Legal Enforcement and Corporate Behavior: An Analysis of Tax Aggressiveness after an Audit

DeBacker, Jason; Heim, Bradley T.; Tran, Anh; Yuskavage, Alexander

doi:10.1086/684037

Cited by 72 publications

(54 citation statements)

References 33 publications

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“…As time passes and the probability of another audit increases, tax payments increase. Thus, similar to Hoopes et al (), DeBacker et al () concludes that firms engage in less tax avoidance when audit selection probability is higher. Finally, Lennox et al () examines the effect of tax audit examination on Chinese firms.…”

Section: Background and Hypothesis Developmentsupporting

confidence: 58%

“…Our paper is also related to three recent applied papers regarding the strategic game between the IRS and corporations. Hoopes et al (), DeBacker et al (), and Lennox et al () suggest that increased enforcement leads to greater tax payments. Using data on IRS audit probability by firm size over time, Hoopes et al () provides evidence that firms facing greater risk of IRS audit report higher cash ETRs relative to firms facing lower risk of IRS audit.…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

“…DeBacker et al () find that tax payments are lower immediately following an audit, when the taxpayer is assumed to have lower expectations of another audit. As time passes and the probability of another audit increases, tax payments increase.…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

See 2 more Smart Citations

Tax Reporting Behavior Under Audit Certainty

Ayers¹,

Seidman

Towery³

2018

Contemporary Accting Res

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This study uses a confidential data set of firms assigned to the Internal Revenue Service's Coordinated Industry Case (CIC) program to examine the effect of audit certainty on firms' tax reporting behavior. We first model the determinants of assignment to the program. Although the ability and incentive to avoid taxes are related to CIC assignment, we find that the IRS assigns firms primarily based on size and complexity. We then test whether audit certainty has a detectable effect on tax payments. Our results show that tax payments do not change when firms enter the CIC program, suggesting the CIC program does not have higher deterrence or enforcement effects relative to the IRS's standard selection and audit process for large corporations not included in the CIC program. However, supplemental analysis suggests that audit certainty does alter managers' expectations regarding future tax payments. Our paper provides new empirical evidence on the strategic game between the taxpayer and the tax authority and has important implications for tax authorities as they consider the costs and benefits of certain audit programs. Comportement en matière de déclarations fiscales en situation de contrôle assuré RÉSUMÉ Les auteurs utilisent un ensemble de données confidentielles relatives à des sociétés affectées au programme Coordinated Industry Case (CIC) de l'Internal Revenue Service afin d'analyser l'incidence d'un contrôle assuré sur le comportement des sociétés quant à leurs déclarations fiscales. Ils modélisent d'abord les déterminants de l'affectation au programme. Bien que la possibilité d'éviter l'impôt et la motivation à le faire soient liées à l'affectation des sociétés au programme CIC, les auteurs constatent que l'IRS les y affecte principalement en fonction de leur taille et de leur complexité. Les auteurs vérifient ensuite si le contrôle fiscal assuré a une incidence décelable sur les paiements d'impôt. Les résultats qu'ils obtiennent révèlent que les paiements d'impôt ne changent pas lorsque les sociétés entrent dans le programme CIC, ce qui semble indiquer que le programme n'a pas d'effet dissuasif ou persuasif plus important que celui du processus standard de sélection et de contrôle fiscal que l'IRS applique aux grandes sociétés non affectées au programme CIC. Une analyse complémentaire permet toutefois de croire que le contrôle assuré influe sur les attentes des gestionnaires en ce qui a trait aux paiements d'impôt futurs. L'étude livre de nouvelles données empiriques illustrant le jeu stratégique qui se joue entre le contribuable et le fisc, données qui ont des répercussions importantes pour les administrations fiscales dans leur analyse des coûts et des avantages de certains programmes de contrôle fiscal.

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Section: Background and Hypothesis Developmentsupporting

confidence: 58%

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

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Tax Reporting Behavior Under Audit Certainty

Ayers¹,

Seidman

Towery³

2018

Contemporary Accting Res

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“…However, with some exceptions (Mendoza et al ., ), field data generally find little or no evidence of a bomb‐crater effect (Erard, ; Advani et al ., ). One explanation for the bomb‐crater effect is that deterrence may ‘crowd out' an individual's ‘intrinsic motivation' to pay taxes (Sheffrin and Triest, ; Frey, ; Gneezy and Rustichini, ), and a similar finding has been found for corporate taxpayers (DeBacker et al ., ). Another explanation is that individuals may update their subjective audit probabilities following an audit (Mittone et al ., ).…”

Section: Insights From Empirical Researchmentioning

confidence: 97%

What Motivates Tax Compliance?

