The Relationship between State and Federal Tax Audits

54 Pages Posted: 18 Jun 2000 Last revised: 19 Aug 2010

See all articles by James Alm

James Alm

Tulane University

Brian Erard

Carleton University - Department of Economics

Jonathan S. Feinstein

Yale School of Management

Date Written: May 1995

Abstract

In this paper we present an econometric analysis of state and federal tax audits. We first present results from a survey of state tax administrators. The survey results indicate that most state tax audit programs are small and rely extensively on information provided by the IRS, although some programs are large and sophisticated. We then present results from a detailed econometric analysis of Oregon state and federal tax returns and tax audits for tax year 1987. Our analysis generates three main conclusions. First, Oregon state and IRS selection criteria are similar, but not identical, suggesting that both tax agencies might benefit from greater sharing of information, especially in some audit classes. Second, Oregon state and IRS audit assessments are strongly positively correlated, as expected. Third, we estimate the shadow values associated with providing additional audit resources to the Oregon Department of Revenue and the IRS in various audit classes, and find that for the IRS the shadow values range from two to five dollars, while for Oregon the values range from one to three dollars.

Suggested Citation

Alm, James and Erard, Brian and Feinstein, Jonathan S., The Relationship between State and Federal Tax Audits (May 1995). NBER Working Paper No. w5134, Available at SSRN: https://ssrn.com/abstract=225199

James Alm (Contact Author)

Tulane University ( email )

United States
5048628344 (Phone)

Brian Erard

Carleton University - Department of Economics

1125 Colonel By Drive
Ottawa, Ontario K1S 5B6
Canada

Jonathan S. Feinstein

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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