The Effect of Unaudited Tax Positions on Corporate Tax Aggressiveness: Evidence from Statute of Limitations Lapses

Abstract

Tax authority resource constraints result in aggressive tax positions often going unaudited. This study uses statute of limitations lapses to examine the effect of unaudited tax positions on corporate tax aggressiveness. We first document that tax positions are more likely to go unaudited when firms claim less aggressive tax positions, when the tax authority has fewer resources, and when firms have more extensive geographic footprints. In our main analyses, we find that firms become less tax aggressive subsequent to positions going unaudited, consistent with firms anticipating heightened tax authority scrutiny after disclosing unaudited tax positions in their financial statements. In supplemental analyses, we find Internal Revenue Service downloads of financial statements increase after firms disclose unaudited tax positions, but tax settlements do not increase. Our findings shed light on a previously unexplored facet of taxpayer-tax authority interactions and are important in light of increased budget constraints faced by tax authorities worldwide.

Keywords: Tax Authority, Statute of Limitations, Tax Aggressiveness, Corporate Disclosure, Unrecognized Tax Benefits

JEL Classification: G30, H26, M41