Corporate Dividend Policy, Tax Avoidance and IRS Scrutiny

Abstract

Dividend policy is a highly researched area, yet there is little research on the consequences of dividend policy for the largest “minority shareholder”, the government. In addition, while there is a substantial body of research on the determinants of tax avoidance, only a few accounting studies have addressed the taxing authority’s scrutiny or reaction to corporate tax avoidance. In this study, we investigate how dividend payout is related to proxies for tax avoidance, including effective tax rates (ETRs), book-tax differences (BTD) and unrecognized tax benefits (UTBs), and to actual and anticipated consequences of tax avoidance including tax settlement (TS) with the Internal Revenue Service (IRS) upon tax audit and estimated interest and penalties (IPs) accrued for uncertain tax planning. We find that dividend payout has significantly negative relations with BOOK-ETR and CASH-ETR, and positive relations with BTD and UTBs, indicating that dividend payout is associated with aggressive tax strategy. We also find that dividend payout is positively related to both TS and IPs, indicating that dividend pay-out is related to risky tax positions. Our results hold up well under a battery of robustness checks.