How Do Firms Respond to Risk-based Tax Audits?

Jarkko Harju, Kaisa Kotakorpi, Tuomas Matikka and Annika Nivala

No 165, Working Papers from VATT Institute for Economic Research

Abstract: We analyze firm responses to risk-based tax audits – a central tool in regular tax enforcement – using full-population data on tax audits and tax returns in Finland. We find an immediate and persistent increase in reported profits by the audited firms after being audited compared to matched non-audited firms with a similar development in key outcomes before the audit. This is an indication of significant non-compliance in the baseline. We also examine the anatomy of non-compliance and find that both revenue and labor costs increase after audits, suggesting that some firms may follow a strategy of under-reporting their overall scale of operation. We use novel data on bankruptcy petitions and court decisions to investigate whether stricter tax enforcement has implications for real economic activity. We find a large increase in the likelihood of bankruptcy after audits among non-compliant firms, but no increase in bankruptcies for compliant firms.

Keywords: tax compliance; tax evasion; tax enforcement; firm behavior; Social security; taxation and inequality; H26; H32; H83; fi=Verotus|sv=Beskattning|en=Taxation| (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-acc, nep-iue, nep-pbe and nep-pub
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https://www.doria.fi/handle/10024/189130

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Working Paper: How Do Firms Respond to Risk-based Tax Audits? (2024)
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