Tax Uncertainty and Voluntary Real-Time Tax Audits

THE ACCOUNTING REVIEW American Accounting Association
Vol. 89, No. 3 DOI: 10.2308/accr-50677

2014
pp. 867–901
Tax Uncertainty and Voluntary Real-Time

Tax Audits
Paul J. Beck
Petro Lisowsky
University of Illinois at Urbana–Champaign
ABSTRACT: This study examines the empirical relation between voluntary participation
in the Internal Revenue Service’s (IRS) Compliance Assurance Process (CAP) audit
program, and tax uncertainty disclosed in financial statements pursuant to Financial
Interpretation No. 48 (FIN 48). Based on the findings of prior analytical and empirical
research, we formulate and test hypotheses about the likelihood of voluntary CAP
participation and the resulting effect on FIN 48 tax reserves. We find that firms with
moderate-sized FIN 48 reserves are more likely to participate in CAP than firms with
either small or large reserves, indicating an inverted U-shaped relation between CAP
participation rates and firms’ tax reserves. After controlling for non-random sample
selection, we find that CAP firms significantly reduce their FIN 48 reserves by about 16.5
percent relative to non-CAP firms. However, this reduction is concentrated among firms
with moderate-sized FIN 48 reserves. These cross-sectional differences are consistent
with FIN 48 reserves reflecting both tax uncertainty and tax aggressiveness.
Keywords: Compliance Assurance Process; CAP audit; FIN 48; ASC 740-10-25; tax
reserve.
JEL Classifications: M41; M42; M48; H25.
Data Availability: FIN 48 data and confidential tax data on CAP participants are
obtained from the Internal Revenue Service (IRS) Large Business &
International (LB&I), Planning, Analysis, Inventory, and Research
Division (PAIR). The CAP data are not publicly available; the FIN 48
For their helpful comments, the authors thank Romana Autrey, Andrew Bauer, Jenny Brown, Kirsten Cook, Paul
Demere, Michael Donohoe, Katharine Drake, John Harry Evans III (senior editor), Michelle Hanlon, Jeff Hoopes, Jane
Frecknall Hughes, Fabio Gaertner, David A. Guenther (editor), Becky Lester, Devan Mescall, Jeffrey Pittman, Gans
Narayanamoorthy, Tom Omer, Bradley Pomeroy, Leslie Robinson, Andrew Schmidt, Casey Schwab, William Snyder,
Tom Sternburg, Luke Watson, Ryan Wilson, two anonymous reviewers, participants at the 2011 American Taxation
Association Midyear Meeting, 2011 Congress of the International Institute of Public Finance, and The University of
Iowa tax Ph.D. seminar, workshop participants at the University of Illinois at Urbana–Champaign and The University of
Arizona, Arizona State University Tax Readings Group, and Texas Tax Readings Group. The authors also thank Stephen
Powers for excellent research assistance. Professor Lisowsky gratefully acknowledges the financial support of the
PricewaterhouseCoopers Faculty Fellowship.
This manuscript was formerly titled, ‘‘Financial Statement Incentives and Benefits of Voluntary Real-Time Tax Audits.’’
Editor’s note: Accepted by David A. Guenther.
Submitted: April 2011
Accepted: November 2013
Published Online: December 2013
867
868 Beck and Lisowsky
data were compiled and validated by the IRS and made available to
one of the authors. All other data are available from public sources
identified in this treatise. Because tax data are confidential and
protected by data nondisclosure agreements under the Internal
Revenue Code, all statistics are presented in the aggregate; no
statistics with three or fewer observations are disclosed. Any
opinions are those of the authors and do not necessarily reflect the
views of the IRS.
I. INTRODUCTION
I
n 2005, the Internal Revenue Service (IRS) introduced a voluntary tax audit program called the
Compliance Assurance Process (CAP) that provides a significant alternative to conventional
tax audits for corporate taxpayers. Unlike conventional audits where the IRS and taxpayers are
placed in a more adversarial relationship and audits are not completed until many months or
possibly years after tax returns are filed, the CAP program features a more cooperative and timely
resolution of uncertain tax positions. As a result, firms can avoid interest or penalties in the event of
a delayed and unfavorable audit outcome. In return for this prompt resolution, however, firms must
agree to fully disclose their uncertain tax positions to the IRS. The goal of this study is to examine
the role of tax uncertainty in firms’ selection into the CAP program, as well as the effect of CAP
participation on resolving such tax uncertainty.
The archival tax literature has focused on a host of determinants and outcomes of tax avoidance
(Dyreng, Hanlon, and Maydew 2008), aggressiveness (Mills 1998; Frank, Lynch, and Rego 2009;
Lennox, Lisowsky, and Pittman 2013), and sheltering (Wilson 2009; Lisowsky 2010; Brown 2011)
that fall along a conceptual tax-minimization continuum (see Hanlon and Heitzman 2010;
Lisowsky, Robinson, and Schmidt 2013 [hereafter, LRS]). However, archival evidence on the
corresponding determinants and outcomes of firms’ tax non-avoidance has not yet been analyzed.
Thus, the CAP audit setting is unique in that it can help researchers to explore why firms voluntarily
agree to limit their ability to engage in tax avoidance. Because little research exists regarding
voluntary constraints on tax avoidance, we begin to fill this void by examining the novel setting of
CAP audits.1
Beck, Davis, and Jung (2000; hereafter, BDJ) and De Simone, Sansing, and Seidman (2013;
hereafter, DSS) use analytical methodologies to examine taxpayer reporting behavior in settings
similar to CAP. Both studies find that taxpayers’ willingness to make voluntary disclosures of tax
uncertainty to the tax authority depends on the assumed effectiveness of the tax authority in
detecting uncertain tax positions. BDJ show that when the tax authority’s audit threat is higher,
taxpayers that have the greatest uncertainty about their tax positions have incentives to make
voluntary disclosures to the tax authority in order to avoid potential penalties for underpayment of
taxes. However, when the audit probability is lower, taxpayers are less willing to make voluntary
disclosures and instead report aggressively, i.e., claim positions with ‘‘weak’’ facts. Extending BDJ,
DSS investigate the consequences of participation in an enhanced cooperative audit like CAP in
which firms obtain audit cost reductions by disclosing uncertain tax positions to the tax authority.
DSS show that as the tax authority’s probability of detecting uncertain tax positions increases,
taxpayers in the enhanced audit program are less likely to claim uncertain positions that are weak.
1
Although other studies find that exogenous IRS audit scrutiny decreases tax avoidance (Hoopes, Mescall, and
Pittman 2012) and the cost of debt (Guedhami and Pittman 2008), we explicitly identify and study the
endogenous choice of why firms voluntarily agree to subject themselves to rigorous, real-time IRS audit
scrutiny.
The Accounting Review

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Tax Uncertainty and Voluntary Real-Time Tax Audits 869
However, when the tax authority’s detection probability is lower, taxpayers both inside and outside
the program are more willing to take weak positions.2
We contribute directly to this research stream by relying on these analytical studies in
developing and testing hypotheses about the types of firms that have incentives to participate in the
IRS’s CAP program, as well as the impact of participation on tax uncertainty through CAP’s
voluntary disclosure regime.3 To do so, we use tax reserves disclosed under Financial Interpretation
No. 48 (FIN 48, Financial Accounting Standards Board 2006) as a measure of tax uncertainty. The
BDJ results suggest that taxpayers with the greatest uncertainty are more willing than other
taxpayers to make voluntary disclosures. Since taxpayers in CAP are required to disclose fully their
uncertain tax positions to the IRS, the CAP participation likelihood should increase with FIN 48
reserves. Such a relation would reflect the ‘‘uncertainty’’ interpretation of FIN 48 reserves following
BDJ.
However, LRS present evidence that FIN 48 reserves are positively related to tax shelter use,
their proxy for extreme tax aggressiveness. Thus, large FIN 48 tax reserves also may reflect tax
aggressiveness rather than uncertainty. Here, tax aggressiveness arises because taxpayers do not
expect the IRS to be successful in detecting their uncertain positions, even if they are included in
the FIN 48 reserve. Such behavior is consistent with the ‘‘low detection’’ equilibrium in DSS.4
Since CAP participants commit to making voluntary disclosures of their uncertain tax positions,
including aggressive positions, we hypothesize that firms with aggressive tax positions will be more
reluctant than uncertain firms to seek admission into CAP. Similarly, the IRS would be reluctant to
accept aggressive firms that might apply to CAP. Thus, under our ‘‘tax aggressiveness’’
interpretation of FIN 48 reserves, as implied by LRS, firms with especially large FIN 48 reserves
would be less likely to participate in CAP than firms with moderate reserves. Combining the
‘‘uncertainty’’ and ‘‘aggressiveness’’ interpretations implies an inverted, U-shaped relation between
CAP participation rates and FIN 48 tax reserves, wherein firms with moderate FIN 48 reserves are
more likely to participate in CAP than firms with small or large reserves.
We test the preceding hypothesis using a confidential list of CAP participants and a large
sample of FIN 48 tax reserve disclosures, both generously provided to one of the authors by the
IRS. We partition firms into three groups based on the size of their FIN 48 reserves and find that
CAP participation rates are higher for firms in the middle FIN 48 reserve group than for firms in the
small reserve group, as predicted by BDJ. However, the probability of CAP participation is lower
for firms in the group with the largest FIN 48 reserves than for the firms in the middle group,
consistent with the tax-aggressiveness interpretation of FIN 48 reserves in LRS.5 Thus, CAP
participation likelihood has an inverted U-shaped relation with FIN 48 reserves. We interpret these
results as implying that the likelihood of participating in CAP is positively associated with tax
uncertainty, but negatively associated with tax aggressiveness.
2
BDJ also characterize such a ‘‘low-pooling’’ equilibrium in which the audit probability threat is lower and all
taxpayers report a low taxable income irrespective of whether their position could be sustained in the event of
challenge by the tax authority. Under these conditions, BDJ show that taxpayers would not have an incentive to
make voluntary disclosures of tax uncertainty.
3
Several other countries, including Korea, U.K., and The Netherlands, have begun implementing cooperative
audit programs similar to CAP (see DSS). While BDJ and DSS analytically address cooperative disclosures and
audits, we are unaware of archival research specifically regarding CAP or similar new foreign tax-auditing
regimes.
4
It may not be clear ex ante why companies engage in tax aggressiveness, as reflected in FIN 48 reserves, unless
ex post the tax authorities are ultimately not detecting or overturning the uncertain positions in as large of
magnitude as the reserves are being established. As suggested by DSS, some tax-aggressive firms may still
choose to participate in CAP because it reduces their audit costs despite a lack of tax uncertainty resolution.
5
We log the FIN 48 tax reserve in our empirical specifications to test for the uncertainty interpretation, and use a
log-squared term to test the aggressiveness interpretation, in addition to including size controls.

May 2014
We also examine the impact of CAP participation on tax reserves. Because CAP participation
is voluntary for both taxpayers and the IRS, we employ a two-stage analysis using our first-stage
CAP participation model to control for potential non-random sample-selection bias in the
second-stage analysis of the effects of CAP. We find that CAP participants obtain, on average, a
$16 million reduction in their FIN 48 reserves. This reduction is both statistically significant and
economically meaningful because it represents approximately 16.5 percent of the tax reserve’s
beginning-period balance. In the cross-section, we find that the effect of CAP participation on tax
reserves varies significantly among firms. Partitioning our sample into small, medium, and large
groups based on firms’ FIN 48 reserves, we find that CAP firms in the middle (‘‘uncertain’’) group
obtain a significant reduction in their tax reserves, while CAP firms in the large and small groups do
not. Again, these results are consistent with the dual interpretation of FIN 48 reserves as reflecting a
combination of tax uncertainty and aggressiveness.
Section II next provides background on the CAP program, FIN 48, and analytical models of tax
uncertainty. Section III develops our hypotheses and empirical models. Section IV identifies our
sample and discusses the results. Section V presents our conclusions and a discussion of our study’s
implications.
II. BACKGROUND
The CAP Audit Program6

The CAP program is a cooperative, real-time audit process between the IRS and large, public
companies that identifies and resolves material tax issues before these firms file their annual U.S.
federal tax returns.7 By increasing the accuracy of tax returns prior to their filing, CAP aims to (1)
reduce or eliminate the need for post-filing audit examinations; (2) shorten examination cycles; (3)
provide timely, final resolution of complex corporate tax issues; and (4) provide more efficient use
of IRS audit resources (IRS 2005).
During our sample period, the IRS took the initiative in recruiting taxpayers into CAP.
However, some taxpayers requested invitations to CAP as well. Entrance into the CAP program is
voluntary on both sides in that taxpayers are not required to accept IRS invitations and the IRS
exercises discretion in extending invitations.8 The admission process is complete when taxpayers
and the IRS sign a Memorandum of Understanding (MOU), which defines objectives for the audit,
sets parameters for information sharing, and indicates the good-faith commitment by both parties to
the CAP audit process. The MOU commits CAP participants to disclose all completed business
transactions and the anticipated tax treatment of material issues. Because participation is re-
evaluated each year, taxpayers are free to withdraw from CAP. Similarly, the IRS is not required to
retain firms in CAP and can, in fact, terminate firms that violate the MOU.
6
This section draws heavily on various publicly available IRS documents and memos, including IRS (2005,
2006).
7
Some examples of frequent material tax issues reviewed during the CAP audit process include the research and
experimentation (R&E) tax credit (IRC §41), transfer pricing (§482), repatriation (§965), the foreign tax credit
(§§901 and 902), golden parachute payments (§280G), and the domestic production activities deduction (§199).
8
As of March 31, 2011, the IRS updated the CAP admission process to allow taxpayers to apply directly without
first obtaining an invitation (IRS 2011). However, this change neither affects our sample period composition nor
fundamentally alters the fact that the CAP program remains voluntary in that the IRS is not required to accept
applicants and taxpayers have the ability to withdraw from the program at any time. Characterizing the CAP
program as voluntary is supported by conversations with IRS personnel, public 10-K disclosures of CAP
participants, and practitioner studies (Ernst & Young 2011, 29). This joint-selection process underlying
participation means that the CAP sample is non-random and, thus, our empirical analysis controls for this
endogeneity issue.

