Cato Institute:  IRS Officials’ Stock Holdings and Corporate Tax Outcomes, by Michael Mayberry (Florida; Google Scholar), Eashwar Nagaraj (Florida; Google Scholar) & Scott G. Rane (Florida; Google Scholar):

The IRS plays an important role in improving corporate transparency and encouraging corporations to act in the best interests of their shareholders and other stakeholders. The agency makes increasingly consequential decisions about audit selection and strategy and receives substantial private financial disclosures from firms. However, its enforcement activities and other interactions with firms remain private until they are disclosed by the firm in financial statements. Thus, investors are not immediately aware of IRS-related information about the firms they invest in, which potentially creates profitable trading opportunities for tax officials. Our research investigates whether the stock trades of high-ranking IRS officials are associated with tax-related information.

IRS officials likely possess relevant information about firms from at least three sources. First, they are privy to information on enforcement decisions concerning corporate taxpayers before it is disclosed to the public. Second, they have access to corporate tax returns, which are not publicly disclosed but contain valuable information about firms’ operations and organizational structure. Third, they have advance notice of IRS policy adjustments and initiatives that may lead to changes in scrutiny for certain firms and industries. This information—not available to other market participants—may cause the personal financial transactions of IRS officials to be associated with positive abnormal returns and future tax enforcement outcomes.

Michael Mayberry (Florida; Google Scholar), Eashwar Nagaraj (Florida; Google Scholar) & Scott G. Rane (Florida; Google Scholar), IRS Officials' Stock Holdings and Corporate Tax Outcomes:

We investigate the information content of personal stock trades by IRS officials. We collect transaction-level data on over five thousand IRS officials' personal investments and document substantial trading activity in individual stocks by officials across IRS departments.

We find that IRS officials' trades, predominantly their purchases, generate positive abnormal returns on average, consistent with officials' information being not yet fully impounded into stock price.

Next, we examine whether stock trades by these officials are associated with the firm's future tax enforcement outcomes. For a given firm, we find IRS officials' purchases are associated with subsequent decreases in tax reserves and specifically lapses in the statute of limitations.  We also find that IRS officials' sales are associated with subsequent unfavorable tax settlements.

These findings suggest that IRS officials possess, and trade on, material tax-related information and that these trades are associated with future tax enforcement outcomes for firms.

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