Sleeping with the Enemy: Taxes and Former IRS Employees

We investigate the financial and tax considerations associated with hiring former IRS employees and whether these hires are associated with subsequent tax payments or settlements. Utilizing professional profiles on LinkedIn between 1980 and 2012, we identify 1,697 episodes where 1,252 full-time IRS employees were hired by 784 unique public corporations. We find that firms tend to hire IRS employees prior to significant economic downturns and that firms hiring IRS personnel are associated with higher GAAP effective tax rates, tax penalties and tax shelter probabilities. Using a propensity matched sample, we find that after making an IRS hire, firms exhibit reduced effective tax rates, reduced tax rate volatility but continue to be associated with higher book-tax differences, tax settlements, and penalties.