The Effect of Audit Burden on Subsequent Tax Evasion

Posted: 22 Mar 2021

See all articles by Amy M. Hageman

Amy M. Hageman

Kansas State University

Ethan LaMothe

University of Central Florida - Kenneth G. Dixon School of Accounting

Mary E Marshall

Portland State University

Date Written: March 19, 2021

Abstract

Taxpayers who are audited can incur both monetary and nonmonetary costs unrelated to their chosen level of compliance. We refer to these costs of being audited as “audit burden” and examine the effect of audit burden on subsequent compliance decisions. Importantly, audit burden does not include the costs related to any evasion discovered by an audit (e.g., penalties, unpaid taxes, or interest), but are the monetary and nonmonetary costs borne by compliers and evaders alike who are audited. Motivated by theory on cost-loss framing, we predict individuals who were initially noncompliant (compliant) on an audited return will subsequently increase (decrease) compliance. We test our hypotheses experimentally using real US taxpayers recruited from the Amazon Mechanical Turk (mTurk) platform. Consistent with our hypotheses, results from our primary experiment suggest burdensome audits are beneficial in reducing noncompliance but also result in greater noncompliance from individuals who were initially compliant. Follow-up experiments rule out alternative explanations and find: (1) our results are robust to alternative specifications of audit burden, (2) apologies may mitigate the unintentional negative effect of audit burden on compliers, and (3) monetary rewards demonstrate no mitigating effect. These results extend the literature on cost-loss framing, which previously focused on voluntary expenditures, by identifying the influence of framing compulsory expenditures. Practical implications to the IRS and other tax enforcement agencies are also discussed.

Keywords: audit burden, tax compliance, tax audit

Suggested Citation

Hageman, Amy M. and LaMothe, Ethan and Marshall, Mary, The Effect of Audit Burden on Subsequent Tax Evasion (March 19, 2021). Available at SSRN: https://ssrn.com/abstract=3808269

Amy M. Hageman

Kansas State University ( email )

Manhattan, KS 66506-4001
United States

Ethan LaMothe

University of Central Florida - Kenneth G. Dixon School of Accounting ( email )

University of Central Florida
P.O. Box 161400
Orlando, FL 32816-1400
United States

Mary Marshall (Contact Author)

Portland State University ( email )

School of Business Administration
Portland, OR 97207
United States

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