Predictable Uncertainty: The Relation between Unrecognized Tax Benefits and Future Income Tax Cash Outflows

54 Pages Posted: 5 Feb 2014 Last revised: 1 Oct 2016

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 30, 2016

Abstract

We estimate the extent to which the reserve for unrecognized tax benefits (UTBs) accrued under Financial Interpretation No. 48 (FIN 48) provides information about the realizability of future income tax cash outflows. Proponents argue that FIN 48 facilitates the ability of UTBs to predict future income tax cash outflows, while critics believe FIN 48 allows for too much discretion in accruing UTBs. We find that UTBs are predictive of future income tax cash outflows and that this empirical relation converges to one over a five-year horizon. This finding is inconsistent with claims of systematic over- or under-reserving of the UTB. We also find no change in the informativeness of income tax reserves under FIN 48 compared to prior guidance under Statement on Financial Accounting Standards No. 5. However, supporting arguments made by FIN 48 critics, we find that the relation between UTBs and future income tax cash flows is stronger for firms that (1) retain a tax and audit specialist accounting firm or (2) engage in less tax avoidance.

Keywords: unrecognized tax benefit; specialist; tax avoidance; FIN 48; ASC 740

JEL Classification: M41, M48, H26

Suggested Citation

Ciconte, Will and Donohoe, Michael P. and Lisowsky, Petro and Mayberry, Michael, Predictable Uncertainty: The Relation between Unrecognized Tax Benefits and Future Income Tax Cash Outflows (September 30, 2016). 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

Register to save articles to
your library

Register

Paper statistics

Downloads
698
Abstract Views
3,054
rank
35,369
PlumX Metrics