Academic and anecdotal evidence indicates that incentive systems often provide short‐term payouts without regard for long‐term consequences. New detailed disclosures mandated by FIN No. 48, Accounting for Uncertainty in Income Taxes, enable us to use a tax setting to investigate whether boards adjust performance‐based pay for uncertainty. We find managers’ bonus payouts are positively associated with tax performance; however, bonus payouts are lower when measures of ex ante tax uncertainty are higher. Our results are robust to tests of alternative explanations including financial reporting aggressiveness, overall firm risk, and other forms of compensation. Further, we document that the relation between bonus compensation and tax performance has changed in the post‐ FIN No. 48 period. Specifically, we identify a significant association between bonus payout and GAAP ETR only in the pre‐ FIN No. 48 period and a significant association between bonus payout and cash ETR only in the post‐ FIN No. 48 period, suggesting that the relation between compensation and tax avoidance should be examined carefully with particular attention to the post‐ FIN No. 48 period.

Given that tax‐related critical audit matters (tax CAMs) were prevalent among accelerated filers (18.5% of observations) during the initial year of CAM disclosures, we examine whether an auditor's disclosure of tax CAMs is associated with variation in tax‐related financial reporting quality, tax avoidance, and tax‐related earnings management. Finding an association between tax CAMs and one of these tax outcomes would indicate that the new auditor reporting standard has indirectly affected investors. Examining the first year of CAM disclosures, we do not find that tax CAMs are associated with broad proxies of tax‐related audit or financial reporting quality (e.g., restatements, internal control weaknesses, comment letters) or tax avoidance (e.g., effective tax rates or book‐to‐tax differences). We do find that tax CAMs are associated with a modest increase in tax accrual quality, an increase in the reserve for unrecognized tax benefits, and a reduction in the likelihood of tax‐related earnings management. However, we do not find these tax CAM effects persist into the second year of CAM reporting. Our evidence is consistent with tax CAM disclosures having a modest but short‐lived effect on companies' reporting of tax accounts. Our findings should inform the PCAOB as they conduct their post‐implementation review of the new audit reporting standard.