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
Date Written: June 4, 2020
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: Suggested Citation