The Review of Economics and Statistics Vol. 105 No. 3 2023

The Dynamic Effects of Tax Audits

Arun Advani¹; William Elming²; Jonathan Shaw³

¹ University of Warwick, CAGE Research Centre, the Institute for Fiscal Studies (IFS), and the Tax Administration Research Centre (TARC) · ² IFS and TARC at the time of involvement in this work · ³ Financial Conduct Authority

Abstract

We study the effects of audits on long run compliance behavior 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. A total of 60%–65% of revenue from audit comes from the change in reporting behavior. Extending the standard model of rational tax evasion, we show that 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.

DOI

10.1162/rest_a_01101

Volume

105

Issue

3

Pages

545-561

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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