Advani, Arun, Elming, William and Shaw, Jonathan (2019) The dynamic effects of tax audits. Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1198). (Unpublished)

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Abstract

Understanding causes of and solutions to non-compliance is important for a tax authority. In this paper we study how and why audits affect reported tax in the years after audit – the dynamic effect – for individual income taxpayers. We exploit data from a random audit program covering more than 53,000 income tax self assessment returns in the UK, combined with data on the population of tax filers between 1999 and 2012. We first document that there is substantial
non-compliance in this population. One in three filers underreports the tax owed. Third party information on an income source does not predict whether a taxpayer is non-compliant on that income source, though it does predict the extent of underreporting. Using the random nature of the audits, we provide evidence of dynamic effects. Audits raise reported tax liabilities for at least five years after audit, implying an additional yield 1.5 times the direct revenue raised from the audit. The magnitude of the impact falls over time, and this decline is faster for
less autocorrelated income sources. Taking an event study approach, we further show that the change in reporting behaviour comes only from those found to have made errors in their tax report. Finally, using an extension of the Allingham-Sandmo (1972) model, we show that these results are best explained by audits providing the tax authority with information, which then constrains taxpayers’ ability to misreport.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HF Commerce > HF5601 Accounting
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Tax auditing, Income tax, Internal revenue
Series Name:	Warwick economics research papers series (WERPS)
Publisher:	University of Warwick. Department of Economics
Place of Publication:	Coventry
ISSN:	0083-7350
Official Date:	June 2019
Dates:	Date Event June 2019 Published
Number:	1198
Institution:	University of Warwick
Status:	Not Peer Reviewed
Publication Status:	Unpublished
Access rights to Published version:	Open Access (Creative Commons)
Description:	This paper also appears as CAGE working paper series number 414. A later version accepted in The Review of Economics and Statistics.
Date of first compliant deposit:	14 May 2019
Date of first compliant Open Access:	15 May 2019
Related URLs:	Other Repository

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