How Much Will Firms Pay for Earnings That Do Not Exist? Evidence of Taxes Paid on Allegedly Fraudulent Earnings

2004 ◽  
Vol 79 (2) ◽  
pp. 387-408 ◽  
Author(s):  
Merle Erickson ◽  
Michelle Hanlon ◽  
Edward L. Maydew
Keyword(s):  
Stock Options ◽  
Income Taxes ◽  
Financial Accounting ◽  
Accounting Earnings ◽  
Tax Returns ◽  
Tax Benefits ◽  
Additional Income ◽  
Tax Expense

We analyze a sample of firms accused of fraudulently overstating their earnings and examine the extent, if any, to which they paid additional income taxes on the allegedly fraudulent earnings. Based on restatements of current tax expense adjusted for the tax benefits of stock options, the evidence indicates that many firms included the overstated financial accounting income on their tax returns, thus overpaying their taxes in the process of inflating their accounting earnings. We estimate that the median firm sacrificed eight cents in additional income taxes per dollar of inflated pretax earnings. In aggregate, we estimate that the firms in our sample paid $320 million in taxes on overstated earnings of about $3.36 billion. These results indicate how far managers of firms are willing to go when allegedly inflating earnings.

Inferring U.S. Tax Liability from Financial Statement Information

2009 ◽  
Vol 31 (1) ◽  
pp. 29-63 ◽  
Author(s):  
Petro Lisowsky
Keyword(s):  
Stock Options ◽  
Accounting Standards ◽  
Financial Statements ◽  
Income Taxes ◽  
Financial Accounting ◽  
Financial Statement ◽  
Corporate Tax ◽  
Data Set ◽  
Accounting For Income Taxes ◽  
Tax Expense

Abstract: Using a multi-year matched tax return-financial statement data set, this study builds empirical models that infer U.S. tax liability on the corporate tax return from publicly available financial statement disclosures, including those of Statement on Financial Accounting Standards No. 109, Accounting for Income Taxes. Results show that current U.S. tax expense, the tax benefit from stock options, current-year tax cushion accrual, consolidation book-tax differences, and R&D are informative in inferring actual tax, while intraperiod tax allocation is not. Additionally, the sign of pretax book income and the existence of net operating loss carryforwards are useful partitioning variables in estimating actual tax. In general, for every dollar of current U.S. tax expense reported on the financial statements, approximately $0.70 is reported in U.S. tax liability on the tax return. The models are validated using a holdout sample, providing support for the notion that public parties can reliably use these results to estimate a firm's tax position. Additional tests reveal a hierarchy of subsamples that researchers may employ when maximizing the usefulness of tax-related disclosures in inferring U.S. tax liability.

The Pricing of Realized Tax Benefits from NOL Carryforwards: Effect of Income Statement Presentation

2008 ◽  
Vol 30 (1) ◽  
pp. 1-27 ◽  
Author(s):  
T. J. Atwood ◽  
J. Kenneth Reynolds
Keyword(s):  
Income Tax ◽  
Accounting Standards ◽  
Income Taxes ◽  
Financial Accounting ◽  
Separate Section ◽  
Income Statement ◽  
Tax Benefits ◽  
One Year ◽  
Tax Expense

ABSTRACT: We examine the pricing of realized tax benefits from net operating loss (NOL) carryforwards across income statement presentations. During the period 1987 through 1992, firms adopting SFAS No. 96 reported these tax benefits as part of income before extraordinary items (via a reduced provision for income tax expense), while non-adopting firms reported these benefits as extraordinary income items under APB No. 11. We provide evidence that NOL tax benefits were priced rationally when reported as extraordinary income items under APB No. 11; however, NOL tax benefits were overpriced, relative to their one-year-ahead persistence, when included in income before extraordinary items under SFAS No. 96. Our results suggest that the rational pricing of income tax information is affected by its presentation in the income statement, despite the clear reporting of sufficient additional details in the footnotes. Our findings provide support for the Financial Accounting Standards Board’s tentative decision to report income taxes in a separate section of the income statement.

