FIN 48 and Tax Compliance

Abstract

We develop a model to examine the effects of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on the strategic interaction between publicly traded corporate taxpayers and the government. Several of our findings contradict conjectures voiced by members of the business community regarding the economic effects of implementing FIN 48. Specifically, taxpayers with strong facts obtain higher expected payoffs from uncertain tax benefits and some disclosed liabilities understate the expected tax liability. Consistent with the common conjectures, however, some taxpayers are more likely to be audited or are deterred from entering into transactions that generate uncertain tax benefits because of FIN 48.

Boon or Bane? Advance Tax Rulings as a Measure to Mitigate Tax Uncertainty and Foster Investment

“…The unfavorable treatment, for example, might be due to the non-deductibility of outflows or double taxation. 7 Similar to Mills et al (2010) p. 1726, who also gives an example for the discrete nature of tax disputes. 8 The parameter ∆ can be interpreted as follows.…”

“…We assume that investments are distributed uniformly in the interval [0, ] in the economy, where is the exogenously given upper boundary of the interval of cash flows. I.e., the tax authority is able to forecast its revenues, although the investors' decision remains characterized by tax uncertainty, which is consistent with Mills et al (2010). To keep things simple, we consider the case ≤ ∆.…”

“…Tax uncertainty arises from the difficulty in applying ambiguous tax laws and anticipating the consequences of a future tax audit (Mills, Robinson, and Sansing, 2010;Lisowsky, Robinson, and Schmidt, 2013). Prior to making an investment decision, investors must forecast the prospective tax burden, as it can be a significant cost factor.…”

Earnings Management through Tax Reserves and Auditor-Provided Tax Services

“…Moreover, FIN 48 has been the biggest change in financial accounting for income taxes over the past decade (Mills, Robinson, & Sansing, 2010) and is believed to have had widespread effects. More studies examining the economic consequences of FIN 48 are needed for us to better understand FIN 48 and its implications.…”

“…Moreover, for the first time, FIN 48 requires explicit disclosure of tax reserves (Note 8). FIN 48 has been the biggest change in financial accounting for income taxes over the past decade (Mills, Robinson, & Sansing, 2010) and is believed to have had widespread effects. One of its potential effects is to decrease earning management through tax reserves (Cazier et al, 2015;Gupta et al, 2016).…”