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The effect of tax audit outcomes on the reporting and valuation of unrecognized tax benefits

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  • Brushwood, James D.
  • Johnston, Derek M.
  • Lusch, Stephen J.

Abstract

We examine whether firms respond to settlements of their uncertain tax benefits (UTBs) by adjusting the related UTB reserve. A reported UTB settlement indicates that the tax authority challenged at least one of the firm's uncertain tax positions, thereby providing information to managers regarding the sustainability of similar tax strategies and outstanding UTBs. Consistent with expectations, our results suggest that UTB settlements are negatively related to the accrual for new uncertain tax positions. Further, we demonstrate that managers make less downward adjustments to the UTB reserve related to existing uncertain tax positions following settlements with tax authorities. Finally, additional analysis suggests that the valuation of UTBs is lower in the year subsequent to a UTB settlement. Collectively, our results suggest that the information gathered from tax audit outcomes influences firms to be more conservative in their tax reporting, and possibly their future tax planning as well.

Suggested Citation

  • Brushwood, James D. & Johnston, Derek M. & Lusch, Stephen J., 2018. "The effect of tax audit outcomes on the reporting and valuation of unrecognized tax benefits," Advances in accounting, Elsevier, vol. 42(C), pages 1-11.
    • Handle: RePEc:eee:advacc:v:42:y:2018:i:c:p:1-11
    DOI: 10.1016/j.adiac.2018.06.001
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    References listed on IDEAS

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    Cited by:

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    3. Hoppe, Thomas & Rechbauer, Martina & Sturm, Susann, 2019. "Steuerkomplexität im Vergleich zwischen Deutschland und Österreich: Eine Analyse des Status quo," arqus Discussion Papers in Quantitative Tax Research 240, arqus - Arbeitskreis Quantitative Steuerlehre.
    4. Li, John, 2022. "The effect of employee satisfaction on effective corporate tax planning: Evidence from Glassdoor," Advances in accounting, Elsevier, vol. 57(C).

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