Do Audits Deter or Provoke Future Tax Noncompliance? Evidence on Self-Employed Taxpayers

Author(s)
Sebastian Beer, Matthias Kasper, Erico Kirchler, B. Erard
Abstract

This article employs unique tax administrative data and operational audit information, including risk scores used for audit selection, from a sample of approximately 7500 self-employed US taxpayers to investigate the effects of operational tax audits on future reporting behavior. Our estimates indicate that audits can have substantial deterrent or counter-deterrent effects, depending on the audit outcome. In the aggregate, taxable income is estimated to increase by roughly 15% 1 year after an operational audit. However, this figure masks substantial heterogeneity within the population. Among those taxpayers who receive an additional tax assessment, reported taxable income is estimated to be 64% higher in the first year after the audit (44% after 3 years) than it would have been in the absence of the audit. In contrast, among those taxpayers who do not receive an additional tax assessment, reported taxable income is estimated to be approximately 15% lower the year after the audit (21% 3 years later) than it would have been had the audit not taken place. Our results suggest that improved targeting of audits toward noncompliant taxpayers would not only yield more direct audit revenue but also pay dividends in terms of future tax collections.

Organisation(s)
Department of Occupational, Economic and Social Psychology
External organisation(s)
International Monetary Fund (IMF), Tulane University, B. Erard & Associates, LLC
Journal
CESifo Economic Studies
Volume
66
Pages
248–264
ISSN
1610-241X
DOI
https://doi.org/10.1093/cesifo/ifz018
Publication date
09-2020
Peer reviewed
Yes
Austrian Fields of Science 2012
501029 Economic psychology
Portal url
https://ucris.univie.ac.at/portal/en/publications/do-audits-deter-or-provoke-future-tax-noncompliance-evidence-on-selfemployed-taxpayers(1713c686-c801-4403-b2a9-51130a7f7a49).html