This study investigates the effect of increases in firm-level investments in the corporate tax function to address financial reporting concerns on the magnitude and timing of firm's tax avoidance. I exploit the novel setting of the remediation of tax-related material weaknesses in internal control (MWs) as a shock that motivates firms to increase investments in the corporate tax function. I examine the impact of increases in these investments on the magnitude and timing of future payoffs in the form of increased tax avoidance. I find no evidence of increases in tax function investments contemporaneously impacting tax avoidance. However, I do find that investments in the income tax function are associated with greater levels of future tax avoidance. Specifically, I find firms making investments in year t have 4-8 percentage point lower 3-year cash and GAAP effective tax rates (ETR) measured at time t +1 to t +3 compared to their industry peers. Descriptive results suggest the primary drivers of this increase in future tax avoidance are lower foreign and state tax expense. I also hand-collect internal control disclosures to investigate how firms remediate tax-related MWs. The results suggest the most common types of investments are in outside consulting and new personnel, including hiring a new tax director. I find that both external and internal tax function investments are positively associated with future tax avoidance, with no differential impact on future ETRs. Results also indicate that risk, complexity, and a lack of resources are predictors of engaging an external service provider. These results demonstrate the magnitude and timing lag of payoffs on tax function investments and illustrate how strengthening internal controls can improve firm performance via increased tax avoidance. -- Abstract.
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