Tax audits are essential for governments to raise revenue but can create economic distortions. To avoid an audit, firms may remain small, move to the informal sector, or shut down. Leveraging administrative tax data from the Ugandan Revenue Authority (URA), a novel linked survey, and a regression discontinuity design (RDD), we show that audits have a dual negative effect: They reduce the tax revenue collected from audited firms and impose large economic distortions. Audited firms are 11 percentage points likelier to shut down, and those that remain operational reduce their output. Back-of-the-envelope calculations indicate that the overall revenue collected from audited firms declines. The total wage bill loss induced by the audits is equivalent to 0.2-0.6% of the total wage bill of the formal economy at baseline, suggesting that the auditing process potentially imposes a large distortion to the Ugandan economy.

I estimate the effects of tax audits on firm direct and indirect tax evasion as well as non-compliance in Pakistan using the universe of tax returns filed by registered firms between TY2008-TY2021. I leverage 7 years of natural experiments, during which time Pakistan varied audit eligibility policies between full eligibility, in which all firms are eligible; parametric eligibility, in which only evasive firms are targeted and eligible; and risk-based eligibility, in which only non-compliant firms are targeted and eligible. Despite changes in audit eligibility, each policy retained random audit selection conditional on eligibility, which I leverage for identification. This context allows me to estimate the static and dynamic effects of tax audits on different populations of firms (i.e., evasive firms and non-compliant firms) and estimate heterogeneous effects of tax audits based on the size of firms. Additionally, I provide evidence on the effect of simply being eligible for an audit.

Do third-party auditors act as watchdogs of tax administration or do they help firms misreport taxes? We answer this question by examining firms response to audit notches - defined as discontinuities in audit requirement - and exogenous policy-induced changes in notches. Using Indian administrative panel data, we develop a novel empirical framework that considers dynamic responses of a firm to notch and conduct a difference-in-differences analysis. Our estimates suggest that firms remit 20 percent higher taxes and report 16 percent higher taxable income, because of third-party audits. Using these estimates, we conclude that the policy is cost-effective and raises net social benet.

Making use of a unique administrative data set for the period 2013-2020 consisting of the universe of administrative filings for the Corporate Income Tax (CIT) and Value-Added Tax (VAT) in Uganda, this paper investigates the impact of tax audits on voluntary compliance among audited firms in subsequent periods. Using matched-difference-in-differences approach with similar unaudited firms as controls, and a stacked design to address the staggered treatment, there is some evidence that audited firms report greater corporate income tax after the audits. The consequences on VAT reporting depend on the number of audits: the response is lagged after the first audit for multiple-time audited firms, likely to reflect the need to audit these taxpayers more than once.