Information processing costs and corporate tax avoidance : Evidence from the SEC's XBRL mandate

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

2 Scopus Citations
View graph of relations

Author(s)

Related Research Unit(s)

Detail(s)

Original languageEnglish
Article number106822
Journal / PublicationJournal of Accounting and Public Policy
Volume40
Issue number2
Online published26 Feb 2021
Publication statusPublished - Mar 2021

Abstract

The IRS uses information contained in financial statements as well as tax returns to detect tax avoidance behavior. We examine the impact on corporate tax avoidance behavior of reductions in the IRS's information processing costs resulting from the mandatory adoption of XBRL for financial reporting. Motivated by the recent debate in the U.S. Congress over the cost-benefit of mandatory XBRL reporting for small firms, we pay particular attention to small firms, which inherently have relatively high information frictions. We find that the adoption of XBRL for financial reporting results in a significant decrease in tax avoidance. We further find that the negative relation between XBRL reporting and tax avoidance is less prominent for firms subject to more intense IRS monitoring in the pre-XBRL-reporting period. Overall, our results suggest that XBRL reporting reduces the cost of IRS monitoring in terms of information processing, which dampens managerial incentives to engage in tax avoidance behavior.

Research Area(s)

  • Information processing costs, IRS monitoring, Tax accrual, Tax audit risk, Tax avoidance, XBRL reporting

Bibliographic Note

Research Unit(s) information for this publication is provided by the author(s) concerned.