Disclosure Complexity and Tax Enforcement Outcomes

ABSTRACT

This study examines how disclosure complexity affects tax enforcement outcomes. Consistent with complex disclosures hindering the IRS’s ability to identify and sustain adjustments to aggressive tax positions, we find that greater disclosure complexity is associated with less government-favorable enforcement outcomes. This effect is greater among taxpayers likely to have engaged in higher levels of tax avoidance but is attenuated among fiscal-year filers and in the post-Tax Cuts and Jobs Act (TCJA) period. Additional analyses show that the effect remains robust to alternative settlement windows and entropy balancing. Overall, our findings suggest the IRS could increase the favorability of enforcement outcomes by evaluating disclosure complexity as part of its pre-audit risk assessment process.

Data Availability: All data are available from publicly available sources mentioned in the paper.

JEL Classifications: D22; D23; D61; H25; H26; M41; M48.