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Measuring Tax Authority Monitoring

Despite growing academic interest in tax authority monitoring, the literature remains lacking a summary measure of realized tax authority monitoring that can be constructed from firms’ publicly available financial statement information. The purpose of this study is to develop such a measure. Specifically, we view unrecognized tax benefit (UTB) releases due to settlements with the tax authority to indicate greater tax authority monitoring, and UTB releases due to lapses in the statute of limitations to indicate lesser tax authority monitoring. Among other tests, we validate a new measure of tax authority monitoring utilizing data from UTB releases by documenting its positive associations with predicted determinants of tax authority monitoring and by showing that it varies across time in expected ways. We believe our measure should be useful to future researchers studying tax authority monitoring in a variety of settings.