The Relative Importance of Tax Reporting Complexity and IRS Scrutiny in Voluntary Tax Disclosure Decisions

57 Pages Posted: 31 Jul 2017 Last revised: 5 Jun 2020

See all articles by Anne Ehinger

Anne Ehinger

Florida State University

Joshua A. Lee

Brigham Young University

Bridget Stomberg

Indiana University - Kelley School of Business

Erin Towery

University of Georgia

Date Written: June 4, 2020

Abstract

Managers face conflicting incentives when making voluntary tax disclosure decisions. Although voluntary tax disclosures can improve firms’ information environments and reduce financial statement users’ costs of processing complex tax information, they can also inform tax authorities about potential noncompliance. This study examines how managers trade off tax reporting complexity and IRS scrutiny in voluntary tax disclosures during quarterly earnings announcements and conference calls. We find that tax reporting complexity dominates managers’ voluntary tax disclosure decisions, on average. However, for firms with the highest IRS scrutiny, the potential costs of revealing useful information to the IRS partially attenuates the positive association between tax reporting complexity and voluntary tax disclosure. Collectively, our results further our understanding of voluntary income tax disclosures by revealing a trade-off between tax reporting complexity and IRS scrutiny. Voluntary tax disclosures are an underexplored yet important area as regulators and activists worldwide call for greater tax transparency.

Keywords: Income tax expense, tax reporting complexity, Internal Revenue Service (IRS), voluntary disclosure

JEL Classification: H25, M41, M48

Suggested Citation

Ehinger, Anne and Lee, Joshua A. and Stomberg, Bridget and Towery, Erin, The Relative Importance of Tax Reporting Complexity and IRS Scrutiny in Voluntary Tax Disclosure Decisions (June 4, 2020). Available at SSRN: https://ssrn.com/abstract=3009390 or http://dx.doi.org/10.2139/ssrn.3009390

Anne Ehinger (Contact Author)

Florida State University ( email )

Tallahasse, FL 32306
United States

Joshua A. Lee

Brigham Young University ( email )

United States
801-422-3154 (Phone)

HOME PAGE: http://https://marriottschool.byu.edu/directory/details?id=37414

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Erin Towery

University of Georgia ( email )

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

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