Do public disclosures of investments in tax planning attract monitoring by tax authorities?

Abstract

Given the returns to investments in tax planning documented by prior studies, we predict that disclosures of investments in tax planning required by the SEC could inform tax authorities about the benefits of examining particular firms. Consistent with this notion, we find that the amount of tax non-audit services fees a firm reports in the current year is significantly associated with multiple measures of tax authority monitoring over the subsequent years. This result is stronger among firms with greater bargaining power who may be able to demand more aggressive tax planning advice from their auditors. Additionally, we find that our results are concentrated within non-audit fees related to tax planning, rather than tax compliance. Our findings contribute to research on tax enforcement and auditor-provided tax services, and have practical implications for firms considering purchasing tax services from their auditors and corporate stakeholders assessing firms’ potential exposure to tax enforcement. Further, our study has public policy implications by providing evidence of an unintended consequence of SEC disclosure requirements.