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In the CAP audit process, the IRS assigns a dedicated auditor, or Account Coordinator (AC), to
each participating taxpayer. The AC reviews the taxpayer’s tax audit history, prior tax issues,
current business practices, financial performance, and even industry trends to identify areas of
potential uncertainty. The AC also consults with IRS specialists and implements the review and
settlement process during the CAP audit. As issues are resolved, the AC and the taxpayer enter into
Issue Resolution Agreements (IRAs) recording the resolutions. After the close of the tax year, the
AC incorporates the IRA into the closing agreement (Form 906). If all issues are resolved, then the
IRS provides written confirmation in a ‘‘full acceptance letter’’ specifying that, subject to a post-
filing review, it will accept the taxpayer’s return if it is filed consistent with the closing agreement.
If any issues are unresolved between the IRS and the taxpayer, the IRS issues a ‘‘partial acceptance
letter’’ that only accepts the taxpayer’s return as it relates to the agreed-upon transactions; the
remaining issues are subject to resolution via the traditional audit examination process or other
venues, such as Fast Track Settlements.
Once a CAP taxpayer files its federal tax return, the IRS and the taxpayer conduct a joint post-
filing review to confirm that the issues are reported as agreed. This review is expected to be
completed within 90 days of the filing of the tax return.9 If all items are in order, then the audit is
closed and the IRS issues a ‘‘no change letter’’ (§7605(b)). However, CAP participation does not
preclude taxpayers from disputing any unresolved issues through established legal channels. If
items remain open or are inconsistent with the resolutions, then they undergo the traditional
examination process. Importantly, participation in CAP does not require firms to agree with the IRS
on every position. Thus, while CAP firms are required to provide full transparency, they are not
required to accept the IRS’s positions on all tax issues. Similarly, the IRS retains the right to re-
open a prior tax year if a taxpayer is found to have violated the MOU by inadequately disclosing its
issues. All tax information obtained during the CAP audit is protected by confidentiality provisions
of §6103, so the IRS does not disclose the identities of CAP participants. Therefore, it is not
possible to discern such participation from public sources unless firms themselves choose to
disclose CAP participation. Our use of IRS data alleviates any biases that might arise from selective
public disclosures of firms’ CAP participation.
There are several important caveats to the CAP program that constrain its ability to reduce
taxpayer uncertainty. Most importantly, CAP does not provide guidance to help taxpayers resolve
prospective or incomplete transactions. Although the AC can be made aware of incomplete tax
issues and later accelerate the compliance review process if the transactions are subsequently
completed, s(he) cannot promulgate legal guidance on the treatment of incomplete or proposed
transactions (IRS 2006). Thus, CAP firms must continue to obtain pre-transactional advice from the
IRS through other channels, such as private letter rulings. Since transactions are reviewed by the
AC only after implementation, the CAP process effectively imposes ultimate responsibility for the
firm’s tax positions on the taxpayer, rather than on the AC or IRS.
A second caveat is that if a firm has open tax issues before participating in CAP, those issues
will remain outside the direct CAP audit process. Thus, for financial reporting, CAP participants
may need to retain FIN 48 tax reserves for pre-existing issues. Also, if a transaction is completed
late in the fiscal year and thus remains unresolved, the firm may need to maintain tax reserves for
9
Note that the 90-day period for the post-filing review can coincide with the deadline to file the firm’s annual 10-
K financial reports, which is typically 45 to 90 days after fiscal year-end. However, even if the post-filing review
lasts longer than 45 days, managers can exercise discretion in the amount of tax reserves to accrue. If managers
believe the issues are ‘‘effectively settled’’ per FIN 48 due to the receipt of a full acceptance letter from the IRS,
then no reserves are accrued, even if the post-filing review is not yet complete. Thus, CAP can reflect resolution
of tax uncertainties that would affect the current period tax reserve, even before the post-filing review is
technically final.

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the position. Finally, as CAP focuses on the U.S. federal tax return, tax reserves may remain open
for uncertain positions involving foreign and/or state taxes.
FIN 48 Reserves for Income Tax Uncertainties

FIN 48 mandates greater consistency in the measurement and disclosure of tax reserves in
financial statements over predecessor guidance in SFAS 5 (FASB 1975). For reporting periods after
December 15, 2006, firms with uncertain tax positions are required to apply FIN 48’s two-step
process to recognize and measure tax reserves (FASB 2006). In concept, the tax reserve liability
arises from tax benefits, such as deductions or credits claimed on the tax return, which due to their
uncertain nature, are not immediately recognized in the financial statements as a reduction to tax
expense.
The first step of recognition examines whether each tax position has a ‘‘more-likely-than-
not’’ (. 50 percent) chance of being sustained upon tax audit based on its technical merits. If so,
then in the second step the firm measures the tax benefit as the largest benefit that has a greater-
than-50-percent likelihood of being realized upon settlement. Thus, FIN 48 splits the total tax
benefit into two parts: the immediately recognized tax benefit that reduces the current period’s
income tax expense, and the unrecognized tax benefit (UTB) for which the firm establishes a
reserve to account for an uncertain future tax audit outcome. FIN 48 also imposes new
standardized disclosures by requiring firms to report the beginning and ending tax reserve
balances to reflect the respective reporting period’s possible tax liabilities arising from all open
disputes with the tax authorities. We use the FIN 48 disclosures of tax uncertainty to develop our
empirical tests.
Analytical Models of Tax Uncertainty

Two analytical models of tax reporting under uncertainty provide insights concerning the
determinants and outcomes of CAP participation. First, BDJ develop a model in which each
taxpayer has a single uncertain tax position, but taxpayers vary in terms of the strength of their
uncertain tax positions. As in CAP, taxpayers in the BDJ model have an opportunity to make
voluntary disclosures of their uncertain tax position to the tax authority in exchange for
protection from underpayment penalties. When the audit probability is large enough to detect
under-reporting, BDJ demonstrate a separating equilibrium in which taxpayers sort themselves
into three groups based on their beliefs about the strength of their tax position. Taxpayers in the
high- and low-probability groups have relatively less uncertainty about their tax liabilities and
report their corresponding positions without making disclosures. Taxpayers in the intermediate
group who have a relatively high level of uncertainty voluntarily disclose their positions to the
tax authority. Disclosure is optimal for firms in the intermediate group because the benefits of
resolving uncertainty and reducing penalties and interest outweigh the expected tax liability
due.
In a related study, DSS model an environment in which taxpayers have an opportunity to
participate in a standard tax audit process or in a cooperative, ‘‘enhanced taxpayer/tax agency’’ audit
process with greater transparency, which is similar to CAP. As in BDJ, the audit-detection
probability is a key factor in influencing firms’ willingness to participate in the enhanced audit
program. When the tax authority can detect uncertain tax positions with a greater probability,
taxpayers participating in the cooperative program only take strong tax positions, while taxpayers
outside the program take both weak and strong positions. For the DSS cooperative audit
equilibrium to be sustainable for taxpayers with strong positions, it is necessary that the tax agency

May 2014
have the ability to identify uncertain positions with a sufficiently high probability; otherwise, all
taxpayers both inside and outside the program report aggressively.10
We use the BDJ and DSS models to develop empirical predictions that are conditional on the
assumed audit-detection probability. When the audit detection threat is sufficiently high, which is a
reasonable assumption given the publicly traded corporations in our sample, the BDJ model
predicts that taxpayers with the greatest uncertainty will have the strongest incentives to make
voluntary disclosures under CAP and, thus, are most likely to become CAP participants. Thus, to
the extent that FIN 48 reserves reflect the uncertainty inherent in the firm’s tax positions, BDJ
predicts that CAP participation rates will be increasing in FIN 48 reserves.
In contrast, the DSS model does not facilitate predictions about the taxpayer types who would
participate in CAP because all taxpayers in their model are ex ante homogeneous. However, the
DSS model does make predictions about the tax reporting behavior of firms that do participate in
CAP. Given a high audit-detection probability, DSS predicts that taxpayers inside a program like
CAP will only take strong tax positions, while taxpayers both inside and outside CAP would be less
willing to take weak tax positions requiring FIN 48 reserves. In contrast to the BDJ model where
tax uncertainty motivates the tax disclosures required of CAP participants, audit cost reduction
motivates taxpayer participation in the DSS model. Thus, obtaining a reduction in tax uncertainty is
not essential for participation in an enhanced audit program such as CAP and the resulting
equilibrium under DSS’s modeling assumptions.11 Next, we present hypotheses motivated by BDJ,
DSS, and LRS regarding the link between tax uncertainty and CAP participation.
III. HYPOTHESES AND EMPIRICAL MODEL DEVELOPMENT

Because tax reserves are now standardized and public via FIN 48, they provide a window
through which to view characteristics of firms participating in CAP, as well as the effects of CAP
participation on taxpayer uncertainty. Since firms’ CAP participation incentives vary, we develop a
first-stage model to explain CAP participation based on various firm characteristics, including tax
reserves. Controlling for non-random selection in CAP, in our second-stage model we then analyze
how CAP participation impacts tax uncertainty as measured by FIN 48 tax reserves, as discussed
next.
10
The DSS sustainability condition from the taxpayer’s perspective is similar to the audit cost probability condition
in BDJ that supports disclosure in their separating equilibrium. Furthermore, the DSS requirement that the tax
agency benefit from the cooperative audit leads to conditions that are qualitatively similar to conditions identified
by BDJ under which a tax reporting regime with disclosure provides equal or higher expected net revenue to the
tax agency relative to a benchmark equilibrium in which no disclosure opportunities are available. Despite these
similarities, however, there are some differences between the models. In DSS, taxpayers are motivated to join
CAP not by an opportunity to reduce uncertainty per se, but by the opportunity to obtain a reduction in their audit
costs. Since DSS’s taxpayers are ex ante identical, participation is a randomized decision with only a subset of
taxpayers participating in equilibrium. In contrast, the BDJ taxpayers differ in terms of their ex ante uncertainty
level and are motivated to make disclosures to reduce penalty exposure. Thus, in BDJ’s separating equilibrium,
only taxpayers with the greatest uncertainty have incentives to make voluntary disclosures of the type required in
CAP.
11
In the DSS model, taxpayers participating in an enhanced disclosure regime continue to have incentives to
participate even when the audit probability is low since their audit costs are lower when they remain inside the
program. Analogously, the tax authority is also motivated to maintain the program in order to reduce its audit
costs. However, in their low audit-detection equilibrium, taxpayers inside and outside the program will take
aggressive (weak) tax positions. In contrast, taxpayers in the BDJ model are unwilling to make disclosures when
the audit-detection probability is low since no audit cost savings are available to them. Also, the tax authority in
BDJ would not have an incentive to offer the program unless its expected revenues net of collection costs were
weakly larger.

