The Effects of Tax Transparency on Firm Reporting Behavior

• In Event: Taxation

Abstract

Recently the reporting environment for uncertain tax positions has changed significantly, resulting in an increase in the potential costs for engaging in tax aggressiveness. In 2007, FASB required firms to disclose their aggregate tax reserves relating to uncertain tax positions in their annual financial statements, and in 2010, the IRS required firms to individually disclose their uncertain tax positions in their annual tax return. This study uses an experiment to examine how this increase in transparency influences a firm’s tax reporting and financial reporting concurrently. Specifically, we examine the two components of uncertain tax position reporting, the decision to elect an uncertain tax position and the respective reserve. We find that an increase in tax transparency has a minimal effect on a firm’s decision to elect a tax position, but has a significant impact on their reserve decision. The results indicate that a tax disclosure construct influences a firm’s financial reporting, but not tax reporting.

Authors

• Robert H. Lee, Pepperdine University

• Anthony P Curatola, Drexel University