Assessing Tax Risk: Practitioner Perspectives

64 Pages Posted: 18 Mar 2015 Last revised: 4 Aug 2019

See all articles by Stevanie S. Neuman

Stevanie S. Neuman

University of Missouri at Columbia - School of Accountancy

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Andrew Schmidt

North Carolina State University

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2019

Abstract

This study uses insights from tax practitioners and tax authorities to define and develop an ex-ante estimate of tax risk that is independent of common tax outcomes studied in the literature. Validation tests confirm that our tax risk measure (1) captures the predictable and unpredictable uncertainty inherent in the three sources of tax risk (i.e., economic risk, tax law uncertainty, and inaccurate information processing) and (2) represents a construct different from current academic tax avoidance, tax uncertainty, and general business risk measures. We then use the tax risk measure to answer two research questions. First, we find a significant, negative association between tax risk and future long-run cash effective tax rates. Second, we demonstrate that our tax risk measure explains a substantial portion of unrecognized tax benefits, incremental and relative to measures of information risk, conditional conservatism, unconditional conservatism, and tax avoidance. Our study offers a measure of tax risk that, consistent with Scholes-Wolfson, reflects the tax risk inherent in all business activities, not just tax avoidance activities, has unique industry effects, and contributes to our understanding of the factors that affect tax planning decisions and result in variation in firms’ effective tax rates. We enhance future tax research by improving the internal, external, and construct validity of tax risk.

Keywords: tax risk; uncertain tax planning; effective tax rates; uncertain tax benefits

JEL Classification: M40; M41; M49

Suggested Citation

Neuman, Stevanie S. and Omer, Thomas C. and Schmidt, Andrew P., Assessing Tax Risk: Practitioner Perspectives (June 18, 2019). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2579354 or http://dx.doi.org/10.2139/ssrn.2579354

Stevanie S. Neuman (Contact Author)

University of Missouri at Columbia - School of Accountancy ( email )

College of Business
Columbia, MO 65211
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Andrew P. Schmidt

North Carolina State University ( email )

Raleigh, NC 27695-8113
United States

HOME PAGE: http://https://poole.ncsu.edu/people/apschmid/

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