ABSTRACT We investigate whether firms requesting private letter rulings (PLRs) from the Internal Revenue Service (IRS) face higher IRS audit intensity. PLRs offer tax certainty by clarifying the tax implications of specific transactions, but they also require firms to incur high costs and provide detailed disclosures. Using a sample of firm-years from 2006 to 2019, we examine the relationship between PLR requests and IRS audit intensity. Across three proxies of IRS scrutiny, we find that PLR firms face higher IRS audit intensity. Further, we find that tax-free restructuring transactions do not explain these results and that the results do not generalize to tax opinions from external advisors, suggesting that the IRS directs greater scrutiny specifically toward PLRs rather than toward their underlying transaction complexity. Overall, we extend the nascent PLR literature by providing evidence of an unintended consequence of seeking tax certainty. Data Availability: All data are from publicly available databases mentioned in the manuscript. JEL Classifications: H2; H26; K34.
Gardner et al. (Fri,) studied this question.