Real Effects of Tax Audits: Evidence from Firms Randomly Selected for IRS Examination

49 Pages Posted: 17 Aug 2019

See all articles by Andrew Belnap

Andrew Belnap

University of North Carolina at Chapel Hill

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: July 15, 2019

Abstract

Tax audits are a necessary component of the tax system but have potentially adverse real effects on the firms selected for audit. We examine the effects of tax audits on whether small firms continue to operate as a going concern. We use IRS data from both random and nonrandom tax audits and find that audited firms are less likely to persist as going concerns following the audit. However, we find that the effect is entirely isolated to firms that underreported their tax liability. We find no evidence that the administrative costs of an audit are associated with more firms ceasing to operate. Finally, we consider whether tax audits could also benefit firms, and we find evidence that in certain cases tax audits help firms learn and make important changes following the audit.

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: Evidence from Firms Randomly Selected for IRS Examination (July 15, 2019). Available at SSRN: https://ssrn.com/abstract=3437137 or http://dx.doi.org/10.2139/ssrn.3437137

Andrew Belnap

University of North Carolina at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
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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