The Impact of Increased Tax Return Reporting on Financial Statement Tax Disclosure Quality: Evidence from IRS Schedule UTP

This study uses the 2010 implementation of IRS Schedule UTP (Uncertain Tax Position) to examine the impact of additional tax return reporting on financial statement tax disclosure quality. Using a hand-collected sample, I find that firms reduce the quality of their Financial Accounting Standards Board Interpretation No. 48 (FIN 48) disclosures for Accounting for Uncertainty in Income Taxes in response to increased proprietary costs of disclosure following the adoption of IRS Schedule UTP. Standard setters intended FIN 48 disclosures to benefit investors. Contrary to this intended outcome, I find that as tax return reporting increases, firms reduce discretionary FIN 48 disclosures, making public tax disclosures more opaque and less useful to tax authorities and other stakeholders. Thus, an unintended consequence of increased tax return reporting is lower financial statement tax disclosure quality that undermines standard setters’ goals of transparency, relevance, and comparability in financial reporting of income taxes.