Do tax audits have a dynamic impact? Evidence from corporate income tax administrative data

Making use of a unique administrative data set consisting of the universe of administrative filings in Rwanda, this paper investigates the impact of tax audits on businesses’ reporting behaviour. The evidence suggests that tax audits have a positive impact on corporate income and corporate tax liabilities reported for three years after the start of the audit process. The results also suggest that the type of audit matters. While ‘comprehensive’ tax audits have a significant positive effect on compliance, ‘narrow-scope’ tax audits exhibit both a positive and a negative effect during a three-year period after the audit, with the net impact being negative. The implication of this, from a tax compliance perspective, is that ‘narrow-scope’ audits are ineffective and that doing more of those and less of comprehensive ones might have a negative impact on tax compliance. Effective tax compliance strategy therefore requires the careful evaluation of all types of audits.