Who Benefits from Detailed Income Tax Disclosure?

In this study, I investigate the costs and benefits of providing detailed income tax footnotes. Specifically, I examine whether the level of specificity in a firm’s income tax footnote is associated with the value relevance of income tax numbers, analysts’ effective tax rate (ETR) forecasting ability, and uncertain tax benefit (UTB) settlements. The Financial Accounting Standards Board (FASB) launched, and finalized, the Income Tax Disclosure Project to address concerns regarding the amount of boilerplate and generic information in firm’s income tax footnotes. Firms argue that the complex and dynamic nature of income taxes will render these disclosures confusing for investors and make it more difficult for them to forecast the firm’s future cash flows. Contrary to firms’ arguments, I find that the value relevance of income tax numbers and analyst ETR forecasting ability both increase with income tax detail. However, firms face real costs for these more detailed disclosures. Firms with more detailed income tax footnotes are more likely to incur more frequent and larger UTB settlements, relative to firms with less detailed income tax footnotes. My findings are relevant for regulators and policymakers evaluating income tax disclosures and provide evidence that diverse types of financial statement users use detailed and complex income tax information when it is provided.