Schedule UTP: Stock Price Reaction and Economic Consequences

Abstract

In 2010, the Internal Revenue Service (IRS) announced the requirement to disclose uncertain tax positions (UTP) on a new schedule (Schedule UTP) to be filed with federal corporate income tax returns. Schedule UTP could increase firm's tax burden by providing a roadmap of tax planning strategies directly to the IRS. Stock returns around the development of Schedule UTP are negative; consistent with investors' concern that Schedule UTP would impose costs on firms. However, we document a significant positive stock price reaction to the release of the final draft of Schedule UTP in which the IRS relaxed many of the controversial provisions of Schedule UTP. Additionally, we find this positive reaction is incrementally larger for more tax aggressive firms. Finally, we find a significant decrease in reported uncertain tax benefits (UTBs) and additions to UTBs after the adoption of Schedule UTP in 2010.

Keywords: Schedule UTP, tax avoidance, uncertain tax positions, event study