Tax enforcement and R&D credits

Mary Cowx

Journal of Accounting and Economics, 2025, vol. 80, issue 1

Abstract: Tax enforcement deters noncompliance, increasing tax revenue, but may also discourage taxpayer investment in activities that policymakers aim to incentivize through tax credits and deductions. This paper investigates this investment-revenue trade-off through the lens of the research and development (R&D) tax credit, a federal tax incentive that is highly scrutinized by the Internal Revenue Service (IRS). My results suggest that expectations about IRS corporate tax scrutiny are negatively associated with both R&D tax credits and R&D investment, on average. I estimate each $1 of aggregate enforcement spending is associated with a reduction in R&D tax credits of $2.64. In terms of elasticities, a 1 % increase in my estimate of IRS corporate tax scrutiny is associated with a decline in R&D tax credits and R&D investment of 0.4 % and 0.2 %, respectively. A survey of 116 managers further supports that the risk of IRS scrutiny affects both R&D tax credit take-up and R&D investment decisions. Moreover, both the survey responses and archival evidence underscore the importance of internal information quality in claiming R&D tax credits, suggesting tax policy simplification as a means to address enforcement-related declines in R&D investment.

Keywords: Innovation; R&D; IRS; Tax enforcement; Tax credits; Tax administration (search for similar items in EconPapers)
JEL-codes: G31 G38 H25 H32 O30 O31 O38 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:80:y:2025:i:1:s0165410125000205

DOI: 10.1016/j.jacceco.2025.101784

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