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Tax Uncertainty as a Determinant of CAP Participation

Because CAP participation is voluntary and jointly adopted by taxpayers and the IRS, both
parties should derive benefits from the program. For taxpayers, the ability to resolve tax uncertainty
on a timely basis should make CAP participation particularly valuable for firms with larger and
more uncertain tax positions. The analytical results in BDJ suggest that firms are more likely to
make voluntary disclosures (required of CAP participants) as tax uncertainty increases. For the IRS,
resolving tax uncertainty is also important in view of Objective #2 of its Strategic Plan that calls for
‘‘expediting and improving issue resolution across interactions with taxpayers’’ (IRS 2009, 14).
Thus, attracting into CAP firms that are subject to uncertainty is also consistent with the IRS’s
strategic objectives. To the extent that taxpayers and the IRS view CAP as an effective means of
reducing tax uncertainty and FIN 48 reserves proxy for taxpayer uncertainty, we would expect the
probability of CAP participation to be increasing in FIN 48 reserves.
However, it is unclear whether the FIN 48 reserves can be viewed solely as a proxy for
uncertainty. LRS document that firms with very large tax reserves are more likely to participate in
tax shelters. Since CAP participation requires full disclosure of uncertain tax positions to the IRS,
firms intending to take highly aggressive tax positions may be reluctant to participate in CAP due to
increased audit scrutiny. Furthermore, such highly aggressive taxpayers are unlikely to be attractive
participants from the IRS’s perspective. Thus, to the extent that very large FIN 48 reserves are
indicative of taxpayer aggressiveness, we expect CAP participation rates to be relatively low for
such taxpayers. Thus, the aggressiveness interpretation of FIN 48 reserves contradicts the
expectation under the uncertainty interpretation that CAP participation will be monotonically
increasing in the size of FIN 48 reserves.
A reconciliation of the uncertainty and aggressiveness interpretations of FIN 48 reserves is
possible when we recognize that the mixture of uncertain versus aggressive taxpayers is likely to
vary as taxpayers are partitioned based on the size of their FIN 48 reserves. Since taxpayers with
moderate levels of FIN 48 reserves are likely to have greater tax uncertainty than taxpayers with
small FIN 48 reserves, we expect that they will derive greater benefit from reducing uncertainty
and, thus, have stronger incentives to participate in CAP. However, as the size of FIN 48 reserves
continues to increase, the proportion of highly aggressive taxpayers also likely increases. Thus,
among taxpayers having the largest FIN 48 reserves, we expect that taxpayer aggressiveness will
discourage CAP participation. The joint consideration of these competing effects leads to an
expectation that CAP participation will exhibit an inverted ‘‘U-shaped’’ relation with FIN 48
reserves as stated below:
H1: The likelihood of CAP participation is an inverted U-shaped function of taxpayers’ FIN
48 tax reserves.
To test H1, we estimate the following pooled, cross-sectional Probit regression model in year t
for years 2007 to 2009 with firm subscripts suppressed:12
PCAP ¼ Uða þ b 0 XÞ;
where PCAP equals probability the firm participates in the CAP audit program at time t and U() is
the standard normal distribution function; and:
12
Consistent with Petersen (2009), we employ Huber-White robust standard errors to adjust for potential serial
correlation among multiple observations per firm, with year indicators controlling for cross-sectional correlation.
All continuous variables are winsorized at the 1 and 99 percent levels to mitigate the effect of outliers.

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b 0 X ¼ b1a RESERVE BBt þ b1b RESERVE BB2t þ b2 LOG SIZEt1 þ b3 CICt1

þ b4 FOREIGNt1 þ b5 R&Dt1 þ b6 M&At1 þ b7 NEWCAPt1 þ b8 ETRt1
þ b9 DFTAXt1 þ b10 PMDACCt1 þ b11 GOODGOVt1 þ b12 APTSt1
þ bX13 LITIGIOUS þ b14 LEVERAGEt1 þ b15 MTBt1 þ b16 ROAt1 þ b17 LOSSt1
X
þ Industryt1 þ Yeart :
1826 2728
ð1Þ
Our key independent variable, RESERVE_BBt, is the natural logarithm of 1 plus the current
period’s tax reserve beginning balance (i.e., prior period’s ending balance), as reported in our
sample firms’ annual financial statement footnotes.13 This specification allows us to examine the
link between beginning-period tax reserves and subsequent participation in CAP for the full three-
year period of 2007–2009, while keeping measurement consistency across the other variables,
which use lagged ending-period values. Given the inverted U-shaped relation between CAP
participation and FIN 48 reserves under H1, we predict that the b1a coefficient will be positive since
CAP participation rates will be increasing in FIN 48 reserves under the uncertainty interpretation. In
contrast, the b1b coefficient is expected to be negative because the likelihood of CAP participation
will decrease for firms with larger FIN 48 reserves under the aggressiveness interpretation. All
variable definitions are described in Appendix A.
While taxpayers’ incentives to participate in CAP are important, acceptance into CAP requires
the IRS’s approval and, thus, will reflect its preferences regarding which types of taxpayers to
include in the program. This outcome occurs because in addition to resolving tax uncertainty, which
is consistent with taxpayers’ objective, the IRS also has an incentive to reduce its audit costs (DSS
2013). As a result, the IRS will give preference to taxpayers for whom conventional audit costs are
high. Accordingly, we include two audit cost proxies in Equation (1). Our first cost proxy is
taxpayer size (LOG_SIZE, or natural log of assets) because large taxpayers require more IRS audit
resources. A second cost proxy is whether the taxpayer is subject to a Coordinated Industry Case
audit (CIC). CIC audits are very costly to both taxpayers and the IRS because they usually occur
several years after filing the tax return and they are likely more adversarial than CAP audits,
increasing potential penalty and litigation costs. Thus, shifting taxpayers from post-filing CIC to
real-time CAP audits has the potential to reduce the IRS’s overall audit costs. Identifying CIC
taxpayers is challenging because few firms publicly disclose that they are in CIC (Hoopes et al.
2012). Thus, we rely on the methodology in Hanlon, Mills, and Slemrod (2007) to indicate whether
a firm is subject to a CIC audit.14 To the extent that the IRS successfully attracts high audit cost
taxpayers into CAP, we expect the signs on both LOG_SIZE and CIC to be positive.
In addition to taxpayer size, tax audit costs can also vary with taxpayer complexity. We include
complexity-related proxies for foreign operations (FOREIGN), research and development (R&D),
mergers and acquisitions (M&A), and new capital issuance (NEWCAP). NEWCAP captures
taxpayers’ desire to increase issuance capacity by reducing tax risk in its operations (Gleason and
Mills 2002). Even though the IRS’s conventional audit costs likely increase with complexity, these
13
Following LRS, we use a log specification, log(1 þ beginning balance reserve in $millions). This transformation
is preferable because (1) it is less heteroscedastic than if the reserve is scaled by total assets; (2) the reserve is
strictly non-negative; and (3) it better facilitates the nonlinear analysis that uses the squared reserve term since
squaring a scaled term instead alters the interpretation.
14
Hanlon et al. (2007) estimate that between 1,000 and 1,200 public and private firms are subject to CIC audits per
year. We determine CIC on an annual basis as the top asset quartile of our sample, which captures about 1,000
firms per year. Because the Hanlon et al. (2007) range of 1,000 to 1,200 CIC firms per year includes private
firms, which we do not examine, the 1,000 firms per year designated as CIC in our sample is likely to be a
conservative estimate.

May 2014
variables have also been associated with increased opportunities for tax avoidance and higher
proposed deficiencies (Hanlon et al. 2007). Therefore, some firms with tax complexity may be
reluctant to participate in CAP even though the IRS would welcome them into the program. In
addition, as CAP’s scope is focused on the U.S. federal jurisdiction, firms with foreign tax positions
are likely to derive less benefit from CAP than firms operating wholly in the U.S. Because these
taxpayer features can offset the audit cost/complexity effect from the IRS’s side, we do not make
sign predictions for the coefficients on these variables.
Next, we control for the effective tax rate (ETR). We expect that firms with high tax rates are
attractive CAP candidates from the perspective of firms and the IRS because greater tax liabilities
are at issue. DFTAX controls for the possibility that firms record their tax reserves in deferred taxes
(Gleason and Mills 2002), even though FIN 48 prohibits such a practice.
Prior research suggests that opportunistic reporting under both financial and tax regimes may
be influenced by corporate governance. We use the indicator variable GOODGOV, which equals 1
if the firm has strong investor protections as measured by the Gompers, Ishii, and Metrick (2003) G-
Index, which we operationalize as a GINDEX below the sample median of 9. We do not predict a
sign on GOODGOV. If governance is strong, then managers are likely to engage in value-
maximizing behavior (Desai and Dharmapala 2006), which would result in CAP being positively
associated with GOODGOV. However, if CAP inhibits optimal tax planning (Dyreng, Hanlon, and
Maydew 2010), then a negative relationship could exist. Alternatively, if governance is weak, then
managers could be motivated to increase their own compensation rather than to maximize firm
value. To the extent that CAP resolves uncertain tax positions and accelerates the recognition of tax
benefits flowing to net income, CAP could be attractive from an earnings management perspective.
However, if opportunities for aggressive tax planning exist and CAP imposes a constraint, then
managers may prefer to keep their firms outside CAP. Along similar lines, we use performance-
matched discretionary accruals (PMDACC) to proxy for a firm’s earnings management (Kothari,
Leone, and Wasley 2005). We do not predict a sign for the coefficient on PMDACC.15
Other control variables included in Equation (1) are APTS, the ratio of auditor-provided tax
service fees to total audit fees, and LITIGIOUS, an indicator variable equal to 1 if the firm belongs
to a high litigation industry, and 0 otherwise. We predict a positive sign on LITIGIOUS because
firms under high litigation risk may be more apt to seek resolution of tax risks, but we do not make
a prediction regarding APTS.16 Next, we control for the firm’s financial condition and growth using
LEVERAGE, market-to-book (MTB), return on assets (ROA), and a LOSS indicator. Finally, we
include one-digit SIC industry and year fixed effects.
15
If high discretionary accrual firms are interested in lowering tax reserves through CAP (which might lower tax
expense), then a positive association would result. A negative association would result if high discretionary
accrual firms are wary of potential scrutiny of their financial reports (Erickson, Hanlon, and Maydew 2004;
Lennox et al. 2013) and, thus, would avoid participating in CAP. However, Koester (2011) presents evidence
that some tax-aggressive firms may use methods other than discretionary accruals to reduce tax liabilities, in
which case the association could be low.
16
On the positive side, if the firm and its tax advisors engage in benign, value-maximizing tax planning for which
there is genuine uncertainty, then the firm would benefit by entering CAP to seek a more timely resolution. Also,
tax advisors may reduce the indirect costs (e.g., loss of managerial time) of CAP participation. Similar cost
reductions may also accrue to the IRS if the tax advisors are successful in resolving uncertain tax positions before
the CAP audit begins. On the negative side, if aggressive tax planning is supported by tax advisors at the audit
firm, there would be little reason to invite the IRS to provide a real-time assessment. Also on the negative side,
taxpayers may view CAP as a substitute for purchasing professional tax advice.

