Assessing Tax Risk: Practitioner Perspectives

Posted: 16 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: July 30, 2019

Abstract

This study uses insights from tax practitioners and tax authorities to define and develop an estimate of ex-ante tax risk that is independent of common tax outcomes studied in prior literature. Validation tests confirm that our tax risk measure (1) represents 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) is a construct different from tax avoidance, tax uncertainty, and general business risk. Using our tax risk measure, we address two research questions of interest to academics and practitioners. First, we examine the association between tax risk and long-run tax avoidance and find a negative association between tax risk and future long-run cash effective tax rates (ETRs). Second, we consider the extent to which unrecognized tax benefits (UTBs) reflect tax risk, tax avoidance, or financial reporting incentives and demonstrate that our tax risk measure explains a substantial portion of UTBs, 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 the Scholes-Wolfson paradigm, 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’ ETRs. Our findings will help managers and tax practitioners focus on industry-specific tax risk components, assess risk during tax planning initiatives, exercise caution when engaging in additional risk if ETRs are low, and adapt tax risk strategies to fit specific company needs. We enhance future tax research by improving the definition and measurement 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 (July 30, 2019). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3436959

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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