The Concerns of Linking IRS Tax Disclosures to Financial Statements on Analysts’ Effective Tax Rate Forecasts

Abstract

This study examines the effect of uncertain tax position (UTP) disclosures on analysts’ effective tax rate (ETR) 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. Overall, we find that UTB additions were originally useful to analysts in forecasting ETRs but became less useful after the implementation of the Schedule UTP form, as it likely reduced the usefulness of information for financial statement users. Our findings contribute to the debate regarding the extent of tax policy overlapping with the generally accepted accounting principles of 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 position, effective tax rate, unrecognized tax benefits, tax disclosure