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The dynamic effects of tax audits

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Advani, Arun, Elming, William and Shaw, Jonathan (2021) The dynamic effects of tax audits. The Review of Economics and Statistics . doi:10.1162/rest_a_01101 (In Press)

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Official URL: https://doi.org/10.1162/rest_a_01101

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Abstract

We study the effects of audits on long run compliance behaviour, using a random audit program covering more than 53,000 tax returns. We find that audits raise reported tax liabilities for five years after audit, effects are longer lasting for more stable sources of income, and only individuals found to have made errors respond to audit. 60-65% of revenue from audit comes from the change in reporting behaviour. Extending the standard model of rational tax evasion, we show these results are best explained by information revealed by audits constraining future misreporting. Together these imply that more resources should be devoted to audits, audit targeting should account for reporting responses, and performing audits has additional value beyond merely threatening them.

Item Type: Journal Article
Subjects: H Social Sciences > HF Commerce
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Tax auditing, Income tax, Financial statements
Journal or Publication Title: The Review of Economics and Statistics
Publisher: MIT Press
ISSN: 0034-6535
Official Date: 22 September 2021
Dates:
DateEvent
22 September 2021Available
6 April 2021Accepted
DOI: 10.1162/rest_a_01101
Status: Peer Reviewed
Publication Status: In Press
Publisher Statement: This is the author’s final version, and that the article has been accepted for publication in Review of Economics and Statistics
Access rights to Published version: Open Access
Copyright Holders: © 2021 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology
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