Our study examines how the uniform rules of FIN 48, which governs accounting for income tax uncertainty, affect the relevance of income tax accounting. By requiring all firms to follow the same recognition and measurement process, the FASB intended FIN 48 to improve the relevance of income tax accounting. However, practitioners argue that reserves reported under FIN 48 lack relevance because they represent liabilities that will never be paid to tax authorities. Consistent with these concerns, we estimate that over a three-year period, only 24 cents of every dollar of reserves unwind via settlements. Moreover, contrary to the FASB's intention, we find no evidence that FIN 48 increased the ability of tax expense to predict future tax cash flows. Rather, we find that the predictive ability of tax expense for future tax cash flows decreases among firms for which FIN 48 is most restrictive. Finally, we find no evidence that investors identify firms for which reserves overstate future tax cash outflows and incorporate this into their valuations. Our results provide evidence that the uniform accounting rules of FIN 48 negatively affect the relevance of income tax accounting. JEL Classifications: H25; M41; M48.

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This study exploits the implementation of IRS Schedule UTP to examine how linking tax return disclosures to financial reporting for income taxes affects firms' reporting decisions. Using confidential tax return data and public financial statement data, I find that after imposition of Schedule UTP reporting requirements, firms report lower financial reporting reserves for uncertain income tax positions, but do not claim fewer income tax benefits on their federal tax returns. The reduction in reserves is concentrated among multinational firms and firms with larger reserves prior to Schedule UTP. These findings suggest that some firms changed their financial reporting for uncertain tax positions to avoid Schedule UTP reporting requirements without changing the underlying positions. In contrast with prior studies, this evidence represents a permanent, rather than a temporary, tax-induced reporting change. My results imply that linking tax return disclosures to financial reporting can have unintended effects on firms' reporting decisions.

This study investigates the effect of accounting measurement and disclosure requirements on multistate income tax avoidance. The proliferation of sophisticated state tax planning techniques combined with the complexity of varying state tax regimes make multistate taxation an area rampant with uncertainty. The accounting standards contained in FASB Interpretation No. 48 (FIN 48) require firms to record and disclose liabilities for uncertain income tax benefits based on a more-likely-than-not merit threshold of each tax position, assuming tax authorities have full information. Theoretical work and initial practitioner claims suggested that the accounting standards would increase reported tax expense and tax payments. Consistent with this, we find that both firm-level state income tax expense and aggregate state-level income tax collections increased surrounding adoption of FIN 48, providing evidence of the association between mandatory financial reporting disclosures and tax compliance behavior. JEL Classifications: H25, H26, M41.