Audit Rule Disclosure and Tax Compliance

Enrico Di Gregorio (), Matteo Paradisi () and Elia Sartori ()
Additional contact information
Enrico Di Gregorio: International Monetary Fund
Matteo Paradisi: EIEF
Elia Sartori: CSEF, https://csef.it/people/elia-sartori/

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We show that tax authorities can stimulate tax compliance by strategically releasing audit-relevant information. We focus on audit policies that disclose to taxpayers that audit risk discretely drops above a threshold determined by their predicted revenues. In a theoretical framework, we derive conditions for the existence of improvements over flat undisclosed audit rules, and we build a test for such improvements that relies on a change in the probability jump at the threshold. Our empirical analysis relies on the Sector Studies, an Italian policy with a disclosed threshold-based design. We leverage more than 26 million Sector Study files submitted between 2007 and 2016. First, we show that taxpayers bunch at the threshold to a great extent, and that this behavior is related to evasion proxies, availability of evasion technologies, and tax incentives. Then, we exploit a staggered Sector Studies reform that widens the initial audit risk discontinuity. In line with our theory, taxpayers who benefit from audit exemptions above the threshold reduce their relative compliance, while those below the threshold improve it. However, mean reported profits increase by 16.2% in treated sectors over six years, suggesting – in light of our test – that a disclosed rule performs better than an undisclosed one.

Keywords: tax compliance; enforcement; evasion; audit; disclosure; firm; bunching. (search for similar items in EconPapers)
JEL-codes: D04 D22 H24 H25 H26 H32 (search for similar items in EconPapers)
Date: 2024-07-01
New Economics Papers: this item is included in nep-acc, nep-iue and nep-pbe
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