IRS Scrutiny and Corporate Innovation

Contemporary Accounting Research, Forthcoming

58 Pages Posted: 17 May 2018 Last revised: 27 Jul 2023

See all articles by Nathan C. Goldman

Nathan C. Goldman

North Carolina State University - Department of Accounting

Niklas Lampenius

University of Hohenheim - Faculty of Business, Economics and Social Sciences

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Arthur Stenzel

NHH - Norwegian School of Economics

Jose Elias Feres de Almeida

Federal University of Espirito Santo (UFES); University of Texas Rio Grande Valley (UTRGV)

Date Written: July 27, 2023

Abstract

The Internal Revenue Service (IRS) administers tax laws enacted by Congress. As part of the IRS’s duties, they often consider taxpayers’ financial statements to help ensure accurate tax reporting and payments. We posit that enhanced financial statement disclosures of tax information under FASB Interpretation Number 48 (FIN 48) lead to more IRS scrutiny and alter the incentives for corporate innovation. Using patent applications as a measure of corporate innovation, we employ a difference-in-difference research design with publicly listed U.S. firms as the treatment group and privately held U.S. firms not subject to the disclosure requirements as the control group. We find robust evidence that following the onset of FIN 48, the number of patent applications by publicly listed firms decreased by 15.4% to 24.3% relative to private firms. This decline in patent applications is attributable to incremental innovation, suggesting that firms lower innovation related to projects with tax benefits that are more likely to be scrutinized by the taxing authorities. These findings suggest that there are real effects of IRS scrutiny and, in particular, real effects of tax disclosures under FIN 48 on corporate innovation.

Keywords: IRS Scrutiny; Unrecognized Tax Benefits, FIN 48, Radical Innovation, Incremental Innovation, Patents, Backward Citations

JEL Classification: M40, M41, M48, O30, O38

Suggested Citation

Goldman, Nathan C. and Lampenius, Niklas and Radhakrishnan, Suresh and Stenzel, Arthur and Almeida, Jose Elias Feres de, IRS Scrutiny and Corporate Innovation (July 27, 2023). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3174891 or http://dx.doi.org/10.2139/ssrn.3174891

Nathan C. Goldman (Contact Author)

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Niklas Lampenius

University of Hohenheim - Faculty of Business, Economics and Social Sciences ( email )

Stuttgart, 70593
Germany

Suresh Radhakrishnan

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

Arthur Stenzel

NHH - Norwegian School of Economics ( email )

Helleveien 30
Bergen, NO-5045
Norway

Jose Elias Feres de Almeida

Federal University of Espirito Santo (UFES) ( email )

Vitoria, Espírito Santo 29075-910
Brazil

University of Texas Rio Grande Valley (UTRGV) ( email )

1201 W. University Dr.
Edinburg, TX
United States

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