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

Keshav Choudhary and Bhanu Gupta

Working Papers from Max Planck Institute for Tax Law and Public Finance

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.

Keywords: Third-party audit; Corporate tax; Evasion; Bunching (search for similar items in EconPapers)
JEL-codes: H26 H32 M42 (search for similar items in EconPapers)
Pages: 48
Date: 2025-06
New Economics Papers: this item is included in nep-acc and nep-iue
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