May 2014
The Effect of CAP Participation on Tax Reserves

Using the preceding empirical model of CAP participation, we now formalize our hypotheses
regarding the effects of CAP on FIN 48 tax reserves. To the extent that uncertainty reduction
motivates taxpayers to participate in CAP, as predicted by BDJ and consistent with H1, we
hypothesize that CAP participants on average obtain greater reductions in tax reserves as compared
to taxpayers operating outside CAP. However, given the recency of both CAP and FIN 48, it is
possible that any observed effects might not be indicative of long-run participation. Because our
sample firms have been in CAP for no more than five years, we formalize our hypothesis with this
caveat in mind:
H2a: CAP participants report greater reductions in their FIN 48 tax reserves during the first
five years of CAP participation than do non-participants.
To test H2a, we estimate the following pooled, cross-sectional ordinary least squares regression
model in year t for years 2007 to 2009, where firm subscripts are suppressed:
DRESERVEt1;t ¼ dt þ c1 CAPt þ c2 LOG SIZEt þ c3 FOREIGNt þ c4 R&Dt þ c5 M&At

þ c6 NEWCAPt þ c7 DDFTAXt1;t þ c8 PMDACCt þ c9 DAPTSt1;t
þ c10 LITIGIOUSt þ Xc11 LEVERAGEt þ c12 X MTBt þ c13 ROAt þ c14 LOSSt
þ c15 INV MILLSt þ c1624 Industryt þ c2526 Yeart þ /;
ð2Þ
where the dependent variable, DRESERVE, is the change in the FIN 48 reserve from t1 to t scaled
by lagged total assets.17 We predict a negative c1 coefficient for CAP under H2a.
The explanatory variables in Equation (2) are similar to those in Equation (1) with a few
exceptions. First, we omit RESERVE_BBt, RESERVE BB2t ; and ETRt1 because they are
mechanically related to DRESERVE. Second, we use a change specification for deferred taxes
(DDFTAX) and auditor provided tax services (DAPTS) because they are more likely than levels to
affect DRESERVE. Third, we use a current specification in Equation (2) rather than lagged variable
specification as in Equation (1). Finally, we include the inverse Mills ratio (INV_MILLS) estimated
from Equation (1) to control for non-randomness in our CAP sample.18
To implement this two-stage selection design in testing H1 and H2a, as well as H2b below, at
least one variable used in Equation (1) must be excluded from the model in Equation (2). The
excluded variable(s) should conceptually and empirically explain CAP participation (CAP) in
Equation (1), yet not be significant in explaining the reserve’s change (DRESERVE) in Equation
(2). We exclude GOODGOV and CIC from Equation (2). Our argument for excluding GOODGOV
is that strong corporate governance can be viewed as a monitoring mechanism that complements or
substitutes for CAP. If so, the b11 coefficient in Equation (1) will be significant. However, in
Equation (2), GOODGOV should not be related to the annual change in the tax reserve because
corporate governance mechanisms are typically stable over time.
17
Because the change can represent both positive and negative values, we are unable to use its log transformation.
18
In effect, the combination of Equations (1) with (2) represents a two-step Heckman (1979) model. We explicitly
present the models separately because we believe the selection issue is of equal importance to the outcome. We
use a Probit rather than logit model in Equation (1) because the inverse Mills ratio requires a bivariate normal
distribution, which the former generates, rather than a logarithmic distribution, which the latter generates. All
inferences related to H1 are materially identical if we use a logit model instead. All inferences related to H2a
(and H2b described later) are materially identical if we use a one-to-one matched sample or propensity score
matching.

May 2014
We also exclude CIC because if the IRS is engaged in costly post-filing audits, it may conclude
that audit costs could be reduced by obtaining greater cooperation from taxpayers. Under such
conditions, the IRS has incentives to encourage CIC firms to participate in CAP. Also, if CIC firms
are already facing a high level of IRS scrutiny, then they may well conclude that the incremental
cost of participating in CAP is negligible; the firm’s own expected audit costs might be reduced by
opting into a pre-filing audit. Thus, we expect higher CAP participation rates for CIC firms than
non-CIC firms, implying a positive coefficient on b3 in Equation (1). However, the increased audit
probability for a CIC firm cannot change the tax reserve in Equation (2) because FIN 48 explicitly
prohibits considering audit probabilities when accruing the reserve.
Disaggregate Analysis by Taxpayer Groups

H2a argues that firms inside CAP will obtain larger FIN 48 reserve reductions on average than
firms outside CAP. However, to the extent that large tax reserves proxy for tax aggressiveness
rather than uncertainty, partitioning based on the size of tax reserves may reveal that CAP affects
firms differently. Under DSS, the ability to reduce audit costs could provide a motivation for
participating in CAP, even if the taxpayer obtains little or no reduction in tax uncertainty.
Therefore, if large tax reserves reflect tax aggressiveness, then it is possible that taxpayers that enter
CAP with large tax reserves will not experience a decrease in their reserves.
Accordingly, we partition CAP participants into low, medium, and high groups based on the
size of their FIN 48 reserves. To the extent that firms in the middle FIN 48 reserve group have more
tax uncertainty than the low reserve group, we would expect that firms in the middle group will
derive a greater reduction in their FIN 48 reserves than firms in the low group. However, to the
extent that large FIN 48 reserves proxy for tax aggressiveness rather than uncertainty, we expect
that a smaller proportion of firms in the large group will obtain reserve reductions compared to the
middle group. Combining these points leads to our final hypothesis:
H2b: Within five years of joining, CAP participants with medium-sized FIN 48 reserves will
experience larger average tax reserve reductions than firms entering CAP with small or
large tax reserves.
The argument that ‘‘uncertain’’ firms in the medium FIN 48 reserve group will experience a
greater reduction in their reserves than firms in the small reserve group is not surprising in that the
size of a firm’s reserve establishes an upper bound for the amount of reduction that can occur.
However, applying this argument to the medium and large groups would lead to the contrary
hypothesis that firms entering CAP with large reserves would experience greater reserve reductions
than firms in the middle group. Since CAP might constrain highly aggressive firms, one may
question why such firms would have incentives to both enter CAP and remain there. However, if
firms are motivated to participate in CAP by obtaining a reduction in expected audit costs, as
demonstrated analytically by DSS, then some aggressive firms may be willing to participate in CAP
without an expectation of obtaining FIN 48 reserve reductions. The presence of such taxpayers
could explain why firms entering CAP with large FIN 48 reserves might obtain comparatively
smaller reserve reductions than the middle group firms, as predicted by H2b.
IV. EMPIRICAL ANALYSIS
Sample Selection
The IRS provided one of the authors with the names of CAP participants during the FIN 48
period beginning in 2007 and ending in 2009. The IRS also provided FIN 48 data that LRS report to
be more accurate than Compustat’s FIN 48 data. We supplement the IRS-provided information with

May 2014
other data from Compustat, Investor Responsibility Research Center (IRRC), and Audit Analytics.
The initial merge yields 27,038 (19,579) observations for testing H1 (H2).19 Due to missing data for
our regression tests, we lose 14,743 (8,220) observations for testing H1 (H2). Finally, in our tests of
H1 and H2, we lose nine observations due to negative balances in the tax reserve. Thus, the final
sample sizes are 12,286 for testing H1 and 11,350 for testing H2.
Table 1, Panel A reports the inter-temporal composition of the sample for our ten industry
classifications. The descriptive data show that the number of observations used in testing H1
decreases from 2007 to 2009, likely reflecting mergers and bankruptcies linked to the recession.
Nevertheless, tests of H1 average about 4,100 firms per year while tests of H2 average about 3,700
firms per year. The greatest industry representation is manufacturing (SIC 3) at over one-quarter of
the sample, with the smallest industry being agriculture (SIC 0) at less than 1 percent.
In terms of CAP activity, our sample includes 184 firm-year CAP participants, including 49 in
2007, 62 in 2008, and 73 in 2009. The population of CAP participants contained 65, 81, and 88
unique firms, respectively, in these three years, so our sample coverage exceeds 75 percent of the
CAP population in each year.20 Most of the CAP participants are in the chemical (SIC 2; n ¼ 51),
manufacturing (SIC 3; n ¼ 31), and retail (SIC 5; n ¼ 30) sectors, while significantly fewer are in
agriculture (SIC 0; n , 5), health (SIC 8; n , 5), and diversified/other (SIC 9; n , 5) sectors.21
For the sample used to test H1 (n ¼ 12,286), the mean beginning FIN 48 tax reserve
(RESERVE_BB) increases from about $15.1 million in 2007 to $20.7 million in 2009, or from 0.51
percent of assets in 2007 to 0.75 percent of assets in 2009. Meanwhile, the change in the FIN 48 tax
reserve (DRESERVE), which is the dependent variable in H2 (n ¼ 11,350), is positive each year
with a mean of $0.93 million in 2007, $0.32 million in 2008, and $0.62 million in 2009. These
values reflect increases of 0.04 percent, 0.02 percent, and 0.03 percent of assets in each respective
year.
Descriptive Statistics
Although Equation (1) uses logged tax reserves, we also include descriptive statistics without
transformation in Table 1, Panel B to facilitate economic interpretation. Consistent with H1, our t-
tests show that CAP firms’ mean RESERVE_BB, in logged (3.679), dollar ($96.1 million), and
scaled terms of 0.9 percent of total lagged ending assets, are significantly larger than for non-CAP
firms at 1.079, $17.5 million, and 0.7 percent, respectively (all p , 0.01; all p-values are two-
tailed). Untabulated results indicate that RESERVE_BB is positively correlated with CAP (p ¼ 0.19;
p , 0.01).
Consistent with the notion that the IRS prefers to include firms in CAP that are more costly to
audit conventionally, the means of size-related variables (LOG_SIZE and CIC) are about two to
four times larger for CAP firms at 9.163 and 0.87, respectively, than for non-CAP firms at 5.886
and 0.241, respectively (p , 0.01). The variables FOREIGN, M&A, LEVERAGE, ROA, and
GINDEX, which is the basis for GOODGOV, are also larger for CAP firms (all p , 0.05), while
R&D and LOSS are lower for CAP firms (both p , 0.05). The t-tests also show that the mean ETR
is higher at 30.8 percent for CAP firms than for non-CAP firms at 21.9 percent (p , 0.01).
19
We use the term ‘‘H2’’ here to denote H2a and H2b.
20
Some CAP firms are excluded due to missing data for the explanatory variables. Before FIN 48 became effective,
12 sample firms participated in CAP in 2005 and 42 in 2006, as compared to 17 total CAP participants in 2005
and 58 in 2006.
21
IRS data nondisclosure agreements prevent us from revealing statistics that utilize fewer than 3 taxpayers. We
use n , 5 here to prevent readers from inferring industry composition due to subtraction from the other
industries. All results remain materially identical if we exclude firms in the financial industry (SIC 6)
(untabulated).

May 2014
880
TABLE 1
Descriptive Statistics
Panel A: Sample Distribution

H2 Sample
Mean
H1 Sample CAP Mean DRESERVE
Mean RESERVE Sample DRESERVE (scaled by
% of Mean RESERVE _BB (scaled # of CAP ($M) assets)
Industry 2007 2008 2009 Total Sample _BB ($M) by assets) in Sample (n ¼ 11,350) (n ¼ 11,350)
SIC 0 (Agriculture) 7 5 6 18 0.15% 26.57 0.771% ,5 0.41 0.021%
SIC 1 (Construction) 327 330 309 966 7.86% 10.97 0.189% 9 0.31 0.007%
SIC 2 (Chemicals) 715 696 659 2,070 16.85% 23.91 0.728% 51 0.78 0.033%
SIC 3 (Manufacturing) 1,223 1,182 1,138 3,543 28.84% 19.51 0.969% 31 0.76 0.043%
SIC 4 (Transportation) 472 461 448 1,381 11.24% 25.16 0.452% 24 0.40 0.007%
SIC 5 (Retail) 400 358 347 1,105 8.99% 16.87 0.499% 30 0.55 0.002%
SIC 6 (Financial) 333 318 303 954 7.76% 14.63 0.279% 22 0.28 0.012%
SIC 7 (Business Services) 570 541 503 1,614 13.14% 15.65 0.856% 11 0.96 0.050%
SIC 8 (Health) 180 174 182 536 4.36% 8.09 0.577% ,5 0.16 0.009%
SIC 9 (Diversified/Other) 40 34 25 99 0.81% 24.10 0.238% ,5 0.38 0.012%
Total 4,267 4,099 3,920 12,286

% of Sample 34.73% 33.36% 31.91% 100.00% Sample Mean:
Mean RESERVE_BB ($M) 15.10 20.38 20.68 18.64 Sample Mean:
Mean RESERVE_BB (scaled) 0.51% 0.77% 0.75% 0.67%
# CAP 49 62 73 184 Sample Mean:
Mean DRESERVE ($M) 0.93 0.32 0.62 0.63 Sample Mean:
Mean DRESERVE (scaled) 0.04% 0.02% 0.03% 0.03%
(continued on next page)
May 2014
Beck and Lisowsky
TABLE 1 (continued)
Panel B: Descriptive Statistics for H1 Sample
May 2014
Tests of Means and Proportions
H1 Sample (n ¼ 12,286) CAP ¼ 1 (n ¼ 184) CAP ¼ 0 (n ¼ 12,102)
P25 Median Mean P75 Std. Mean Std. Mean Std. Diff.

