Private Letter Rulings: Unlocking Tax Certainty, Triggering IRS Monitoring

• In Event: Pen Pals with the IRS

Abstract

In this study, we investigate whether firms requesting Private Letter Rulings (PLRs) from the Internal Revenue Service (IRS) face higher levels of tax authority monitoring than other firms. PLRs offer tax certainty by clarifying the tax implications of specific transactions, but they also require significant disclosure and involve high direct and indirect costs. Using a sample of 16,383 firm-years from 2010 to 2023, of which 14% of firms requested a PLR, we analyze the effect of PLRs on tax authority scrutiny using the monitoring measure developed by Finley and Stekelberg (2022). Our findings reveal that firms requesting PLRs face heightened tax monitoring, consistent with salience theory. This conclusion holds even after removing PLR requests related to tax-free mergers, spin-offs, and reorganizations, some of the most common requests from public corporations, suggesting that the results broadly apply to PLR-requesting firms. Finally, we do not find evidence that firms requesting a tax opinion from their external tax advisors, rather than a PLR from the IRS, face similarly heightened monitoring. This research extends the nascent PLR literature and provides insights into the consequences of voluntary tax disclosures on tax authority monitoring. The findings should be relevant to managers and tax advisors weighing the costs and benefits of a PLR request, particularly in light of the IRS’s recent expansion of the scope of issues eligible for PLRs.

Authors

• Jesse Gardner, jgrdnr@clemson.edu

• Ryan Polk, Clemson University

• Courtney Yazzie, Clemson University