Accounting for Tax Benefits of Employee Stock Options and Implications for Research

2002 ◽  
Vol 16 (1) ◽  
pp. 1-16 ◽  
Author(s):  
Michelle Hanlon ◽  
Terry Shevlin
Keyword(s):  
Income Tax ◽  
Stock Options ◽  
Employee Stock Options ◽  
Tax Rates ◽  
Effective Tax Rates ◽  
Marginal Tax Rates ◽  
Tax Benefits ◽  
The Impact ◽  
Tax Expense ◽  
Reported Income

This paper examines how firms account for and report the tax benefits of employee stock options (ESOs). The tax benefits of ESOs reduce taxes actually owed but enter stockholders' equity directly without reducing reported income tax expense. Failing to adjust reported income tax expense for this benefit can lead to poorly specified studies with the distinct possibility of considerable measurement error and flawed inferences. We explain the adjustments needed for more reliable estimates of effective tax rates, tax burdens, and marginal tax rates often critical to analyses of firm-specific and public policy issues. We document problems with firms' disclosures and, using a sample of large NASDAQ firms likely to be heavy users of ESOs, find that adjusting for the ESO tax benefit is essential to understanding the impact of taxes on those firms.

Unintended Consequences of Linking Tax Return Disclosures to Financial Reporting for Income Taxes: Evidence from Schedule UTP

2017 ◽  
Vol 92 (5) ◽  
pp. 201-226 ◽  
Author(s):  
Erin M. Towery
Keyword(s):  
Financial Reporting ◽  
Income Tax ◽  
Multinational Firms ◽  
Unintended Consequences ◽  
Income Taxes ◽  
Unintended Effects ◽  
Reporting Requirements ◽  
Reporting Decisions ◽  
Tax Returns ◽  
Tax Benefits

ABSTRACT 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.

scholarly journals Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification

2017 ◽  
Vol 39 (1) ◽  
pp. 45-66 ◽  
Author(s):  
John L. Abernathy ◽  
Brooke Beyer ◽  
Andrew D. Gross ◽  
Eric T. Rapley
Keyword(s):  
Forecast Accuracy ◽  
Tax Avoidance ◽  
Financial Accounting ◽  
Tax Rates ◽  
Financial Accounting Standards Board ◽  
Effective Tax Rates ◽  
Fin 48 ◽  
Income Statement ◽  
Tax Benefits ◽  
Tax Expense

ABSTRACT Financial Accounting Standards Board Interpretation No. 48 (FIN 48, FASB 2006) allows discretion regarding the income statement classification of interest and penalty expenses for unrecognized tax benefits (UTBs). We investigate whether tax avoidance, management compensation, and debt agreements affect the expense classification election and whether this discretion has implications for financial statement users. We find firms that engage in tax avoidance activities, measured by effective tax rates (ETRs) and involvement in tax disputes, are more likely to include interest and penalties in tax expense. We also find that interest and penalties are more likely to be classified as tax expense when CEO compensation is more sensitive to pre-tax income. Finally, we find that UTB interest and penalty expense classification is associated with analysts' ETR forecast accuracy, which suggests there is a potential unintended consequence related to decision usefulness of FIN 48 reporting due to expense classification discretion.

Analisis Ekualisasi SPT Masa PPN Dengan SPT PPh Badan Terhadap Kewajiban Perpajakan PT. Adiyana Teknik Mandiri

2018 ◽  
Vol 6 (3) ◽  
pp. 117-122
Author(s):  
Irham Firdauza Pratama ◽  
Hadi Sutomo
Keyword(s):  
Income Tax ◽  
Value Added ◽  
Preventive Measure ◽  
Income Taxes ◽  
Financial Statement ◽  
Corporate Income Tax ◽  
Applicable Law ◽  
Tax Returns ◽  
Tax Audit ◽  
The Difference

