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

See all articles by Eva Eberhartinger

Eva Eberhartinger

Vienna University of Economics and Business

Reyhaneh Safaei

Paderborn University; TRR 266 Accounting for Transparency

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business; TRR 266 Accounting for Transparency

Yuchen Wu

Ludwig Maximilian University of Munich (LMU); TRR 266 Accounting for Transparency

Date Written: December 1, 2021

Abstract

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

Suggested Citation

Eberhartinger, Eva and Safaei, Reyhaneh and Sureth-Sloane, Caren and Wu, Yuchen, Is Risk Profiling in Tax Audit Case Selection Rewarded? An Analysis of Corporate Tax Avoidance (December 1, 2021). TRR 266 Accounting for Transparency Working Paper Series No. 60, WU International Taxation Research Paper Series No. 2021-07, Available at SSRN: https://ssrn.com/abstract=3911228 or http://dx.doi.org/10.2139/ssrn.3911228

Eva Eberhartinger

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna 1020
Austria

HOME PAGE: http://www.wu.ac.at

Reyhaneh Safaei (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

Caren Sureth-Sloane

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

Yuchen Wu

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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