Do IRS Audits Deter Corporate Tax Avoidance?

64 Pages Posted: 1 Sep 2010 Last revised: 30 Aug 2013

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill

Devan Mescall

University of Saskatchewan

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: November 2011

Abstract

We extend research on the determinants of corporate tax avoidance to include the role of Internal Revenue Service (IRS) monitoring. Our evidence from large samples implies that U.S. public firms undertake less aggressive tax positions when tax enforcement is stricter. Reflecting its first-order economic impact on firms, our coefficient estimates imply that raising the probability of an IRS audit from 19 percent (the 25th percentile in our data) to 37 percent (the 75th percentile) increases their cash effective tax rates, on average, by nearly 2 percentage points, which amounts to a 7 percent increase in cash effective tax rates. These results are robust to controlling for firm size and time, which determine our primary proxy for IRS enforcement, in different ways; specifying several alternative dependent and test variables; and confronting potential endogeneity with instrumental variables and panel data estimations, among other techniques.

Keywords: tax enforcement, corporate governance, IRS audits, taxes, agency costs

JEL Classification: M40, G34, G32, H25

Suggested Citation

Hoopes, Jeffrey L. and Mescall, Devan and Pittman, Jeffrey, Do IRS Audits Deter Corporate Tax Avoidance? (November 2011). Available at SSRN: https://ssrn.com/abstract=1668628 or http://dx.doi.org/10.2139/ssrn.1668628

Jeffrey L. Hoopes (Contact Author)

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Devan Mescall

University of Saskatchewan ( email )

Edwards School of Business
Saskatoon, Saskatchewan S7N 5A7
Canada

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

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