The consequences of linking IRS tax disclosures to financial statements on analysts’ effective tax rate and earnings forecasts

Posted: 12 Jul 2021

See all articles by Dana Hollie

Dana Hollie

Louisiana State University, Baton Rouge - Department of Accounting

Russell Barber

University of Colorado Denver

Norman Massel

Loyola University of Chicago

Date Written: July 6, 2021

Abstract

This study examines the effect of uncertain tax position (UTP) disclosures on analysts’ effective tax rate (ETR) and earnings forecasts. The Internal Revenue Service (IRS) requires that firms provide detailed information about UTPs reported in their annual 10-K filings on their Schedule UTP form. Schedule UTP applies to federal tax positions for which a corresponding tax reserve has been created for financial reporting purposes. Academics and practitioners have deliberated whether Schedule UTP disclosures could lead to firms altering how they account for their unrecognized tax benefits (UTBs) in financial statements in an effort to report fewer UTPs on Schedule UTP. Overall, we find that analysts’ ETR and earnings forecast errors increased after Schedule UTP implementation, which suggests that Schedule UTP reduced the usefulness of information for financial statement users. We also find that that ETR forecast errors are greater for firms that have a lower probability of inclusion in the IRS Coordinated Industry Case (CIC) program. Our findings contribute to the debate regarding the extent of tax policy overlapping with Generally Accepted Accounting Principles financial reporting. Our results are also timely given that the Treasury Department is currently considering additional Schedule UTP disclosure requirements, which may further incentivize firms to alter UTB reporting in their financial statements.

Keywords: uncertain tax positions, disclosure quality, effective tax rates, analysts’ earnings forecasts, unrecognized tax benefits

JEL Classification: M41

Suggested Citation

Hollie, Dana and Barber, Russell and Massel, Norman, The consequences of linking IRS tax disclosures to financial statements on analysts’ effective tax rate and earnings forecasts (July 6, 2021). Available at SSRN: https://ssrn.com/abstract=3882118

Dana Hollie (Contact Author)

Louisiana State University, Baton Rouge - Department of Accounting ( email )

E.J. Ourso College of Business Administration
2800 Business Education Complex
Baton Rouge, LA 70803
United States

Russell Barber

University of Colorado Denver ( email )

United States

Norman Massel

Loyola University of Chicago ( email )

25 East Pearson Street
Chicago, IL 60611
United States

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