Differential responses to tax regulation: The case of Schedule UTP

Schedule UTP was instituted by the Internal Revenue Service to obtain more detailed information about firms' uncertain tax benefits (UTBs) that are required to be reported on a firm's financial statements. We document that the reaction of firms was not uniform. We provide evidence that post Schedule UTP, firms with higher political costs lower their UTBs more than average firms but do not increase their cash taxes paid. In addition, we look at firms reporting zero or missing UTBs before Schedule UTP was implemented. We find that these firms paid more in cash taxes after the introduction of Schedule UTP. From a policy standpoint, schedule UTP affects significant subgroups of firms in different manners.