Audits, Audit Effectiveness, and Post-audit Tax Compliance

43 Pages Posted: 21 Sep 2020 Last revised: 25 Sep 2020

See all articles by Matthias Kasper

Matthias Kasper

University of Vienna; Tulane University

James Alm

Tulane University

Date Written: September 18, 2020

Abstract

This study uses a laboratory experiment to investigate the effect of tax audits on post-audit tax compliance. An important feature of our experimental design is the addition of audit ”effectiveness” to our audit mechanism, where effectiveness is defined as the share of undeclared income that the tax agency detects in an audit. This addition allows us to examine the effects of audit effectiveness on post-audit compliance. We also study whether tax audits have differential effects on different types of taxpayers, as distinguished by their prior reporting behavior. Contrary to theoretical predictions, we find that tax audits have differential effects on post-audit compliance and that the effectiveness of audits determines these responses; that is, while effective audits increase post-audit tax compliance, ineffective audits have the opposite effect. We also find that tax audits (whether effective or not) increase subsequent compliance of noncompliant taxpayers while they reduce compliance among individuals who have been found to report their income correctly. Finally, we find no evidence that tax audits crowd out the intrinsic motivation to comply of honest individuals. Our findings suggest that the specific deterrent effect of tax audits is more ambiguous than much previous analysis suggests, with these effects dependent on the effectiveness of the audit process and on the taxpayer’s prior reporting behavior.

Keywords: Tax compliance; Audit effectiveness; Specific deterrence; General deterrence; Laboratory experiments

JEL Classification: C9; H26; H83

Suggested Citation

Kasper, Matthias and Alm, James, Audits, Audit Effectiveness, and Post-audit Tax Compliance (September 18, 2020). WU International Taxation Research Paper Series No. 2020-12, Available at SSRN: https://ssrn.com/abstract=3695035 or http://dx.doi.org/10.2139/ssrn.3695035

Matthias Kasper (Contact Author)

University of Vienna

Universitätsstraße 7
Vienna, Vienna 1010
Austria

Tulane University ( email )

New Orleans, LA 70118
United States

James Alm

Tulane University ( email )

United States
5048628344 (Phone)

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