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The Dynamic Effects of Tax Audits

Author

Listed:
  • Arun Advani

    (University of Warwick, CAGE Research Centre, the Institute for Fiscal Studies (IFS), and the Tax Administration Research Centre (TARC))

  • William Elming

    (IFS and TARC at the time of involvement in this work)

  • Jonathan Shaw

    (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.

Suggested Citation

  • Arun Advani & William Elming & Jonathan Shaw, 2023. "The Dynamic Effects of Tax Audits," The Review of Economics and Statistics, MIT Press, vol. 105(3), pages 545-561, May.
    • Handle: RePEc:tpr:restat:v:105:y:2023:i:3:p:545-561
    DOI: 10.1162/rest_a_01101
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    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration

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