Real effects of tax audits

Andrew Belnap (), Jeffrey L. Hoopes (), Edward L. Maydew () and Alex Turk ()
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Andrew Belnap: University of Texas at Austin
Jeffrey L. Hoopes: University of North Carolina at Chapel Hill
Edward L. Maydew: University of North Carolina at Chapel Hill
Alex Turk: Internal Revenue Service

Review of Accounting Studies, 2024, vol. 29, issue 1, No 19, 665-700

Abstract: Abstract Tax audits are a necessary component of the tax system, but policymakers and others have expressed concerns about their potentially adverse real effects. Understanding the causal effects of tax audits has been hampered by lack of data and because typically tax audits are not randomly assigned. We use administrative data from random tax audits of small businesses to examine the real effects of being subject to a tax audit. We find that audited firms are more likely to go out of business following the audit. The effect is concentrated in firms that underreport their taxes, although we find some evidence that the administrative costs of an audit also negatively affect firm survival. Among firms that continue as going concerns, we find evidence that audits have adverse effects on future revenues but no effect on future wages, employment, or investment. Finally, we find that tax audits have side benefits, causing firms to make changes to improve their tax efficiency.

Keywords: Real effects; IRS audits; Tax enforcement; Corporate tax; Tax avoidance; H25; H26; K20; M41; M48 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-022-09717-w

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