The Economic Impact of Audits

Study Context

While several studies have investigated the impact of tax audits on evasion, we neither know much about how tax audits affect firms’ operations, nor how firms respond to changes in the enforcement environment. These are important estimates to consider when designing audit strategies. In 2016, a national revenue authority (not named to preserve the integrity of the study) reduced the probability of being audited for taxpayers with the highest compliance risk. In preliminary work, leveraging the authority’s rich administrative data, David found that taxpayers pay less taxes and are less likely to file taxes after this move to a less stringent enforcement environment.

Next, he seeks to understand how an audit impacts a firm’s operation. The data in hand is rich in its scope and duration, but it is restricted to the formal sector. To understand what happens when firms do not file taxes, David, in close collaboration with the revenue authority, will develop a survey to conduct with both audited and unaudited firms before and after the audit.

Study Design

In preliminary work, to evaluate the impact of changes in the enforcement environment, David successfully used a triple-difference strategy. The work compared firms with high/low compliance risk, and high/low financial importance (a composite measure defined by the revenue authority) before/after the policy change in 2016.

To estimate the impact of being audited, he leverages variation in the audit selection process, part of which is data driven. Several of the administrative data sources have not been used by other researchers before. In addition, the survey would allow the authors to understand what happens to firms when they move to informality after an audit.

Results and Policy Lessons

Forthcoming