Dependent Variable
CAPt 0.000 0.000 0.015 0.000 0.121
Variable of Interest
RESERVE_BBt (Log) 0.000 0.000 1.118 1.944 1.622 3.679 1.680 1.079 1.589 ***
Control Variables
LOG_SIZEt1 4.228 5.919 5.935 7.537 2.328 9.163 1.295 5.886 2.305 ***
CICt1 0.000 0.000 0.250 1.000 0.433 0.870 0.338 0.241 0.427 ***
FOREIGNt1 0.000 0.000 0.114 0.079 0.317 0.173 0.367 0.113 0.316 **
R&Dt1 0.000 0.000 0.290 0.062 1.567 0.025 0.052 0.294 1.578 **
Tax Uncertainty and Voluntary Real-Time Tax Audits
M&At1 0.000 0.000 0.382 1.000 0.483 0.565 0.497 0.379 0.485 ***
NEWCAPt 0.000 0.000 0.471 1.000 0.499 0.696 0.461 0.468 0.499
ETRt1 0.000 0.248 0.220 0.363 0.209 0.308 0.143 0.219 0.209 ***
DFTAXt1 0.004 0.000 0.001 0.003 0.019 0.001 0.012 0.001 0.020
PMDACCt1 0.052 0.002 0.006 0.056 0.155 0.002 0.086 0.006 0.156
GINDEXt1 7.000 9.000 9.028 11.000 2.543 9.839 2.632 8.988 2.532 ***
APTSt1 0.000 0.364 0.103 0.143 0.157 0.113 0.153 0.102 0.157
LITIGIOUSt1 0.000 0.000 0.322 1.000 0.467 0.332 0.472 0.322 0.467
LEVERAGEt1 0.003 0.145 0.193 0.317 0.197 0.251 0.148 0.192 0.198 ***
MTBt1 1.115 1.930 3.300 3.461 4.938 3.309 4.590 3.299 4.944
ROAt1 0.056 0.044 0.023 0.108 0.262 0.087 0.098 0.025 0.263 ***
LOSSt1 0.000 0.000 0.338 1.000 0.473 0.103 0.305 0.342 0.474 ***
Other Descriptives
RESERVE_BBt ($M) 0.000 0.000 18.641 5.988 54.482 96.109 99.569 17.463 52.639 ***
RESERVE_BBt (Scaled) 0.000 0.000 0.007 0.007 0.013 0.009 0.010 0.007 0.013 ***
RESERVE_EBt ($M) 0.000 0.000 19.088 6.117 55.196 88.929 93.288 18.026 53.722 ***
RESERVE_EBt (Log) 0.000 0.000 1.133 1.962 1.632 3.601 1.695 1.906 1.602 ***
881

TABLE 1 (continued)
882

RESERVE_EBt (Scaled) 0.000 0.000 0.007 0.008 0.014 0.009 0.010 0.007 0.136 *
DRESERVEt1,t ($M) 0.000 0.000 0.602 0.042 7.175 1.089 15.958 0.628 6.955 ***
DRESERVEt1,t (Scaled) 0.0000 0.0000 0.0003 0.0001 0.0028 0.0004 0.0034 0.0003 0.0028 ***
Panel C: Descriptive Statistics for H2 Sample

Dependent Variable
DRESERVEt1,t 0.0000 0.0000 0.0003 0.0002 0.0028 0.0004 0.0030 0.0003 0.0028 ***
Variable of Interest
CAPt 0.000 0.000 0.016 0.000 0.123
Control Variables
LOG_SIZEt 4.346 6.013 6.030 7.611 2.316 9.249 1.294 5.981 2.294 ***
FOREIGNt 0.000 0.000 0.116 0.096 0.334 0.178 0.393 0.115 0.332 **
R&Dt 0.000 0.000 0.243 0.063 1.392 0.024 0.047 0.247 1.403 **
M&At 0.000 0.000 0.370 1.000 0.483 0.514 0.501 0.368 0.482 ***
NEWCAPt 0.000 0.000 0.469 1.000 0.499 0.696 0.461 0.465 0.499 ***
DDEFTAXt1,t 0.005 0.000 0.000 0.005 0.026 0.001 0.015 0.000 0.026
PMDACCt 0.051 0.001 0.004 0.052 0.140 0.004 0.088 0.005 0.141
DAPTSt1,t 0.017 0.000 0.001 0.017 0.123 0.016 0.106 0.001 0.123 *
LITIGIOUSt 0.000 0.000 0.322 1.000 0.467 0.333 0.473 0.322 0.467
LEVERAGEt 0.003 0.145 0.192 0.317 0.196 0.253 0.143 0.191 0.197 ***
MTBt 1.000 1.694 2.890 2.979 4.562 3.163 5.131 2.884 4.550
ROAt 0.070 0.037 0.032 0.098 0.256 0.071 0.090 0.034 0.257 ***
LOSSt 0.000 0.000 0.371 1.000 0.483 0.126 0.333 0.375 0.484 ***
May 2014
Beck and Lisowsky

TABLE 1 (continued)
May 2014
Other Descriptives

DRESERVEt1,t ($M) 0.000 0.000 0.629 0.065 7.254 1.089 15.958 0.656 7.037 ***
RESERVE_BBt ($M) 0.000 0.052 19.059 6.276 55.041 96.109 99.569 17.876 53.195 ***
RESERVE_BBt (Log) 0.000 0.051 1.147 1.985 1.630 3.679 1.680 1.108 1.599 ***
RESERVE_BBt (Scaled) 0.000 0.000 0.007 0.008 0.013 0.009 0.010 0.007 0.013 **
RESERVE_EBt ($M) 0.000 0.085 19.555 6.551 55.855 88.929 93.288 18.490 54.385 ***
RESERVE_EBt (Log) 0.000 0.082 1.162 2.022 1.641 3.601 1.695 1.124 1.612 ***
RESERVE_EBt (Scaled) 0.000 0.000 0.007 0.008 0.013 0.009 0.010 0.007 0.013 *
*, **, *** Denote significance at the p , 0.10, p , 0.05, and p , 0.01 levels, respectively.
Sample period at time t is 2007–2009. Continuous variables are winsorized at the 1 and 99 percentile levels.
See Appendix A for full variable definitions.
883
Panel C presents the variables used in testing H2a and H2b. The mean (median) DRESERVE,
the dependent variable, for the sample firms is 0.03 percent (0 percent) of total lagged assets, or an
increase in the reserve of $0.629 ($0) million. Consistent with H2a and H2b, the mean DRESERVE
in dollars ($1.089 million) and scaled by assets (0.04 percent) is negative for CAP firms, but
positive for non-CAP firms ($0.656 million and 0.03 percent, respectively), where the difference is
statistically significant at p , 0.01.22 Also, the simple correlation of DRESERVE with CAP is 0.03
(p , 0.01) (untabulated). These findings lend initial support to H2a and H2b in that CAP firms
obtain significant reduction of tax reserves relative to non-CAP firms.
Regression Results of CAP Participation under H1

Table 2 presents evidence regarding the role of tax uncertainty in explaining CAP participation.
Consistent with our prediction in H1, the results in column (1) show that the coefficient on
RESERVE_BBt is significantly positive (p , 0.01) while the coefficient on RESERVE BB2t is
significantly negative (p , 0.01). Thus, CAP participation likelihood initially increases with FIN
48 reserves, but then decreases once tax reserves reach a critical level—a finding consistent with the
interpretation of large FIN 48 reserves being an indicator of aggressiveness rather than uncertainty.
The inverted, U-shaped relation between CAP participation rates and FIN 48 reserves supports the
notion that tax uncertainty rather than tax aggressiveness is responsible for a firm’s participation
decision in a voluntary tax disclosure and real-time audit regime such as CAP. Furthermore, the
finding that the effect of the FIN 48 reserve is dominated by tax uncertainty or tax aggressiveness at
different regions of the distribution is consistent with a more complete interpretation of the FIN 48
reserve that has not yet been formally argued or established in the archival tax literature.
In column (2) of Table 2 we present our first robustness test of Equation (1) by creating
LoCashETRt1, an indicator variable equal to 1 if the firm’s cash ETR is below the sample median
of 19.6 percent, and 0 otherwise, which we interact with RESERVE_BB. The intuition is that CAP
participation will be less attractive to ‘‘aggressive’’ firms that pay little in cash taxes as reflected by
low cash ETRs, and yet accrue increasing tax reserves as captured by the interaction term, relative
to firms that are simply ‘‘uncertain,’’ reflecting the RESERVE_BB main effect. Consistent with this
intuition, RESERVE_BB remains significantly positive (p , 0.01), while its interaction with
LoCashETR is significantly negative (p , 0.05).
In a second robustness test in column (3) of Table 2, we partition the sample distribution of
RESERVE_BB into ten groups based on the size of FIN 48 reserves and create a corresponding
vector of nine indicator variables. When the firm’s RESERVE_BB belongs to a specific decile, the
indicator for that decile is equal to 1, and it is 0 otherwise, with RESERVE_BB ¼ 0 being the
omitted group. The decile-by-decile results again indicate an inverted, U-shaped relation in that the
middle-decile firms are more strongly associated with CAP participation as compared to firms in the
tails, thus providing further support for H1. For example, we find that the coefficient on
RESERVE_BB_Dec9 is statistically greater than the coefficient on RESERVE_BB_Dec10 (p ,
0.02; also see footnote 23 later).
Our third sensitivity analysis reported in column (4) of Table 2 is a variation of the previous
test in which the ten groups are collapsed into three groups. In particular, we augment the previous
specification by collapsing the middle deciles into a single indicator variable, RESERVE_BB_
Dec5to9, equal to 1 if the firm’s RESERVE_BB falls in deciles 5 through 9. Deciles 1 through 4 are
analogously collapsed into the reference category, while Decile 10 is retained using the indicator
variable, RESERVE_BB_Dec10. The collapsed partitioning enables us to compare firms in the
22
For additional perspective, the bottom quartile CAP participant reduces its tax reserves by $16.4 million.

May 2014
TABLE 2
Full Sample Multivariate Probit Regression Results on the Determinants of CAP Participation
May 2014
PrðCAPt Þ ¼ b1a RESERVE BBt þ ðb1b RESERVE BB2t Þ þ ðb1c LoCashETRt1 þ b1d RESERVE BBt 3 LoCashETRt1 Þ
þðR1em RESERVE BB Decilest Þ þ b2 LOG SIZEt1 þ b3 CICt1 þ b4 FOREIGNt1 þ b5 R&Dt1 þ b6 M&At1
þb7 NEWCAPt1 þ b8 ETRt1 þ b9 DFTAXt1 þ b10 PMDACCt1 þ b11 GOODGOVt1 þ b12 APTSt1 þ b13 LITIGIOUSt1

X
þb14 LEVERAGEt1 þ b15 MTBt1 þ b16 ROAt1 þ b17 LOSSt1 þ b1826 Industryt1 þ b27 YR2008
þb28 YR2009 þ e: ð1Þ
Dependent Variable: CAP (3) (4)

(1) (2) Reserve Decile Middle vs. Highest
Main Results Low Cash ETR by Decile Reserve Decile
Pred.
Variable Sign Coefficient z-stat Coefficient z-stat Coefficient z-stat Coefficient z-stat
RESERVE_BB þ 0.493*** 5.07 0.155*** 5.47
RESERVE_BB2 0.068*** 3.79

LoCashETR 0.190 1.27
RESERVE_BB 3 LoCashETR 0.064** 2.32
RESERVE_BB_Dec2 0.411* 1.83
RESERVE_BB_Dec3 0.619** 2.29
RESERVE_BB_Dec4 0.660*** 3.01
RESERVE_BB_Dec10 0.505** 2.52 0.351* 1.89
RESERVE_BB_Dec5to9 0.620*** 5.23
Audit Cost
LOG_SIZE þ 0.256*** 5.59 0.179*** 4.63 0.252*** 5.62 0.246*** 5.95
CIC þ 0.321* 1.83 0.326* 1.87 0.300* 1.70 0.313* 1.74
Tax Complexity
FOREIGN ? 0.298** 2.23 0.306** 2.91 0.307** 2.31 0.276** 2.07
885

TABLE 2 (continued)
886

Pred.
R&D ? 1.285 1.56 1.334 1.58 1.254 1.55 1.239 1.50
M&A ? 0.033 0.34 0.045 0.47 0.025 0.27 0.053 0.54
NEWCAP ? 0.067 0.71 0.077 0.83 0.079 0.85 0.073 0.77
Tax Rate
ETR þ 0.204 1.05 0.262 1.37 0.234 1.23 0.276 1.51
DFTAX þ 1.125 0.49 1.007 0.49 1.166 0.52 1.286 0.57
Manager Accrual Opportunity
PMDACC ? 0.698* 1.76 0.550 1.59 0.709* 1.79 0.647* 1.73
GOODGOV ? 0.053 0.40 0.091 0.67 0.057 0.42 0.100 0.73
APTS ? 0.030 0.10 0.025 0.08 0.043 0.14 0.027 0.09
LITIGIOUS þ 0.354** 2.49 0.320** 2.30 0.347** 2.42 0.332** 2.36
Financial Condition
LEVERAGE ? 0.091 0.33 0.019 0.07 0.098 0.36 0.080 0.30
MTB þ 0.014 0.98 0.012 0.77 0.538 1.09 0.016 1.05
ROA þ 0.553 1.08 0.445 0.99 1.058 1.45 0.518 1.07
LOSS 0.098 0.79 0.052 0.41 0.108 0.87 0.102 0.82
Constant 5.124*** 13.75 4.310*** 17.38 5.013*** 13.49 4.814*** 15.58
Year Controls Yesa Yesc Yese Yesg
Industry Controls Yesb Yesd Yesf Yesh
Observations 12,286 12,286 12,286 12,286
Pseudo R2 28.9% 27.8% 29.3% 28.1%
RESERVE_BB_Dec5to9 versus RESERVE_BB_Dec10 v2 ¼ 2.71
p ¼ 0.09
All models reported herein are significant at the p , 1 percent level using a Chi-square test. All models use robust standard errors clustered by firm. Continuous variables are
winsorized at the 1 and 99 percentile levels.
a
YR2008 is not significant; YR2009 is significantly positive (Coeff. ¼ 0.16; z ¼ 2.73; p , 0.01).
May 2014
Beck and Lisowsky

