IRS Attention

• In Event: Taxes and Financial Reporting

Abstract

In its monitoring role, the IRS has access to substantial private information, but some have argued that it also accesses complementary public information from firms’ financial statements. The presumption that the IRS accesses public financial statements could in turn alter firms’ disclosure patterns of tax-related information. We employ a novel dataset that records the IRS’s access to 10-Ks hosted on EDGAR, which we term “IRS attention,” and examine the determinants and consequences of changes in IRS attention. We find evidence that IRS attention is associated with various measures of tax avoidance, and has surged since the FASB required increased disclosure of tax contingencies under FIN 48. We then examine firms’ responses to anticipated IRS examination of financial accounting disclosures. We find that after the implementation of Schedule UTP and Schedule M-3, which both increased the level of private tax reporting to the IRS, the amount of public disclosure in the tax footnote also increased, consistent with the perception of proprietary costs of disclosure in the tax footnote among public firms. Overall, this study shows evidence of substantial IRS attention and of an important interplay between IRS-required private disclosures and firm’s public disclosure patterns.

Authors

• Zahn Bozanic, The Ohio State University

• Jeffrey Lamro Hoopes, The Ohio State University

• Jacob Thornock, University of Washington

• Braden Williams, University of Washington