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Data constraints have largely prevented empirical research on the link between tax enforcement within the U.S. and corporate governance (e.g., Desai and Dharmapala, 2006; Desai, Dyck, and Zingales, 2007). We capitalize on novel data compiled by Transactional Records Access Clearinghouse (TRAC) to gauge the impact of IRS monitoring on private firms' borrowing costs. Given that prior research seldom employs this data source, we provide some background on TRAC, a nonpartisan research institute affiliated with Syracuse University that since 1989 has publicly disseminated comprehensive statistics on many federal agencies, including the IRS, using the government's own real data. TRAC applies the following data collection process (Long, Roberge and Lamicela 2006):
To build its data warehouse, TRAC begins by searching through government manuals, Web sites, and other sources in order to identify relevant systems of records and transactional databases maintained by different agencies. Based on these leads, TRAC makes requests for specific data sets and all of the agency documentation describing the details of what is covered and how the information is organized. The requests usually are made under the Freedom of Information Act. When release of the data entails a lawsuit and court decision, this beginning step can require a great deal of time and expense. Once the data sets and documentation are in hand, statistical and other kinds of checks are made to test the completeness and reliability of the information that has been provided. Data from different sources about similar events may be compared or merged as a farther check on data set reliability. Data sets and fields that fail to measure up are not used for analysis.
The credibility of TRAC's analysis is evident in that the IRS Oversight Board (e.g., 2004), the nine-member panel responsible for monitoring IRS activities, cites their tax enforcement statistics in its annual reports. Moreover, reputable news media, including The New York Times (e.g., Johnston, 2004), the Wall Street Journal (e.g., McKinnon, 2004), The Washington Post (e.g., Crenshaw 2000), and Time (e.g., Kadlect, 2001), frequently broadcast TRAC statistics. Indeed, in the aftermath of the IRS withholding certain tax data from TRAC, U.S. Senator Carl Levin implored the IRS in 2006 to reverse this decision since "much of what the public knows about IRS enforcement is based on figures that TRAC makes publicly availalbe." The U.S. Senate consults TRAC studies on IRS tax enforcement in its Finance Committee and Permanent Subcommittee on Investigations deliberations (e.g., Crenshaw, 2000)......[citing TRAC research.
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