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Watchdogs or Accomplices? The Role of Third-Party Auditors in Corporate Tax Compliance

Author

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  • Keshav Choudhary
  • Bhanu Gupta

Abstract

Traditional tax audits are effective at raising revenue but are costly to scale. Can third-party auditors enhance compliance, or are they prone to collusion due to inherent conflicts of interest? We study a policy reform in India that introduced unanticipated changes in the revenue threshold for mandatory third-party audits. Using a combination of bunching and difference-in-differences methods on administrative data, we estimate that third-party audits can increase tax payments by around 45%, on average. However, firms with income or expenses already subject to third-party reporting exhibit smaller responses to private audits, reflecting a lower scope for manipulation. Our findings suggest that extending third-party audit requirements to smaller firms below the current threshold may be a cost-effective approach to increasing compliance in low state capacity settings.

Suggested Citation

  • Keshav Choudhary & Bhanu Gupta, "undated". "Watchdogs or Accomplices? The Role of Third-Party Auditors in Corporate Tax Compliance," Working Papers tax-mpg-rps-2024-04, Max Planck Institute for Tax Law and Public Finance.
    • Handle: RePEc:mpi:wpaper:tax-mpg-rps-2024-04
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    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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