule UTP

48 Pages Posted: 14 Feb 2013 Last revised: 12 Oct 2017

Date Written: November 21, 2016

Abstract

This study exploits the implementation of IRS Schedule UTP to examine how linking tax return disclosures to financial reporting for income taxes affects firms’ reporting decisions. Using confidential tax return data and public financial statement data, I find that after imposition of Schedule UTP reporting requirements, firms report lower financial reporting reserves for uncertain income tax positions, but do not claim fewer income tax benefits on their federal tax returns. The reduction in reserves is concentrated among multinational firms and firms with larger reserves prior to Schedule UTP. These findings suggest some firms changed their financial reporting for uncertain tax positions to avoid Schedule UTP reporting requirements without changing the underlying positions. In contrast with prior studies, this evidence represents a permanent rather than a temporary tax-induced reporting change. My results imply that linking tax return disclosures to financial reporting can have unintended effects on firms’ reporting decisions.

Keywords: IRS; Tax uncertainty; Schedule UTP; Accounting for income taxes; Disclosure

JEL Classification: H25, M41, M48

Suggested Citation

Towery, Erin, Unintended Consequences of Linking Tax Return Disclosures to Financial Reporting for Income Taxes: Evidence from Schedule UTP (November 21, 2016). The Accounting Review, Vol. 92, No. 5, 2017, Available at SSRN: https://ssrn.com/abstract=2216904 or http://dx.doi.org/10.2139/ssrn.2216904

Erin Towery (Contact Author)

University of Georgia ( email )

Terry College of Business
Athens, GA 30602-6254
United States

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