Many cases are related to corrections caused by the occurrence of VAT and Income Tax equalization. The difference in reporting the circulation of business on the VAT SPT with the Corporate Income Tax Return is the object of the tax authorities' examination. Basically, equalization is not to find the same number of circulation businesses but to find the cause of the difference between the VAT Period of Income Tax and the Corporate Income Tax Return. These differences are often due to differences in provisions between Income Taxes and Value Added Taxes, such as tax objects, exchange rates, and so on. The purpose of this study was to find out how to report the circulation of business between the VAT Period of VAT and Corporate Income Tax Returns of PT. AdiyanaTeknikMandiri. To find out the process and analysis of equalization between VAT Period of VAT and Corporate Income Tax Returns at PT. AdiyanaTeknikMandiri. To find out the equalization benefits of the VAT Period SPT with Corporate Income Tax Returns for companies. This study uses a comparative descriptive method with qualitative and quantitative data, namely by analyzing and processing financial statement data and existing fiscal reports, then comparing the circulation of business to the results of calculations according to the VAT Period of VAT and Corporate Income Tax Returns, then processed further to provide an explanation of the difference in business circulation generated. The results of this study indicate that PT. AdiyanaTeknikMandiri that the company in reporting the circulation of its business has not been reported as it should, it is known after equalizing it is known that there is a number of business circulation that has not been reported in the VAT Period SPT report so that it causes a difference in the amount of business circulation between the VAT Period of Income Tax and the Corporate Income Tax Return. Equalization process is carried out by comparing the VAT Period report with the Corporate Income Tax Return, collecting data on business circulation in the ledger, comparing the data obtained, then analyzing the factors that cause the different reporting of business circulation. Equalization benefits for the company, which can be a preventive measure to face a tax audit by the tax authorities, so that the company can explain in accordance with the conditions that occur, equalization can also be a benchmark of compliance and increase the accuracy of taxpayers in reporting the amount of tax obligations in accordance with the applicable law .   Keywords: tax equalization, business circulation, corporate income tax return

Firm Performance, Capital Structure, and the Tax Benefits of Employee Stock Options

2005 ◽  
Vol 40 (1) ◽  
pp. 135-160 ◽  
Author(s):  
Kathleen M. Kahle ◽  
Kuldeep Shastri
Keyword(s):  
Capital Structure ◽  
Stock Options ◽  
Employee Stock Options ◽  
Short Term ◽  
Tax Shield ◽  
Tax Benefits ◽  
One Year ◽  
Increasing Function ◽  
Options Theory

AbstractThis paper analyzes the relation between the capital structure of a firm and the tax benefits realized from the exercise of stock options. Theory suggests that firms with tax benefits from the exercise of stock options should carry less debt since tax benefits are a non-debt tax shield. We find that both long- and short-term debt ratios are negatively related to the size of tax benefits from option exercise. Moreover, one-year changes in long-term leverage are negatively related to changes in the number of options exercised. Such a relation does not exist for changes in short-term leverage. Finally, firms with option-related tax benefits tend to issue equity, with the net amount of equity issued an increasing function of these tax benefits.

FIN 48 and Tax Compliance

2010 ◽  
Vol 85 (5) ◽  
pp. 1721-1742 ◽  
Author(s):  
Lillian F. Mills ◽  
Leslie A. Robinson ◽  
Richard C. Sansing
Keyword(s):  
Tax Compliance ◽  
Economic Effects ◽  
Business Community ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Publicly Traded ◽  
Fin 48 ◽  
Tax Benefits ◽  
The Government ◽  
Expected Payoffs

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.

Analyzing the Tax Benefits from Employee Stock Options

2009 ◽  
Vol 64 (4) ◽  
pp. 1797-1825 ◽  
Author(s):  
ILONA BABENKO ◽  
YURI TSERLUKEVICH
Keyword(s):  
Stock Options ◽  
Employee Stock Options ◽  
Tax Benefits
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