TABLE 2 (continued)
b
Only SIC 2 is significantly positive (Coeff. ¼ 0.41; z ¼ 2.47; p ¼ 0.014).
c
d
May 2014
e
f
g
h

887
middle group to firms having much smaller and larger FIN 48 reserves.23 We find a highly
significant positive sign and a larger coefficient on RESERVE_BB_Dec5to9 relative to the
coefficients for the firms in the lowest decile (the reference group) and highest decile. In particular,
a test between coefficients in the full sample indicates that firms belonging to the middle
‘‘uncertain’’ deciles (0.62) are marginally more likely to participate in CAP than firms in the highest
‘‘aggressive’’ decile (0.351) (p ¼ 0.09). Overall, our sensitivity tests are consistent with H1 and
show that taxpayers in the middle FIN 48 tax reserve group have higher CAP participation rates
than taxpayers in the small or large reserve groups.
We note that our audit cost proxies, LOG_SIZE and CIC, both have positive and significant
coefficients. These results are consistent with arguments that the IRS has incentives to attract these
taxpayer types into CAP to improve audit efficiency. The variable FOREIGN is reliably negative
(all p , 0.05), consistent with CAP’s diminished ability to resolve taxpayer uncertainty when
foreign activities represent a substantial share of pretax income. LITIGIOUS is significantly positive
(p , 0.05), suggesting that firms operating in litigious industries benefit from mechanisms such as
CAP that can resolve tax risks sooner. Finally, we find some evidence that PMDACC is positively
related to subsequent CAP participation (p , 0.10), although we remain cautious as to its
interpretation.
To further test the robustness of our main results in Table 2, we re-estimate Equation (1) using
a one-to-one matched sample. In particular, we match each of our 184 CAP participants with 184
non-CAP firms based on the same fiscal year, two-digit SIC industry code, sign of profitability, and
nearest total assets (AT). Although we only have 368 total observations for this specification, the
matched sample results on our variables of interest are similar to the full sample results.
Specifically, the main results in Column (1) of Table 3 indicate that RESERVE_BB has a positive
coefficient while RESERVE_BB2 has a negative coefficient and both are significant (p , 0.01).
Insignificant signs for the LOG_SIZE, CIC, and ROA coefficients (untabulated) suggest that the
matching has controlled successfully for size and profitability, although by construction the
matching eliminates the ability to make other inferences regarding audit costs. The robustness tests
in Table 3 involving low cash ETR and the decile splits are consistent with those reported in Table
2 for the full sample, so we do not discuss them further.
To determine if our CAP participation results are sensitive to the new tax reserve guidance
under FIN 48, and to whether firms are in their first year of CAP, we perform two analyses in
sequence. First, we analyze separately all firms that joined CAP after FIN 48 became effective.
Accordingly, we exclude from the entire sample period the 126 observations related to firms that
joined CAP before FIN 48. As reported in column (1) of Table 4, both the full and matched sample
results confirm the inverted U-shaped relation between CAP participation rates and tax reserves on
post-FIN 48 CAP firms. Second, we further partition the FIN 48 era firms to focus only on firms
23
The cut-offs for the three groups are based on both empirical and theoretical grounds. The strongest empirical
results to identify the low versus middle group cut-off for the full (Table 2) and matched (Table 3) samples are at
Decile 4 versus 5; the coefficients on Deciles 4 and 5 in the full (matched) sample are significantly different at p
¼ 0.16 ( p ¼ 0.07). The strongest results to identify the middle versus high group cut-off for the full and matched
samples are at Decile 9 versus 10; the coefficients on Deciles 9 and 10 in the full (matched) sample are
significantly different at p ¼ 0.02 ( p ¼ 0.33). Thus, we designate our middle group as between Deciles 5 and 9.
Note also that the coefficient estimates in Table 2 rise between the low and middle group cut-off (i.e., from
Decile 4 to 5), which is consistent with theory that the middle (uncertain) group has a higher probability of
making voluntary disclosures under CAP than the low group. Also, note that the coefficient estimates fall
between the middle and high group cut-off (i.e., from Decile 9 to 10), again consistent with theory that the high
group has a lower probability of making voluntary disclosures under CAP than the middle group.

May 2014
TABLE 3
Matched Sample Multivariate Probit Regression Results on the Determinants of CAP
Participation
PrðCAPt Þ ¼ b1a RESERVE BBt þ ðb1b RESERVE BB2t Þ þ ðb1c LoCashETRt1

þb1d RESERVE BBt 3 LoCashETRt1 Þ þ ðR1em RESERVE BB Decilest Þ
þb2 LOG SIZEt1 þ b3 CICt1 þ b4 FOREIGNt1 þ b5 R&Dt1 þ b6 M&At1
þb7 NEWCAPt1 þ b8 ETRt1 þ b9 DFTAXt1 þ b10 PMDACCt1
þb11 GOODGOVt1 þ b12 APTSt1 þ b13 LITIGIOUSt1
þb14 LEVERAGEt1 þ b15 MTBt1 þ b16 ROAt1 þ b17 LOSSt1
X
þ b1826 Industryt1 þ b27 YR2008 þ b28 YR2009 þ e: ð1Þ

Pred.
RESERVE_BB þ 0.735*** 3.87 0.208*** 3.38
RESERVE_BB2 0.107*** 3.09
LoCashETR 0.044 0.12
RESERVE_BB
3 LoCashETR 0.107* 1.85
RESERVE_BB_Dec2 0.036 0.07
RESERVE_BB_Dec4 0.473 1.03
RESERVE_BB_Dec8 0.830** 2.50
RESERVE_BB_Dec10 0.676* 1.95 0.611* 1.88
RESERVE_BB_Dec5to9 0.885*** 3.84
Constant 2.237** 2.01 0.273 0.30 1.957* 1.72 1.178 1.17
All Variable Controls Yes Yes Yes Yes
Year Controls Yes Yes Yes Yes
Industry Controls Yes Yes Yes Yes
Observations 368 368 368 368
Pseudo R2 17.0% 8.2% 13.7% 8.7%
RESERVE_BB_Dec5to9
versus RESERVE_BB_Dec10 v2 ¼ 0.88
p ¼ 0.35
All models use robust standard errors clustered by firm. Continuous variables are winsorized at the 1 and 99 percentile
levels. All models reported herein are significant at the p , 1 percent level using a Chi-square test. Year and industry
fixed effects are not significant.

May 2014
during their first year in CAP, which leaves 31 first-year CAP firms in the FIN 48 era sample.24
After combining these CAP firms with the remaining non-CAP firms in our full and matched
samples, the results reported in column (2) remain similar to our previous tests in that
RESERVE_BB has a positive coefficient (p , 0.01) while RESERVE_BB2 has a negative coefficient
(p , 0.05). The results are consistent with our interpretation that tax uncertainty increases, and tax
aggressiveness decreases, the likelihood that a firm will join CAP.
Consequences of CAP Participation under H2a and H2b

In this section, we present our results on whether CAP participation is linked to a subsequent
decrease in tax uncertainty, as measured by the FIN 48 reserve. The ability to identify Equation (2)
in testing H2a and H2b requires the exclusion of at least one variable that we use in Equation (1).
Empirically, the results in Table 2 show that CIC, but not GOODGOV, is related to CAP in
Equation (1), and that neither variable is significantly related to DRESERVE if included in Equation
(2) (untabulated). These results suggest that CIC, but not GOODGOV, is an appropriate variable to
exclude. Nonetheless, we exclude GOODGOV as well because of its conceptual support.25
After controlling for non-random CAP participation by using the inverse Mills ratio
(INV_MILLS) and excluding GOODGOV and CIC, our main results in Table 5 show a strong
negative relation between CAP and the change in the FIN 48 tax reserve (DRESERVE) (p , 0.01 [p
, 0.05] in the full [matched] samples), thus supporting H2a.26 In interpreting the economic
significance of an overall reduction in the FIN 48 reserve for CAP participants, the coefficient on
CAP for the full sample is 0.00074. The mean lagged total asset value for CAP firms is
$21,423.38 million (untabulated). Therefore, holding all other variables at their mean values and
controlling for non-random selection, CAP participation reduces the mean reserve by $15.85
million (0.00074 3 $21,423.38), or 16.5 percent ($15.85/$96.109) of the CAP sample’s mean
beginning reserve. This result suggests that the estimated benefits of reducing tax uncertainty are
economically meaningful under CAP. Thus, our result provides the first benchmark on the size of
resolved tax uncertainties under CAP that taxpayers and the IRS can use to evaluate whether joint
participation is desired.
Paralleling the cross-sectional variation in firms’ CAP participation incentives under H1, we
anticipate that the impact of CAP participation on firms’ tax reserves will also vary based the on
size of their beginning-period FIN 48 reserves. Accordingly, to test H2b directly, we specify
Equation (2) along a disaggregated sample to compare the reserve reduction for the middle decile
24
Note that we specify our main tests of H1 as a ‘‘levels’’ model of CAP participation rates rather than as a
‘‘changes’’ model of entrance into CAP because the former accurately reflects that CAP firms and the IRS make
an annual choice regarding participation. Once they participate in CAP, firms and the IRS are not obligated to
continue participating. Thus, tax uncertainty can remain a key motivation to continue, not just initiate, CAP
participation.
25
All results hold when we include GOODGOV (but exclude CIC) in Equation (2); GOODGOV remains
insignificant.
26
Note that in the second (third) column of Table 5, we employ a two-stage model where the first stage is the
matched (full) sample of 368 (12,286) observations from Equation (1), and the second-stage uses the matched
sample of 368 firms. Implying reasonably successful matching in the matched sample tests, ROA and LOG_SIZE
are not significant in columns 2 and 3. We also drop all zero RESERVE_BB observations and obtain identical
inferences. In additional tests, we (1) replace the sign of profitability criterion with actual profitability and (2)
employ propensity score matching. Our inferences remain. Conceptually, the Heckman approach is more
appealing because it controls for unobservable factors that influence CAP participation (e.g., firm’s prior audit
history, use of private letter rulings), while propensity score matching assumes self-selection is wholly explained
by observable factors.

