Compliance Effects of Risk-Based Tax Audits
30 Pages Posted: 9 May 2019
Date Written: 2019
Tax administrations use machine learning to predict risk scores as a basis for selecting individual taxpayers for audit. Audits detect noncompliance immediately, but may also alter future filing behavior. This analysis is the first to estimate compliance effects of audits among high-risk wage earners. We exploit a sharp audit assignment discontinuity in Norway based on individual tax payers risk score. Additional data from a random audit allow us to estimate how the audit effect vary across the risk score distribution. We show that the current risk score audit threshold is set far above the one that maximizes net public revenue.
Keywords: tax audits, tax revenue, tax reporting decisions, income tax, machine learning, risk profiling
JEL Classification: D040, H260, H830
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