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Session Overview
Session
G01: Audits
Time:
Thursday, 19/Aug/2021:
4:00pm - 5:30pm


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Presentations
4:00pm - 4:22pm

Optimal Taxes And Penalties When The IRS Cannot Commit To Its Audit Policy

Martin Besfamille1,2, Leandro Arozamena3,4, Pablo Sanguinetti5,3

1Pontificia Universidad Católica de Chile, Chile; 2CESifo, Germany; 3Universidad Torcuato Di Tella, Argentina; 4CONICET, Argentina; 5CAF Banco de Desarrollo de America Latina, Venezuela

We examine the problem of a utilitarian government that sets taxes and fines for evaders but cannot commit to any enforcement policy. Given the tax law, the government and taxpayers -some of whom are honest-play a report-audit game that, depending on taxes, fines and audit costs, generates either full evasion and no audits, or partial evasion and random auditing. We show that it may be optimal for the government not to fine evaders as a way to commit not to audit. Moreover, social welfare is nonmonotonic in the audit cost.

Besfamille-Optimal Taxes And Penalties When The IRS Cannot Commit-357.pdf


4:22pm - 4:45pm

The Deterrence Value of Tax Audit: Estimates from a Randomized Audit Program

Mazhar Waseem, Michael Best, Jawad Shah

University of Manchester, United Kingdom

In modern tax systems audit is the sole instrument through which the tax authority can detect noncompliance and create deterrence. We exploit a national program of randomized audits covering the entire population of VAT filers from Pakistan to study how much evasion audit uncovers and how much evasion it prevents by changing behavior. While audit uncovers a substantial amount of evasion (the evasion rate among firms in the bottom three size quartiles is more than 100%), it does not deter future cheating. Examining more than ten intensive and extensive margin outcomes, we detect no effect of audit on proximate or distant firm behavior. Our results suggest audits are suboptimally utilized in checking mechanical violations of law instead of creating deterrence against evasion.

Waseem-The Deterrence Value of Tax Audit-247.pdf


4:45pm - 5:07pm

Taxpayer Self-Inspections, Audits, and Optimal Tax Administration

Wei Cui

University of British Columbia, Canada

I document an important tax collection practice previously unknown to tax administration research: mandatory taxpayer self-inspections. The practice emerged spontaneously across China in the 1990s and persists despite having no basis in law. If taxpayers report additional liabilities after self-inspections, no penalties are imposed. Unlike tax amnesties, self-inspections are (i) backed up by the threat of government inspections with a high probability, and (ii) used as a routine revenue-generation technique. Self-inspections represent 50% of the activity in China’s “tax inspection” system and assume even greater importance in the larger “revenue management” system. They appear much more effective at generating revenue than costlier government inspections.

I offer a conceptual scheme clarifying the relation between self-inspections and other enforcement tools. Self-inspections show that the presumed centrality of audits rests not on its effectiveness in raising revenue, but rather on the importance of the social norm of truthful reporting.

Cui-Taxpayer Self-Inspections, Audits, and Optimal Tax Administration-204.pdf


5:07pm - 5:30pm

Do Tax Audits Deter CIT Non-Compliance? Evidence from administrative data

Christos Kotsogiannis1,2, Luca Salvadori1,3

1Tax Administration Research Centre (TARC), University of Exeter - Business School, United Kingdom; 2CESifo; 3Barcelona Institute of Economics (IEB)

What is the impact of risk-targeted tax audits on corporate income tax (CIT) filers’ future reporting behaviour? Do diverse types of examinations lead to different results in terms of their deterrence power? To the best of our knowledge, this is the first paper framed in the developing world addressing these research questions. We find evidence of significant pro-deterrence effect on CIT reporting one year after audit. The effect is lower in magnitude when time passes but not statistically significant and it is completely driven by the change in behaviour of audited taxpayers determined uncompliant. Our results suggest that the type of audit matters. Comprehensive audits drive the aggregate pro-deterrence result while desk-based audits tend to have a counter-deterrent effect after the second year.

Kotsogiannis-Do Tax Audits Deter CIT Non-Compliance Evidence from administrative data-443.pdf


 
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