May 2014
TABLE 4
Multivariate Probit Regression Results on the Determinants of CAP Participation:
Additional Analysis
PrðCAPt Þ ¼ b1a RESERVE BBt þ b1b RESERVE BB2t þ b2 LOG SIZEt1 þ b3 CICt1
þb4 FOREIGNt1 þ b5 R&Dt1 þ b6 M&At1 þ b7 NEWCAPt1 þ b8 ETRt1
þb9 DFTAXt1 þ b10 PMDACCt1 þ b11 GOODGOVt1 þ b12 APTSt1
þb13 LITIGIOUSt1 þ b14 LEVERAGEt1 þ b15 MTBt1 þ b16 ROAt1
X
þb17 LOSSt1 þ b1826 Industryt1 þ b27 YR2008 þ b28 YR2009 þ e: ð1Þ
(1) (2)
Exclude Firms that Same as (1) þ Only Include
Dependent Variable: CAP Joined CAP before FIN48 First-Year CAP Participants
Full Sample Matched Sample Full Sample Matched Sample
Pred.
RESERVE_BB þ 0.474*** 2.89 0.982*** 0.34 0.538*** 3.30 1.122*** 3.98
RESERVE_BB2 0.053** 1.96 0.142*** 2.93 0.064** 2.39 0.160*** 3.38
Audit Cost
LOG_SIZE þ 0.212*** 3.82 0.229 1.42 0.196*** 3.33 0.173 1.02
CIC þ 0.594*** 2.67 0.262 0.52 0.491** 2.06 0.156 0.29
Tax Complexity
FOREIGN ? 0.457*** 2.92 0.356 1.06 0.437*** 2.66 0.486 1.39
R&D ? 1.058 0.91 0.354 0.11 0.785 0.85 1.885 0.63
M&A ? 0.058 0.44 0.098 0.37 0.085 0.65 0.099 0.35
NEWCAP ? 0.328** 2.58 0.346 1.56 0.410*** 2.89 0.370 1.59
Tax Rate
ETR þ 0.322 1.14 0.564 0.62 0.206 0.64 0.277 0.30
DFTAX þ 5.256 1.63 5.301 0.77 7.560** 2.43 8.844 1.30
Manager Accrual Opportunity
PMDACC ? 0.509 0.76 1.509 0.99 0.717 1.30 2.463 1.43
GOODGOV ? 0.247 1.22 0.301 0.87 0.345** 2.03 0.618* 1.88
APTS ? 0.326 0.93 0.472 0.71 0.306 0.84 0.344 0.48
LITIGIOUS þ 0.123 0.56 0.181 0.36 0.045 0.22 0.339 0.68
Financial Condition
LEVERAGE ? 0.546 1.43 1.456 1.50 0.605 1.61 1.695 1.60
MTB þ 0.005 0.41 0.011 0.34 0.001 0.04 0.022 0.75
ROA þ 0.814 1.01 1.749 1.32 1.183 1.49 1.722 1.29
LOSS 0.345* 1.67 0.377 0.86 0.207 1.02 0.388 0.75
Constant 5.711*** 10.26 4.584*** 3.29 5.423*** 10.55 3.800*** 2.65
Year Controls Yes Yes Yes Yes
Industry Controls Yes Yes Yes Yes
Observations 12,160 116 12,133 62
Pseudo R2 32.2% 20.5% 29.0% 22.3%

May 2014
TABLE 4 (continued)
All models use robust standard errors clustered by firm. Continuous variables are winsorized at the 1 and 99 percentile
levels. All models reported here in are significant at the p , 1 percent level using a Chi-square test.
group (RESERVE_BB_Dec5to9 ¼ 1) against reductions for the combined low and high group
(RESERVE_BB_Dec5to9 ¼ 0) and the high (‘‘aggressive’’) group (RESERVE_BB_Dec10 ¼ 1)
only.27 If CAP indeed attracts the most uncertain taxpayers as participants and then successfully
resolves their uncertainties in real-time (consistent with H1), then the reserve reduction should be
concentrated among CAP firms whose beginning-period FIN 48 reserves belong to the middle
decile group. Indeed, column (1) of Table 6 reports that the reduction in tax reserves among CAP
firms is concentrated in the middle group, with columns (3) and (5) reporting no significant changes
in either the low or the high tax reserve groups. The relatively greater reduction in FIN 48 reserves
for CAP participants in the middle group relative to those in the small group is consistent with H1.
The finding that firms in the high reserve group obtain smaller tax reserve reductions than firms in
the middle group is consistent with H2b and LRS in that large FIN 48 reserves proxy for tax
aggressiveness. Thus, as demonstrated by DSS, audit cost reductions rather than uncertainty
reduction can motivate such taxpayers to participate and remain in CAP.
Inter-Temporal Analysis of Tax Reserves

Related to potential short-run effects of CAP participation caveated in H2a, we analyze next the
impact of CAP participation on FIN 48 tax reserves over time. Accordingly, we split the CAP
variable in Equation (2) into CAP_YR1, equal to 1 if it is the firm’s first year in CAP (0 otherwise),
and CAP_YR2þ, equal to 1 if it is the firm’s second or later year(s) in CAP (0 otherwise).
Untabulated results indicate that, while CAP firms obtain their largest reserve reductions in
CAP_YR1, the reductions remain significant for CAP_YR2þ (all p , 0.10). Also, the CAP_YR1
coefficients are always more negative than those on CAP_YR2þ (full sample: 0.00110 versus
0.00064; matched sample in both stages: 0.00122 versus 0.00091; full [matched] sample in
first [second] stage: 0.00120 versus 0.00091). While the largest FIN 48 reserve reductions occur
in the first year of CAP participation, our untabulated results imply that smaller benefits do persist
over subsequent years of our sample period.
When the inter-temporal effects are analyzed separately for the decile groups similar to H2b,
we find that consistent differences between the groups are maintained over time. Specifically, the
results in column (2) of Table 6 indicate that CAP firms in the middle decile group continue to
decrease their reserves over our sample period, while columns (4) and (6) show that there is no
persistent reserve reduction for CAP firms belonging to the low and/or high decile groups.
Although these results are consistent with the tax reporting benefits accruing to the middle group of
taxpayers as in BDJ, our limited sample period leaves open the question of when a stable long-run
equilibrium might be achieved. As we acknowledge in developing H2a and H2b that due to the
recency of both FIN 48 and CAP, our results may be more descriptive of short-run than long-run
CAP participation effects and, thus, should be interpreted as such.
27
See footnote 23 for details on why the sample is split along these decile groups. Note that the inclusion of firms
with zero tax reserves in the bottom decile makes the non-middle decile subsample size larger than the middle
decile subsample. This issue is less problematic in the matched sample tests; in fact, our results strengthen.

May 2014
TABLE 5
Multivariate Ordinary Least Squares Regression Results on the FIN 48 Reserve Effects of CAP Participation
May 2014
DRESERVEt1;t ¼ dt þ c1 CAPt þ c2 LOG SIZEt þ c3 FOREIGNt þ c4 R&Dt þ c5 M&At þ c6 NEWCAPt þ c7 DDFTAXt1;t þ c8 PMDACCt

þc9 DAPTSt1;t þ c10 LITIGIOUSt þ c11 LEVERAGEt þ c12 MTBt þ c13 ROAt þ c14 LOSSt þ c15 INV MILLSt
X
þ c1624 Industryt þ c25 YR2008 þ c26 YR2009 þ /: ð2Þ
Dependent Variable: DRESERVE Full (Matched) Sample

Full Sample in Both Stages Matched Sample in Both Stages in First (Second) Stage
Pred.
Variable Sign Coefficient t-stat Coefficient t-stat Coefficient t-stat
CAP 0.00074*** 2.61 0.00098** 2.47 0.00097** 2.43
LOG_SIZE þ 0.00004** 2.30 0.00018 0.96 0.00019 0.98
FOREIGN þ 0.00029** 2.50 0.00155** 2.14 0.00154** 2.13
R&D þ 0.00000 0.02 0.00469 0.50 0.00489 0.53

M&A þ 0.00023*** 3.63 0.00073* 1.75 0.00074* 1.75
NEWCAP 0.00002 0.27 0.00026 0.57 0.00025 0.55
DDFTAX 0.00041 0.35 0.00566 0.48 0.00622 0.53
PMDACC 0.00084*** 4.87 0.00239 0.92 0.00243 0.94
DAPTS ? 0.00013 0.55 0.00279 1.28 0.00282 1.30
LITIGIOUS þ 0.00046*** 5.66 0.00158 1.58 0.00157 1.55
LEVERAGE ? 0.00049*** 3.21 0.00017 13.00 0.00022 0.16
MTB þ 0.00023*** 3.78 0.00006* 1.96 0.00006* 1.72
ROA þ 0.00001 0.06 0.00268 0.92 0.00260 0.89
LOSS 0.00008 1.08 0.00034 0.41 0.00033 0.41
INV_MILLS 0.00033 0.93 0.00036 0.22 0.00035 0.11
Constant 0.00009 0.79 0.00194 0.93 0.00224 1.02
Year Controls Yesa Yesc Yese
Industry Controls Yesb Yesd Yesf
Observations 11,350 368 368
Adjusted R2 2.0% 13.9% 13.9%
893

TABLE 5 (continued)
894
All models use robust standard errors clustered by firm. Continuous variables are winsorized at the 1 and 99 percentile levels. INV_MILLS is the self-selection correction variable
derived from using Equation (1) as the first-stage model in which CIC and GOODGOV are the exclusionary variables. All models reported herein are significant at the p , 1
percent level using an F-test.
a
YR2008 is significantly negative (Coeff. ¼ 0.00016; t ¼ 2.70; p , 0.01); YR2009 not significant.
b
SIC 5 is significantly negative (Coeff. ¼0.00461; t ¼4.70; p , 0.01); SIC 8 is significantly negative (Coeff. ¼0.00025; t ¼1.83; p ¼ 0.07); SIC 9 is significantly negative
(Coeff. ¼ 0.00028; t ¼ 1.83; p ¼ 0.07).
c
YR2008 is significantly negative (Coeff. ¼ 0.00113; t ¼ 2.37; p ¼ 0.02); YR2009 is significantly negative (Coeff. ¼ 0.00098; t ¼ 2.17; p ¼ 0.03).
d
SIC 1 is significantly positive (Coeff. ¼ 0.00174; t ¼ 1.90; p ¼ 0.06); SIC 4 is significantly positive (Coeff.¼ 0.0026; t ¼ 3.16; p , 0.01).
e
YR2008 is significantly negative (Coeff. ¼ 0.00113; t ¼ 2.37; p ¼ 0.02); YR2009 is significantly negative (Coeff. ¼ 0.00098; t ¼ 2.16; p ¼ 0.03).
f
SIC 1 is significantly positive (Coeff. ¼ 0.00166; t ¼ 1.72; p ¼ 0.09); SIC 4 is significantly positive (Coeff. ¼ 0.00262; t ¼ 3.23; p , 0.01).
May 2014
Beck and Lisowsky
TABLE 6
Multivariate Ordinary Least Squares Regression Results on the FIN 48 Reserve Effects of CAP Participation
May 2014
Middle Decile Group and Inter-Temporal Subsample Analysis
(Dependent Variable: DRESERVE)

DRESERVEt1;t ¼ dt þ ðc1 CAPt Þ þ c2 LOG SIZEt þ c3 FOREIGNt þ c4 R&Dt þ c5 M&At þ c6 NEWCAPt þ c7 DDFTAXt1;t þ c8 PMDACCt
þc9 DAPTSt1;t þ c10 LITIGIOUSt þ c11 LEVERAGEt þ c12 MTBt þ c13 ROAt þ c14 LOSSt þ c15 INV MILLSt
X
þ c1624 Industryt þ c25 YR2008 þ c26 YR2009 þ /: ð2Þ
Panel A: Full Sample in Both Stages

RESERVE_BB_Dec5to9 ¼ 1 RESERVE_BB_Dec5to9 ¼ 0 RESERVE_BB_Dec10 ¼ 1
(1) (2) (3) (4) (5) (6)
Pred. Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient
Variable Sign (t-stat) (t-stat) (t-stat) (t-stat) (t-stat) (t-stat)

CAP 0.00064* 0.00012 0.00023
(1.76) (1.12) (0.26)
CAP_YR1 0.00128* 0.00090 0.00053
(1.90) (0.82) (0.31)
CAP_YR2þ 0.00031* 0.00041 0.00019
(1.75) (0.96) (0.23)
INV_MILLS 0.00050 0.00048 0.00003 0.00003 0.00569 0.00567
(0.54) (0.52) (0.96) (0.96) (0.89) (0.88)
Constant 0.00072 0.00073 0.00002 0.00002 0.00389 0.00394
(0.80) (0.81) (0.15) (0.15) (1.20) (1.24)
All Variable, Year, and Industry Controls Yes Yes Yes Yes Yes Yes
Observations 2,049 2,049 9,301 9,301 410 410
Adjusted R2 5.5% 5.6% 1.6% 1.6% 15.7% 16.1%

895
TABLE 6 (continued)
896
Panel B: Matched Sample in Both Stages

(1) (2) (3) (4) (5) (6)
CAP 0.00151*** 0.00056 0.00276
(2.86) (0.80) (1.29)
CAP_YR1 0.00196** 0.00064 0.00353
(2.48) (0.49) (1.29)
CAP_YR2þ 0.00136** 0.00054 0.00215
(2.47) (0.83) (1.01)
INV_MILLS 0.00019 0.00011 0.00286 0.00287 0.00267 0.00410
(0.08) (0.05) (0.72) (0.71) (0.04) (0.27)
Constant 0.00592** 0.00585* 0.00385 0.00387 0.03488*** 0.03658***
(1.83) (1.82) (1.18) (1.20) (3.01) (2.97)
Observations 170 170 198 198 34 34
Adjusted R2 27.5% 27.8% 5.4% 5.3% 39.9% 40.6%
Panel C: Full (Matched) Sample in First (Second) Stages

(1) (2) (3) (4) (5) (6)
CAP 0.00152*** 0.00061 0.00256
(2.88) (0.87) (1.20)
CAP_YR1 0.00195** 0.00067 0.00350
(2.46) (0.51) (1.24)
CAP_YR2þ 0.00137** 0.00060 0.00247
(2.48) (0.93) (1.24)
May 2014
Beck and Lisowsky

