Accounting for Tax Uncertainty Over Time

64 Pages Posted: 18 Jan 2024

See all articles by Mary Cowx

Mary Cowx

Arizona State University (ASU) - W.P. Carey School of Business

Mary Vernon

University of Illinois at Chicago - Department of Accounting

Date Written: December 2023

Abstract

This study documents a significant decline in reserves for uncertain tax benefits (UTBs) from 2010 to 2019. Our evidence suggests the UTB decline is not driven by changes in tax avoidance, on average, but rather by changes in financial reporting. Specifically, we find the UTB decline is largely discretionary in nature, rather than relating to changes in firm fundamentals or tax avoidance. The financial reporting changes relate to expectation updating through information gathering from at least two sources: (1) tax authority interactions and (2) peer firm UTB disclosures. Our evidence supports that tax authority interactions affect manager expectations both through direct interactions, which reveal the previously unknown tax authority treatment, and through a lack of interactions, which can signal the firm’s tax positions are less risky than previously estimated. We also find that firms mimic industry peers but not industry leaders, suggesting firms desire their UTBs to blend in with the pack. Finally, we find the decline in UTBs improves the comparability, but not necessarily the relevance, of the UTB reserve over time.

Keywords: corporate taxation, tax uncertainty, uncertain tax benefits, cash effective tax rate

JEL Classification: H32, H25, H26, M41

Suggested Citation

Cowx, Mary and Vernon, Mary, Accounting for Tax Uncertainty Over Time (December 2023). Available at SSRN: https://ssrn.com/abstract=4678373 or http://dx.doi.org/10.2139/ssrn.4678373

Mary Cowx (Contact Author)

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Mary Vernon

University of Illinois at Chicago - Department of Accounting ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States

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