Audits, audit effectiveness, and post-audit tax compliance

Abstract

This study uses a laboratory experiment to investigate the effect of audit effectiveness, or the share of undeclared income that the tax agency detects in an audit, on post-audit tax compliance. We also study whether the effects of audits depend on a taxpayer's reporting behavior prior to the audit. Our findings show that tax audits have differential effects on post-audit compliance and that the effectiveness of audits determines these responses; that is, while effective audits increase post-audit tax compliance, ineffective audits have the opposite effect. We also find that relatively compliant taxpayers exhibit the strongest behavioral response to audits. Our results indicate that the specific deterrent effects of tax audits are more ambiguous than standard and behavioral models of tax compliance suggest, with these effects dependent on the effectiveness of audits and on the taxpayer's prior reporting behavior.