Dynamic effects of tax audits and the role of intentions

• Published in: Journal of public economics Vol. 234; p. 105121
• Main Author: Christiansen, Tobias Gabel
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2024
• Subjects: Risk score; Self-employed; Tax audits; Tax compliance; Tax revenue; Tax revenue; H83; Self-employed; Tax compliance; Risk score; Tax audits; H26
• ISSN: 0047-2727
• DOI: 10.1016/j.jpubeco.2024.105121

Using a random audit program covering more than 17,000 tax returns, I study how tax audits affect the subsequent compliance behavior of self-employed with varying intentions to comply. Leveraging novel information provided by auditors on taxpayers’ perceived willingness to comply, I find that unintentional non-compliers, driven by inattention or misunderstandings of the tax rules, exhibit higher compliance in subsequent years. This results in a revenue increase equivalent to 340% of the tax uncovered from the audit after 5 years. In contrast, intentional non-compliers who deliberately evade taxes and are typically targeted for operational audits do not respond to audits and have a low recovery rate for evaded taxes. Based on these findings, I illustrate how risk scores derived from pre-audit information can be used to target taxpayers expected to respond strongly to audits, leading to increased revenue gains of 87% compared to an approach that focuses on initial revenue from audits. Finally, I propose targeted and personalized guidance as a cheaper alternative to mitigate unintentional misreporting compared to expensive audits. •I study how tax audits affect self-employed with varying intentions to comply.•Audits foster higher levels of compliance among those who make inadvertent mistakes.•Those typically subject to operational audits show no increase in compliance.•Tax agencies can increase revenue by targeting those who respond strongly to audits.•Personalized guidance may serve as a cheaper way to reduce inadvertent misreporting.