Is Risk Profiling in Tax Audit Case Selection Rewarded? An Analysis of Corporate Tax Avoidance
58 Pages Posted: 27 Aug 2021 Last revised: 7 Dec 2022
Date Written: December 1, 2021
This study examines the relation between tax audit case selection based on risk profiling and corporate tax avoidance. We exploit the International Survey on Revenue Administration (ISORA) data on risk profiling in tax administrations from 2014 to 2017 to investigate whether the implementation of risk profiling has an incremental effect on firms’ tax avoidance. Controlling for tax enforcement, firm-specific, and country-specific factors, our results suggest that the use of risk profiling is associated with lower tax avoidance. Risk profiling seems to be an effective tool to curb tax avoidance across firms of all sizes, but the effect is more pronounced for large firms. However, risk profiling seems only effective in countries where risk profiling experts support the tax administration, and where tax administrations employ a larger number of tax auditors. Additional tests with country-level data on tax administration performance imply that risk profiling improves tax administrations’ performance. Overall, our findings point towards risk profiling as an audit case selection tool, appropriately staffed, incrementally attenuates firms’ tax avoidance and increases tax revenues. Experts for a thorough design and execution of risk profiling and sufficient staffing of the subsequent audits of high-risk taxpayers are necessary.
Keywords: tax audits, tax avoidance, tax compliance, tax enforcement, tax risk
JEL Classification: H25, H26, M41, M42, M48
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