The ex-England boss became interim chairman in December when incumbent Jimmy Russo stepped down.
Taylor told the club's website: "I would like to see if I can play my part in the continuing work to re-establish stability at Watford."
He added: "I'm not coming back to run Watford Football Club.
"I have great confidence in the executive staff and they have my full support."
Taylor has a long-standing affinity with the Hornets, after becoming manager in 1977 he led them from the fourth-tier of English football to the top-flight.
He returned in the 1990s and took the club into the Premier League for one season.
Source: BBC Sport
Source: BBC Sport