The Effect of Unchallenged Tax Positions on Corporate Tax Aggressiveness: Evidence from Statute of Limitations Lapses

Abstract

Tax authority resource constraints result in aggressive tax positions often going unchallenged. This study uses statute of limitations lapses to examine the effect of unchallenged tax positions on corporate tax aggressiveness. We first document that unchallenged tax positions are more likely when a firm claims less aggressive tax positions, when the tax authority has fewer resources, and when a firm has a more extensive geographic footprint. In our main analyses, we find that firms become less tax aggressive in years subsequent to positions going unchallenged, consistent with firms anticipating heightened tax authority scrutiny after disclosing unchallenged tax positions in their financial statements. In supplemental analyses, we find Internal Revenue Service (IRS) downloads of firms’ financial statements increase after firms disclose unchallenged tax positions, but tax settlements do not increase. Our findings shed light on a previously unexplored facet of taxpayer-tax authority interactions and are important in light of the increased budget constraints faced by tax authorities worldwide.