TABLE 6 (continued)
May 2014
(1) (2) (3) (4) (5) (6)
INV_MILLS 0.00164 0.00115 0.00341 0.00339 0.02742 0.02422

(0.37) (0.26) (0.48) (0.48) (0.73) (0.62)
Constant 0.00630* 0.00613* 0.00329 0.00329 0.02806*** 0.02978
(1.82) (1.78) (1.06) (1.05) (2.47) (2.48)
Observations 170 170 198 198 34 34
Adjusted R2 27.6% 27.9% 5.3% 5.5% 40.5% 41.1%
All models use robust standard errors clustered by firm. Continuous variables are winsorized at the 1 and 99 percentile levels. See Appendix A for full variable definitions.
RESERVE_BB_Dec5to9 ¼ 1 if the firm’s RESERVE_BB is in the sample’s 5th through 9th deciles, 0 otherwise. RESERVE_BB_Dec10 ¼ 1 if the firm’s RESERVE_BB is in the
sample’s 10th decile. CAP_YR1 ¼ 1 if it is a CAP participant’s first year in CAP, 0 otherwise. CAP_YR2þ¼ 1 if it is a CAP participant’s second or later year in CAP, 0 otherwise.
INV_MILLS is the self-selection correction variable derived from using Equation (1) as the first-stage model in which CIC and GOODGOV are the exclusionary variables. All
models reported herein are significant at the p , 1 percent level using an F-test.
897
Supplemental Test: Effective Tax Rate Changes for CAP Participants

Prior research finds that managers are compensated for reducing GAAP ETRs (Robinson,
Sikes, and Weaver 2010; Armstrong, Blouin, and Larcker 2012). Since CAP is one mechanism that
can reduce the tax reserve, and thus the ETR, it is possible that compensation incentives might drive
managers to participate in CAP. In untabulated tests, we replace the dependent variable in Equation
(2) with the change in (various measures of ) ETR, including total GAAP, current, cash, foreign,
federal, and state. Although decreasing the FIN 48 reserve should decrease ETRs if the release
represents an over-reserve, we observe no significant change in any of the ETR measures, even if
we restrict our sample to only profitable firms. Therefore, we conclude that the release is neither
from an over- nor under-reserve on average and, thus, CAP participation is unlikely to alter
managerial compensation as it relates to ETR reporting.28
V. CONCLUSIONS AND IMPLICATIONS

The CAP program fundamentally transforms a more adversarial audit relationship between
corporations and the IRS into a more cooperative one. In exchange for voluntarily disclosing
information on a timely basis to the IRS, CAP provides firms with the opportunity to resolve
promptly their tax uncertainties. Ours is the first study to provide empirical evidence on the role of
tax uncertainty in the determinants and outcomes of CAP participation. As a result, we extend the
tax literature by identifying a unique setting that limits a firm’s tax avoidance.
Based on data provided by the IRS, we find that CAP participation rates exhibit an inverse
U-shaped relation with the size of firms’ FIN 48 tax reserves. Our results are consistent with
analytical predictions of BDJ and the empirical findings of LRS that firms facing high levels of tax
uncertainty, but not aggressiveness, have strong incentives to avail themselves of a voluntary tax
disclosure regime such as CAP. These results lead to a more complete interpretation that FIN 48
reserves reflect both tax uncertainty and tax aggressiveness.
After controlling for non-random selection into CAP, we find that the mean FIN 48 reserve
declines by almost $16 million, or 16.5 percent, per CAP firm relative to non-CAP firms. These
effects are primarily concentrated among firms with intermediate levels of FIN 48 reserves—the
same firms that prior theory predicts would be most attracted to CAP. In terms of the timing of the
effects of CAP, the most significant reductions in tax reserves occur during the first year of
participation. However, tax reserve reductions persist over subsequent years as well.
Our study has several implications. Using changes in FIN 48 reserves as our proxy for changes
in tax uncertainty, our results provide evidence that CAP’s more cooperative approach is consistent
with the IRS’s strategic objectives in that tax uncertainty is reduced for participants as a whole. Our
finding that CAP’s effects vary in the cross-section might also imply that compliance may not be
enhanced for firms in the high FIN 48 reserve group that we characterize as tax aggressive.
However, we temper this latter implication because we cannot observe the counter-factual case of
28
The finding that tax reserves decrease without a concurrent decrease in GAAP or Cash ETRs can occur for
several reasons. First, there could be large, non-reserve-related changes to ETRs that counteract the smaller
reserve effects. Second, even without other change factors, the beginning-period reserves of CAP firms may not
be uniformly accurate; some CAP firms could be over-reserved while others under-reserved prior to tax
resolution. To the extent that CAP provides prompt tax resolution, CAP firms should experience a decrease in
FIN 48 reserves relative to non-CAP firms. However, the ETR effects are potentially different for CAP firms that
are under-reserved versus over-reserved. If a CAP firm is under-reserved, then settling uncertainties
unambiguously decreases the reserve (if accrued), but increases the GAAP ETR for the under-reserved amount.
If a CAP firm is over-reserved, then settling uncertainties decreases both the tax reserve and GAAP ETR. Cash
ETRs also can be impacted differently by CAP. For example, resolving a favorable position will reduce the tax
reserve, but will have no effect on Cash ETR. However, settling an unfavorable position will reduce the tax
reserve, but increase the Cash ETR.

May 2014
FIN 48 reserves that would have been reported had these firm not participated in CAP and had
instead been subjected to conventional audits. Also, due to data limitations, we cannot consider
more refined measures of audit cost savings, such as corporate tax compliance budgets or IRS agent
hours. If the costs of CAP are lower than conventional audits for firms with high FIN 48 reserves,
then CAP may still be successful in making the audit process more cost-effective for all parties,
even when FIN 48 reserves are not reduced.
Our study is subject to three additional caveats. First, we are unable to observe other attributes
that might impact CAP participation, including the taxpayer’s prior audit history and ability to
resolve tax uncertainty through other means, such as private letter rulings. Second, we lack
information on firms that applied to CAP and were rejected. Third, due to the newness of the CAP
program, we are constrained to an examination of relatively short-term effects and must leave a
long-run analysis to future research. Nevertheless, our results provide the first empirical evidence
on the role of tax uncertainty in the determinants and outcomes of the CAP real-time tax audit
program.
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APPENDIX A
Variable Definitions
Variables of Interest
CAP ¼ 1 if a firm participates in the Internal Revenue Service’s (IRS) Compliance Assurance
Process (CAP) audit program, 0 otherwise (Source: IRS);
RESERVE_BB ¼ log(1 þ tax reserve beginning balance) as reported in financial statement
footnotes pursuant to Financial Interpretation No. 48 (FIN 48), in $millions (Source: IRS,
10-Ks); and
DRESERVE ¼ (ending balance beginning balance of the FIN 48 tax reserve)/lagged total
assets (AT) (Source: IRS, 10-Ks; Compustat).
Control Variables
LOG_SIZE ¼ log(1 þ total assets in $millions [AT]) (Source: Compustat);
CIC ¼ 1 if firm is in the top quartile of each year’s distribution of lagged total assets [AT], 0
otherwise (Source: Compustat);

May 2014
FOREIGN ¼ foreign pretax income (PIFO)/total pretax income (PI), winsorized at [1,1]. If PI
0, ETR ¼ 0 (Source: Compustat);
R&D ¼ research and development expense (XRD)/total sales (SALE) (Source: Compustat);
M&A ¼ 1 if firm is engaged in merger or acquisition activities, where AQC is not 0 or missing,
0 otherwise (Source: Compustat);
NEWCAP ¼ 1 if firm issues debt (DLTIS/AT) or equity (SCSTKC/AT) in excess of 5 percent
of total assets (AT), 0 otherwise (Source: Compustat);
PMDACC ¼ performance-matched discretionary accruals (see Kothari, Leone, and Wasley
2005) (Source: Compustat);
GOODGOV ¼ 1 if firm has strong corporate governance, calculated as whether the firm’s G-
Index score (GINDEX) is below the sample median of 9, 0 otherwise (Source: IRRC);
APTS ¼ ratio of auditor-provided tax service fees to total audit fees paid by the firm to its
independent auditor (Source: Audit Analytics);
ETR ¼ effective tax rate calculated as total tax expense (TXT)/pretax income (PI), winsorized
at [0,1]. If PI 0, ETR ¼ 0 (Source: Compustat);
DFTAX ¼ deferred tax expense (TXDI)/total assets (AT) (Source: Compustat);
LEVERAGE ¼ ratio of (short-term [DLC] þ long-term debt [DLTT])/total assets [AT] (Source:
Compustat);
MTB ¼ market-to-book ratio, or (common shares outstanding [CSHO] 3 stock price at end of
fiscal year [PRCC_F])/book value of common equity [CEQ] (Source: Compustat);
ROA ¼ return on assets, or pretax income [PI] divided by total assets [AT], winsorized at [1,1]
(Source: Compustat);
LOSS ¼ 1 if firm reported negative net income [NI] in current year, 0 otherwise;
LITIGIOUS ¼ 1 if firm operates in a high litigation industry, 0 otherwise. Litigious industries
include SIC codes 2833–2836 (biotechnology), 3570–3577 (computers), 3600–3674
(electronics), 5200–5961 (retailing), 7370–7379 (programming), 8731–8734 (research
and development) (Source: Compustat);
YEAR ¼ 1 if firm’s fiscal year-end is 2008 (2009), 0 otherwise;
INDUSTRY ¼ 1 if firm belongs to any one-digit SIC code, where Agriculture ¼ SIC 0;
Construction ¼ SIC 1; Chemicals ¼ SIC 2; Manufacturing ¼ SIC 3 (reference category);
Transportation ¼ SIC 4; Retail ¼ SIC 5; Financial ¼ SIC 6; Business Services ¼ SIC 7;
Health ¼ SIC 8; and Diversified ¼ SIC 9, 0 otherwise; and
INV_MILLS ¼ inverse Mills ratio generated from Equation (1), used in Equation (2).

May 2014
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THE ACCOUNTING REVIEW American Accounting Association

Vol. 89, No. 3 DOI: 10.2308/accr-50677

Tax Uncertainty and Voluntary Real-Time

The Accounting Review

The Accounting Review

The CAP Audit Program6

The Accounting Review

The Accounting Review

FIN 48 Reserves for Income Tax Uncertainties

Analytical Models of Tax Uncertainty

The Accounting Review

III. HYPOTHESES AND EMPIRICAL MODEL DEVELOPMENT

The Accounting Review

Tax Uncertainty as a Determinant of CAP Participation

The Accounting Review

b 0 X ¼ b1a RESERVE BBt þ b1b RESERVE BB2t þ b2 LOG SIZEt1 þ b3 CICt1

The Accounting Review

The Accounting Review

The Effect of CAP Participation on Tax Reserves

DRESERVEt1;t ¼ dt þ c1 CAPt þ c2 LOG SIZEt þ c3 FOREIGNt þ c4 R&Dt þ c5 M&At

The Accounting Review

Disaggregate Analysis by Taxpayer Groups

IV. EMPIRICAL ANALYSIS

The Accounting Review

The Accounting Review

Panel A: Sample Distribution

Total 4,267 4,099 3,920 12,286

(continued on next page)

The Accounting Review

(continued on next page)

Tests of Means and Proportions

Panel C: Descriptive Statistics for H2 Sample

(continued on next page)

The Accounting Review

Regression Results of CAP Participation under H1

The Accounting Review

The Accounting Review

Dependent Variable: CAP (3) (4)

RESERVE_BB2 0.068*** 3.79

(continued on next page)

Dependent Variable: CAP (3) (4)

(continued on next page)

The Accounting Review

The Accounting Review

PrðCAPt Þ ¼ b1a RESERVE BBt þ ðb1b RESERVE BB2t Þ þ ðb1c LoCashETRt1

Dependent Variable: CAP (3) (4)

The Accounting Review

Consequences of CAP Participation under H2a and H2b

The Accounting Review

(continued on next page)

The Accounting Review

Inter-Temporal Analysis of Tax Reserves

The Accounting Review

The Accounting Review

Dependent Variable: DRESERVE Full (Matched) Sample

R&D þ 0.00000 0.02 0.00469 0.50 0.00489 0.53

(continued on next page)

The Accounting Review

Panel A: Full Sample in Both Stages

Variable Sign (t-stat) (t-stat) (t-stat) (t-stat) (t-stat) (t-stat)

(continued on next page)

Panel B: Matched Sample in Both Stages

Panel C: Full (Matched) Sample in First (Second) Stages