The predictive ability of tax contingencies for future income tax cash outflows

53 Pages Posted: 5 Feb 2014 Last revised: 17 Sep 2023

See all articles by Will Ciconte

Will Ciconte

University of Illinois at Urbana-Champaign - Department of Accountancy; University of Florida - Fisher School of Accounting

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy

Petro Lisowsky

Boston University Questrom School of Business; Norwegian Center for Taxation

Michael Mayberry

University of Florida - Fisher School of Accounting

Date Written: September 13, 2023

Abstract

Prior research shows that contingent liabilities do not accurately predict future cash payments due to the managerial discretion afforded by accounting standards. We examine the extent to which current accounting guidance for a material contingent liability—the reserve for unrecognized tax benefits (UTBs) under FIN 48—generates accruals that are predictive of future income tax cash outflows. We document that UTBs fully unwind as cash tax payments over the subsequent five years, suggesting that managers, on average, accurately incorporate their expectations of future tax liabilities. This result persists for firms that are (1) most affected by the implementation of FIN 48, (2) unable to impound detection risk into their reserves, (3) engaged in relatively more ex-ante tax avoidance, (4) suspected to have engaged in earnings management through the tax accounts, and (5) subject to plausibly exogenous shocks to tax reporting. Overall, our results suggest that current accounting guidance under FIN 48 for contingent tax liabilities enables managers to accurately report, and financial statement users to reliably predict, future cash obligations.

Keywords: FIN 48; ASC 740; unrecognized tax benefit; income tax

JEL Classification: M41, M48, H26

Suggested Citation

Ciconte, Will and Donohoe, Michael P. and Lisowsky, Petro and Mayberry, Michael, The predictive ability of tax contingencies for future income tax cash outflows (September 13, 2023). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2390150 or http://dx.doi.org/10.2139/ssrn.2390150

Will Ciconte

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

1206 South Sixth Street
Champaign, IL 61820
United States

University of Florida - Fisher School of Accounting ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Michael P. Donohoe (Contact Author)

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

1206 South Sixth Street
Champaign, IL 61820
United States

Petro Lisowsky

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Ste. 518H
Boston, MA 02215
United States
6173532661 (Phone)

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

Michael Mayberry

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

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