Measuring Tax Authority Monitoring
43 Pages Posted: 28 Apr 2019 Last revised: 11 Jul 2019
Date Written: July 9, 2019
Despite growing academic interest in tax authority monitoring, a consensus definition of monitoring has not yet emerged from this literature. Additionally, the various measures of monitoring that have been employed in prior research have a number of drawbacks. In this study, we develop a new summary measure of tax authority monitoring that can be constructed from firms’ publicly available financial statement information. Specifically, we view unrecognized tax benefit (UTB) releases due to settlements with the tax authority, net of UTB releases due to lapses in the statute of limitations, to indicate tax authority monitoring. We validate this measure by documenting its positive association with predicted determinants of tax authority monitoring including overall IRS audit probability, R&D intensity, tax haven usage, interest and penalties accrued on UTBs, and IRS attention to firms’ financial statements. We believe our measure should be useful to future researchers studying tax authority monitoring in a variety of settings.
Keywords: Tax Authority Monitoring; Tax Enforcement; Unrecognized Tax Benefits; External Monitoring
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