Accepted by Merle Erickson. We obtain tax return data from the Internal Revenue Service's (IRS) Large Business & International Division (LB&I) and the Office of Tax Shelter Analysis (OTSA). As IRS data are not publicly available and are protected by nondisclosure agreements under the Internal Revenue Code, all statistics are presented in the aggregate. Firm-specific details disclosed in this manuscript are wholly derived from publicly available sources. Any opinions are those of the authors and do not necessarily reflect the views of the IRS. For their helpful comments, the authors thank Paul Beck, Jennifer Blouin, Charles Boynton, Michael Donohoe, Scott Dyreng, Michelle Hanlon, Brian Holt, David Cay Johnston (discussant), Rick Laux, Andrew Lyon (discussant), Devan Mescall, Lillian Mills, Tom Omer (discussant), Mark Peecher, Jeff Pittman, Richard Sansing, Jeri Seidman, Doug Shackelford, Jake Thornock, Ryan Wilson, and two anonymous reviewers; participants at the 2010 University of North Carolina-KPMG Tax Symposium, the 2010 IRS Research Conference, and the 2010 American Accounting Association annual meeting; workshop participants at the University of Illinois at Urbana-Champaign, Michigan State University, University of Hawaii, North Carolina State University, and University of Connecticut; and members of the Texas Tax Readings group. The authors also thank Monika Dubiel, Thomas Pan, Victoria Ruppert, and Jennifer Wu for excellent research assistance. Finally, Petro Lisowsky appreciates generous support from the PricewaterhouseCoopers Faculty Fellowship at the University of Illinois. This manuscript was formerly titled, “An Examination of FIN 48: Tax Shelters, Auditor Independence, and Corporate Governance.”
Do Publicly Disclosed Tax Reserves Tell Us About Privately Disclosed Tax Shelter Activity?
Version of Record online: 1 FEB 2013
Copyright ©, University of Chicago on behalf of the Accounting Research Center, 2013
Journal of Accounting Research
Volume 51, Issue 3, pages 583–629, June 2013
How to Cite
LISOWSKY, P., ROBINSON, L. and SCHMIDT, A. (2013), Do Publicly Disclosed Tax Reserves Tell Us About Privately Disclosed Tax Shelter Activity?. Journal of Accounting Research, 51: 583–629. doi: 10.1111/joar.12003
- Issue online: 11 APR 2013
- Version of Record online: 1 FEB 2013
- Accepted manuscript online: 17 DEC 2012 10:44AM EST
- Received 27 September 2010; accepted 27 November 2012
We examine whether public disclosures of tax reserves recently made available through Financial Interpretation No. 48 (FIN 48) reflect corporate tax shelter activities. Understanding this relation is important to corporate stakeholders and researchers keen to infer the aggressive nature of a firm's tax positions from its tax reserve accrual. Our study links public disclosures of tax reserves with mandatory private disclosures of tax shelter participation as made to the Internal Revenue Service's Office of Tax Shelter Analysis. We find strong, robust evidence that the tax reserve is positively associated with tax shelters, while other commonly used measures of tax avoidance are not. Based on out-of-sample tests, we also show that the reserve is a suitable summary measure for predicting tax shelters. The tax benefits of tax shelters are economically significant, accounting for up to 48% of the aggregate FIN 48 tax reserves in our sample.