Alm

2018

Journal of Economic Surveys

271

223

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In this paper, I review and assess what we have learned about what motivates individuals to pay -or to not pay -their legally due tax liabilities. I focus on three specific questions. First, what does theory say about what motivates tax compliance? Second, what does the evidence show? Third, how can government use these insights to improve compliance? I conclude with some suggestionsand some predictions -for future research. 356 ALM measure of the individual's constant relative risk aversion. Using the definitions of I C and I N in equations (1) and (2), the expected utility maximization generated by the solution to equation (3) can be solved for the optimum amount of reported income R*. 9 Now suppose that R* is calculated for specific, realistic values of the various parameters. For example, if t = 0.4, f = 2, p = 0.02 and e = 1, then the individual will optimally report no income. Very large values for relative risk aversion are required to generate compliance consistent with actual country experience. When e = 3, reported income is only 14% of true income; when e = 5, it is still only 44%; when e = 10, it is 71%; and e must exceed 30 for compliance to exceed 90%. Even if the probability of detection is as (unrealistically) high as 30% (with t = 0.4 and f = 2), relative risk aversion must exceed 7 to generate compliance over 90%. However, existing field evidence on the coefficient of relative risk aversion using a variety of approaches suggests that e ranges between 1 and 2, and may even be as low as 0 (Friend and Blume, 1975;Hansen and Singleton, 1983;Hall, 1988;Chetty, 2006;Gandelman and Hernandez-Murillo, 2013). Risk aversion must be abnormally large for behaviour to be even roughly comparable to actual observed choices, even in many developing countries with low levels of compliance.Admittedly, there are reasons why this simplistic analysis somewhat overstates the problem with the standard expected utility approach. 10 Consider the United States as an example. First, a standard feature of many individual income tax systems is that a third party (e.g. the individual's employer) reports the relevant part of an individual's taxable income to the tax authority (and often also withholds income taxes on this reported taxable income). This third-party information increases significantly the chances that an individual who underreports income on a filed return will be detected, especially in its combination with employer source-withholding. 11 Second, the 'official' IRS audit rate somewhat understates 'actual' IRS audit policy. In fact, the IRS conducts a range of audits, and for many types of audits, the actual rates are quite high. Third and relatedly, while overall audit rates are quite low, among certain income and occupation classes, they are more frequent. Fourth, the IRS conducts a wide range of audit-type activities, including line matching and requests for information, and these activities are much more frequent. 12 Finally, it is individual perceptions of audit rates that influence behaviour, rather than...

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“…The studies that use data from random of individual taxpayers audits typically find large positive compliance effects, which are hard to reconcile with the idea that audits today lowers the perceived audit probability for the future (Advani et al, 2017;DeBacker et al, 2018b). A study of firm audits, on the other hand, find patterns that are consistent with the bomb-crater effect of audits (DeBacker et al, 2015).…”

Section: Introductionmentioning

confidence: 98%

Compliance effects of risk-based tax audits

Torsvik¹,

Raaum²,

Løyland³

et al. 2019

Preprint

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Tax administrations use machine learning to predict risk scores as a basis for selectingindividual taxpayers for audit. Audits detect noncompliance immediately, butmay also alter future filing behavior. This analysis is the first to estimate complianceeffects of audits among high-risk wage earners. We exploit a sharp audit assignmentdiscontinuity in Norway based on individual tax payers risk score. Additional datafrom a random audit allow us to estimate how the audit effect vary across the risk scoredistribution. We show that the current risk score audit threshold is set far above theone that maximizes net public revenue.

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Legal Enforcement and Corporate Behavior: An Analysis of Tax Aggressiveness after an Audit

Cited by 72 publications

References 33 publications

Tax Reporting Behavior Under Audit Certainty

Tax Reporting Behavior Under Audit Certainty

What Motivates Tax Compliance?

Compliance effects of risk-based tax audits

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