Tax-Related Disclosure Costs: Evidence from Redactions in Material Contracts
Prof. Nancy Lixin Su
Professor and Head
School of Accounting and Finance
The Hong Kong Polytechnic University
The IRS uses a firm’s public disclosure together with its private tax return in determining whether the firm warrants examination. Consistent with our conjecture that material contracts contain information useful to the resource-constrained IRS for its enforcement, we find that firms facing tougher ex-ante IRS scrutiny are more likely to redact material contract disclosure. Cross-sectionally, we find this positive association between IRS scrutiny and redactions in material contracts is more pronounced for firms with foreign subsidiaries, greater book-tax differences, and more uncertain tax positions, but is mitigated for firms facing less competition. Redactions in material contracts are associated with less IRS enforcement ex post. Overall, we provide novel evidence on firms’ redaction decisions arising from tax-related disclosure costs.
