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

57 Pages Posted: 9 May 2013 Last revised: 12 Mar 2014

Jason Matthew DeBacker

University of South Carolina - Darla Moore School of Business

Bradley T. Heim

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Anh Tran

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Alex Yuskavage

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Date Written: September 5, 2013

Abstract

Contrary to common expectations, this paper shows that legal enforcement may increase subsequent corporate misbehavior. Using IRS data, we find that corporations gradually increase their tax aggressiveness after an audit for a few years and then reduce it sharply. We show that this U-shaped impact is consistent with strategic responses on the part of firms and Bayesian updating of audit risk. This adverse effect on corporate behavior calls for reexamining both theory and policy of legal enforcement.

Keywords: legal enforcement, tax audit, tax evasion, tax avoidance, Bayesian updating

JEL Classification: H25, K42, M42

Suggested Citation

DeBacker, Jason Matthew and Heim, Bradley T. and Tran, Anh and Yuskavage, Alex, Legal Enforcement and Corporate Behavior: An Analysis of Tax Aggressiveness after an Audit (September 5, 2013). Available at SSRN: https://ssrn.com/abstract=2262586 or http://dx.doi.org/10.2139/ssrn.2262586

Jason Matthew DeBacker

University of South Carolina - Darla Moore School of Business ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States

Bradley T. Heim

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Anh Tran (Contact Author)

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Alex Yuskavage

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

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