Taxpayer Behavior under Audit Certainty
50 Pages Posted: 23 May 2015 Last revised: 16 Jun 2017
Date Written: June 15, 2017
This study uses a confidential dataset of firms assigned to the Internal Revenue Service (IRS)’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. Though 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 significant 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 significant 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.
Keywords: Tax examination; Internal Revenue Service; Coordinated Industry Case program; Tax avoidance
JEL Classification: H25; M20; M41
Suggested Citation: Suggested Citation