Real effects of tax audits

Review of Accounting Studies

62 Pages Posted: 17 Aug 2019 Last revised: 8 Aug 2022

See all articles by Andrew Belnap

Andrew Belnap

University of Texas at Austin - McCombs School of Business

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area

Edward L. Maydew

University of North Carolina at Chapel Hill

Alex Turk

Government of the United States of America - Internal Revenue Service (IRS)

Date Written: August 5, 2022

Abstract

Tax audits are a necessary component of the tax system, but policymakers and others have expressed concerns about their potentially adverse real effects. Understanding the causal effects of tax audits has been hampered by lack of data and because typically tax audits are not randomly assigned. We use administrative data from random tax audits of small businesses to examine the real effects of being subject to a tax audit. We find that audited firms are more likely to go out of business following the audit. The effect is concentrated in firms that underreport their taxes, although we find some evidence that the administrative costs of an audit also negatively affect firm survival. Among firms that continue as going concerns, we find evidence that audits have adverse effects on future revenues but no effect on future wages, employment, or investment. Finally, we find that tax audits have side benefits, causing firms to make changes to improve their tax efficiency.

Keywords: IRS audit, real effect, corporate tax

JEL Classification: H25, M41

Suggested Citation

Belnap, Andrew and Hoopes, Jeffrey L. and Maydew, Edward L. and Turk, Alex, Real effects of tax audits (August 5, 2022). Review of Accounting Studies, Available at SSRN: https://ssrn.com/abstract=3437137 or http://dx.doi.org/10.2139/ssrn.3437137

Andrew Belnap

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Jeffrey L. Hoopes (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

Alex Turk

Government of the United States of America - Internal Revenue Service (IRS) ( email )

1111 Constitution Avenue, NW
Washington, DC 20224
United States

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