Conclusion
In this study, we examine how tax audit settlements of a company's uncertain tax positions affect its subsequent tax planning and reporting behavior. In the annual UTB disclosure, firms are required to report the amount of the UTB reserve that was settled during the year with tax authorities. In particular, the presence of a settlement suggests that the tax authority challenged at least one of the firm's uncertain tax positions and, therefore, provides the company with new information regarding the sustainability of its tax avoidance strategies and existing uncertain tax positions. Consistent with expectations, our multivariate tests suggest that UTB settlements are negatively associated with the accrual related to new uncertain tax positions. In addition, we demonstrate that managers appear to respond to UTB settlements by decreasing the extent of downward adjustments to the UTB reserve related to existing uncertain tax positions. Collectively, these findings suggest that tax authority scrutiny in the form of settlements may induce managers to be more conservative with their tax reporting, and possible their tax planning activities as well. Furthermore, we conjecture and find that that the valuation of UTBs is lower in the year subsequent to a UTB settlement. Our study makes several important contributions to the literature. First, we extend the stream of research focusing on tax enforcement by examining the effect of firm-specific tax audit outcomes on subsequent firm behavior.
