Amazing Grace: Tax Amnesties and Compliance

Abstract

a one-time amnesty may increase future Does a tax amnesty raise or lower com-compliance if it is accompanied by greater pliance over time? This paper uses experi-expenditures for enforcement and stronger mental methods to analyze the long run penalties for evaders. Critics contend that impact of an amnesty. The results indicate the long run consequences of an amnesty that the average level of compliance falls are more likely to lead to a significant after an amnesty. However, a well-de-negative impact on voluntary compliance. signed amnesty may be able to overcome They present several arguments to bolthis decline. If post-amnesty enforcement ster their case. First, honest taxpayers may efforts increase, then aggregate comp,ii-perceive the amnesty as special treatance actually increases. In fact, post-am-ment for tax cheats. If the honest taxpaynesty compliance is higher when an am-ers resent the tax break given to evaders nesty is accompanied by increased and conclude that the amnesty is unfair enforcement efforts than when enforce-to them, then their compliance may dement increases without an amnesty. An cline. Second, individuals may not believe amnesty may therefore be an effective tool that the amnesty is a one-time opportufor easing the transition to a tougher tax nity to repay taxes. If they anticipate furegime. ture amnesties, then compliance may again decline. No work to date has been able to re-

Are State Tax Amnesty Programs Associated with Financial Reporting Irregularities?

“…The results show that the coefficient on AMNESTY is positive and marginally significant (p value ¼ .059), suggesting that during the period of a state tax amnesty program, the likelihood of engaging in a financial reporting irregularity is higher for firms headquartered in states offering the tax amnesty program relative to all other firm-year observations. This is consistent with the notion that managers' perceptions of lax monitoring by the state tax authority during the amnesty period are associated with non-tax financial reporting behavior, which complements prior work that examines tax effects of state tax amnesty programs (e.g., Alm, McKee, and Beck 1990). As expected, the likelihood of engaging in a financial reporting irregularity is significantly lower in the post-SOX period (p value < .01), which is characterized by a heightened awareness of regulator, investor, and auditor scrutiny.…”

“…Noticeably absent from prior research are efforts to ascertain the effect of state tax amnesty programs on non-tax corporate behaviors. If amnesty signals weakened or lax enforcement, as prior literature has suggested, it is therefore important to understand the extent to which perceptions of monitoring credibility influence non-tax corporate behavior in addition to the tax compliance effects examined in prior studies (e.g., Alm, McKee, and Beck 1990;Luitel and Sobel 2007;Ross and Buckwalter 2013). Understanding these unintended effects is important for policy makers as they continue to implement tax amnesty programs.…”

“…This study makes several contributions. First, it contributes to a literature that examines the tax effects and patterns of tax amnesties (e.g., Alm, McKee, and Beck 1990;Christian, Gupta, and Young 2002;Luitel and Sobel 2007;Mikesell and Ross 2012) by examining the relation between tax amnesty programs and non-tax firm-level behavior (financial reporting irregularities). Second, it contributes to the emerging literature that considers the role tax authorities play in monitoring managerial behavior (e.g., Dyck and Zingales 2004;Desai, Dyck, and Zingales 2007;Hanlon, Hoopes, and Shroff 2012;Hoopes, Mescall, and Pittman 2012) and the relation between financial reporting quality and various tax-related activities (Frank, Lynch, and Rego 2009).…”

Strategic Tax Planning for State Tax Amnesties

“…The announcement of an amnesty period potentially allows unknown tax evaders to voluntarily reveal themselves to the authorities in the near future, ideally for the purpose of becoming permanently compliant taxpayers. Much of the policy concern and attention from academics has been in the ability of the amnesty to permanently improve long-run compliance, as it may have the unintended consequence of revealing tax evasion as a profitable pursuit or by causing the perception that amnesty will be a frequently reoccurring phenomenon (e.g., Alm, McKee, and Beck 1990;. This article suggests that another possibility is that an announced amnesty will cause some compliant taxpayers to become temporarily delinquent, effectively treating the state as a short-term loan officer.…”

Does Voluntary Tax Compliance Increase After Granting Tax Amnesty?

“…Most states are more interested in short-term benefits which results in poor planning and a limited scope for reform (Parle and Hirlinger, 1986). The long term impacts of after tax amnesty include that the average level of tax compliance falls and that taxpayers do not believe that the granting of tax amnesty is one time opportunity to repay taxes (Alm & Beck, 1993;Alm, Mckee, & Beck, 1990). Hasseldine and Bebbington (1991) suggest that tax amnesty is not the appropriate way to identify and to increase tax compliance of tax evaders.…”