The Impact of In-person Communication on Resolving Tax Uncertainty with the IRS

Abstract

We investigate the extent to which in-person communication affects firms' ability to resolve tax uncertainty with the Internal Revenue Service (IRS). Using public data, we construct a novel measure that approximates driving traffic between a firm's headquarters and its closest IRS office to capture in-person communication. By examining stay-at-home orders issued by states during the COVID-19 pandemic as staggered shocks to social interaction, we validate that our driving traffic measure plausibly captures in-person communication. We find firms with high in-person communication with the IRS before COVID are less effective at resolving tax uncertainty following COVID-related social restriction orders. These firms encounter less resolution of prior-period tax uncertainties, more unfavorable tax settlements, and extended tax audits. The effects are greater for firms having more IRS interaction before COVID, such as through the Coordinated Industry Case or Compliance Assurance Process programs. We offer timely policy implications as the IRS reassesses its remote work model amid the Trump Administration's mandate for in-person work.

Keywords: in-person, remote, tax uncertainty, tax audit JEL Classification: H11, H25, M41, M48

JEL Classification: H11, H25, M41, M48