The Unintended Consequences of Schedule UTP and the Role of the Auditor

• In Event: Breakfast with Research Roundtable Forum Session
  In Paper Session: Audit Quality Roundtable

Abstract

IRS Schedule UTP requires firms to disclose to the IRS each of the uncertain tax positions reserved for on financial statements. Linking private disclosure to the IRS of uncertain tax positions to the financial statement disclosure of these items incentivizes firms to report fewer additions to unrecognized tax benefits on financial statements. We provide evidence that firms with a Big 4 auditor, firms with an industry specialist auditor and firms with a tax industry specialist auditor report more additions to unrecognized tax benefits after the IRS introduced Schedule UTP compared to before Schedule UTP. Our results are consistent with three proxies for higher audit quality constraining the opportunistic underreporting of additions to unrecognized tax benefits after Schedule UTP.

Authors

• Norman Massel, Louisiana State University

• Jung Eun Park, University of Nebraska Omaha

• Erin Emily Henry, University of Memphis