Did FIN 48 improve the mapping between tax expense and future cash taxes?

Gleason, Cristi A.; Markle, Kevin; Song, Jane Z.

doi:10.1007/s11142-022-09751-8

Cited by 5 publications

(5 citation statements)

References 24 publications

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“…However, as our findings only speak to the indirect effects, we leave it to future research to consider the direct effects. (Gleason et al, 2023). Our findings provide insights into the potential unintended real effects of these enhanced tax financial statement disclosures.…”

Section: Introductionmentioning

confidence: 77%

“…These findings suggest that the SEC and FASB should potentially consider the real effects of IRS scrutiny when considering changes in tax financial statement disclosures. For instance, worldwide, there is a shift towards enhanced tax disclosures via country‐by‐country reporting of tax‐related information (De Simone & Olbert, 2022; Joshi et al, 2020; Overesch & Wolff, 2021), public tax return disclosures (Hoopes et al, 2018), and tax uncertainty disclosures (Gleason et al, 2023). Our findings provide insights into the potential unintended real effects of these enhanced tax financial statement disclosures.…”

Section: Introductionmentioning

confidence: 99%

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IRS scrutiny and corporate innovation

Goldman,

Lampenius,

Radhakrishnan

et al. 2023

Contemporary Accting Res

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The IRS administers tax laws enacted by Congress. As part of the IRS's duties, they often consider taxpayers' financial statements to help ensure accurate tax reporting and payments. We posit that enhanced financial statement disclosures of tax information under FASB Interpretation Number 48 (FIN 48) lead to more IRS scrutiny and altered the incentives for corporate innovation. Using patent applications as a measure of corporate innovation, we employ a difference‐in‐differences research design with publicly listed US firms as the treatment group and privately held US firms not subject to the disclosure requirements as the control group. We find robust evidence that following the onset of FIN 48, the number of patent applications by publicly listed firms decreased between 15.4% and 24.3% relative to private firms. This decline in patent applications is attributable to incremental innovation, suggesting that firms lower innovation related to projects with tax benefits that are more likely to be scrutinized by the taxing authorities. These findings suggest that there are real effects of IRS scrutiny and, in particular, real effects of tax disclosures under FIN 48 on corporate innovation.This article is protected by copyright. All rights reserved.

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Section: Introductionmentioning

confidence: 77%

Section: Introductionmentioning

confidence: 99%

IRS scrutiny and corporate innovation

Goldman,

Lampenius,

Radhakrishnan

et al. 2023

Contemporary Accting Res

View full text Add to dashboard Cite

show abstract

“…Robinson et al (2016) find that, for some firms, FIN 48 had a negative impact on the accounting for income taxes. In contrast, Gleason et al (2023) find that FIN 48 improved accounting for income taxes for US firms relative to non‐US firms. Distinct from both Robinson et al (2016) and Gleason et al (2023), our study examines the predictive ability of the income tax reserve itself, rather than inferring it from tax expense more broadly, and exploits data on FIN 48's effect on accounting for income taxes within US firms using the CEA at adoption.…”

Section: Introductionmentioning

confidence: 90%

“…In contrast, Gleason et al (2023) find that FIN 48 improved accounting for income taxes for US firms relative to non‐US firms. Distinct from both Robinson et al (2016) and Gleason et al (2023), our study examines the predictive ability of the income tax reserve itself, rather than inferring it from tax expense more broadly, and exploits data on FIN 48's effect on accounting for income taxes within US firms using the CEA at adoption. Our results show that FIN 48 is beneficial to financial statement users in that we find evidence of a key benefit—UTBs are reliably predictive of future income tax cash outflows, even for firms most affected by the change in accounting, where critics asserted UTBs might be less reliable, and through changes over time in tax return reporting.…”

Section: Introductionmentioning

confidence: 90%

“…We define firms with relatively lower detection risk if they are in the bottom quartile of (1) the predicted probability of Coordinated Industry Case (CIC) program assignment (LOWCIC = 1; Ayers et al, 2019), or (2) the number of Form 10-K downloads by the IRS (LOWIRS = 1) (Bozanic et al, 2017). 17 An advantage of exploiting the CEA is that we effectively use the firm as its own control, which complements Gleason et al (2023). We obtain similar results if we measure the impact of FIN 48 using the signed value of the CEA.…”

Section: Detection Risk Assumptionmentioning

confidence: 99%

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The predictive ability of tax contingencies for future income tax cash outflows

Ciconte,

Donohoe,

Lisowsky

et al. 2023

Contemporary Accting Res

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Prior research shows that contingent liabilities do not accurately predict future cash payments due to the managerial discretion afforded by accounting standards. We examine the extent to which current accounting guidance for a material contingent liability—the reserve for unrecognized tax benefits (UTBs) under FIN 48—generates accruals that are predictive of future income tax cash outflows. We document that UTBs fully unwind as cash tax payments over the subsequent five years, suggesting that managers, on average, accurately incorporate their expectations of future tax liabilities. This result persists for firms that are (1) most affected by the implementation of FIN 48, (2) unable to impound detection risk into their reserves, (3) engaged in relatively more ex ante tax avoidance, (4) suspected to have engaged in earnings management through the tax accounts, and (5) subject to plausibly exogenous shocks to tax reporting. Overall, our results suggest that current accounting guidance under FIN 48 for contingent tax liabilities enables managers to accurately report, and financial statement users to reliably predict, future cash obligations.This article is protected by copyright. All rights reserved.

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Accounting for Tax Uncertainty Over Time

Cowx,

Vernon

2024

SSRN Journal

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Did FIN 48 improve the mapping between tax expense and future cash taxes?

Cited by 5 publications

References 24 publications

IRS scrutiny and corporate innovation

IRS scrutiny and corporate innovation

The predictive ability of tax contingencies for future income tax cash outflows

Accounting for Tax Uncertainty Over Time

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