Audit Rates Research Articles

Audit Information Dissemination, Taxpayer Communication, and Compliance Behavior

Taxpayer audits are a central feature of the voluntary compliance system in the United States federal individual income tax. Audits are thought to have a direct deterrent effect on the individuals actually audited. Audits are also believed to have an indirect deterrent effect on individuals not audited, and in fact there is some empirical evidence that audit rates affect compliance beyond the audited individuals themselves. However, empirical studies cannot measure or control for taxpayer awareness of audit risk, and they also cannot uncover the behavioral channels through which the direct and indirect effects operate; that is, the ways in which learn about - and communicate among themselves - audit rates, and the subsequent effects on compliance, are not known and cannot be discovered by empirical studies. In this study, we use laboratory experiments to examine several types of information dissemination and taxpayer communication about audit frequency and audit results. These experiments allow us to test hypotheses about the effects of two types of communication of audit policies and results, in order to explore the direct and the indirect effects of audits: official information disseminated by the government (e.g., the experimenter) and unofficial, or informal, communications among taxpayers (e.g., the subjects). Our results indicate that unofficial communications have a strong indirect effect on compliance: messages that indicate that a subject was not audited or was able to cheat actually reduce compliance, while messages that a subject was audited or paid his or her taxes increase compliance. Also, official announcements of information may not always encourage voluntary compliance.

Audit Certainty, Audit Productivity, and Taxpayer Compliance

Strategies for dealing with evasion include such standard policies as stricter enforcement (e.g., increased audit rates, more extensive audits, larger penalties). However, the exact responses of taxpayers to these enforcement measures are quite difficult to measure with existing field data, and so are not known precisely. In this paper we use experimental methods to examine how individuals respond in their compliance decisions to a certain probability of audit and to information concerning the of an audit. Our design informs some individuals that their return will be audited with certainty prior to making their compliance decision, while other individuals receive information that they will not be audited; we also inform individuals of the productivity of the audit by stating how much unreported income will be discovered via the audit. We find that the announcement of audits increases the compliance rate of those who are told that they will be audited. However, the compliance rate of those who know that they will not be audited falls, and the net effect is that overall compliance falls.

Third-Party Income Reporting and Income Tax Compliance

Individuals whose income is not reported to the tax authority by a third party (e.g., the self-employed and those earning casual wages such as tips) may be less likely to be detected evading taxes relative to the case in which they are subject to third-party reporting. However, the compliance response is not known, in part because of the difficulty in obtaining information on individual choices in these situations. We use experimental methods to examine individual income tax compliance in settings where a portion of an individual's income is relatively difficult to detect upon audit by the tax authority, due to the absence of third-party information. Our results indicate that tax compliance rates decline as individuals earn larger shares of income that is not perfectly detectable. Our results also indicate that tax compliance rates decline with higher income, lower audit rates, and higher tax rates.

The taxpayer resentment and 'neo ultra-rationality' hypotheses

This study empirically investigates two hypotheses, the taxpayer resentment hypothesis and the neo ultra-rationality hypothesis, both of which argue that higher federal budget deficits induce an increase in the degree of aggregate federal personal income tax evasion. Using annual data on two alternative measures of aggregate federal personal income tax evasion for two periods, 1960-2002 and 1960-1997, and allowing for such factors as federal income tax rates, IRS tax return audit rates, and a variable measuring the public's general dissatisfaction with government, it is found that income tax evasion is an increasing function of the budget deficit. Important policy implications of this finding are provided in the concluding section of the study.

Tax Evasion and Auditing in a Federal Economy

This paper analyzes the relation between tax auditing and fiscal equalization in the context of fiscal competition. We incorporate a model of tax evasion by firms into a standard tax competition framework where regional governments use their audit rates as a strategic instrument to engage in fiscal competition. We compare the region’s choice of audit policies for three different cases: A scenario of unconfined competition without interregional transfers, a scenario with a gross revenue equalization (GRS) scheme and finally, a scenario with net revenue sharing (NRS), where not only the revenues from taxation but also the regions auditing costs are shared. Without regional transfers, fiscal competition leads to audit rates which are inefficiently low for revenue-maximizing governments. While in general GRS aggravates the inefficiency, NRS makes the decentralized choice of auditing policies more efficient.

Tax Evasion on Gratuities

Tax evasion on tips earned by servers is a pervasive problem, one that has received almost no attention in the tax evasion literature. The authors develop a model of joint server and employer tax compliance to derive predictions for how the customer tipping rate, the server’s sales and tax rate, and the expected IRS penalty on employers influence compliance by both parties. They test the model by examining interstate differences in reported hourly pay (wages plus reported tips) during 2001. They use the Occupational Employment Statistics surveys, data on IRS regional audit rates, data from each state’s food and beverage service industry, and information on each state’s minimum wage and tax laws to perform ordinary least squares and two-stage least squares estimation. Empirical results generally provide strong support for a number of the theory’s predictions.

SOX Costs: Auditor Attestation under Section 404

This study examines the cost of the new internal control audit required by the Sarbanes-Oxley Act of 2002 (SOX) for a sample of Fortune 1000 companies. The average audit fee increase from 2003 to 2004 of $2.3 million is significant and is primarily attributable to the new SOX audit. SOX audit costs appear to be based on company size, asset growth, and the effectiveness of internal controls in addition to the 2003 financial statement audit rate. Specifically, the SOX audit costs increase with size, but the SOX audit unit costs vary inversely with size. This inverse relationship is consistent with larger companies benefiting from returns to scale and smaller companies spending fewer resources on internal controls and being more likely to have material weaknesses in internal controls. The positive relationship between SOX audit costs and asset growth supports the notion that rapidly growing firms may not be able to update their internal control systems in a timely manner and, therefore, may be more likely to experience internal control weaknesses. Firms that reported ineffective internal controls experienced higher SOX audit costs than those that reported effective internal controls. We also find evidence that financial services firms paid significantly lower SOX audit rates and electronic equipment and electronics firms paid significantly higher SOX audit rates than firms in other industries.

The advantage of focusing law enforcement effort

It is shown in this paper that there may exist an intrinsic advantage in focusing law enforcement effort on a subgroup of possible violators of law, rather than applying law enforcement effort uniformly over the relevant population of potential violators. For example, it may be desirable for the tax audit rate to be higher in one region of the country than another. This may be desirable even though, as is assumed, the frequency of violations does not differ among regions.

Stricter enforcement may increase tax evasion

This paper shows that stricter enforcement may increase tax evasion. Individuals vote on a linear income tax, which is used to finance lump sum transfers. Individuals may evade taxes, but they have to pay fines when caught. Stricter enforcement may make redistributive taxation more attractive to the decisive voter. The tax rate and transfer may rise, which in turn may increase tax evasion. The paper also discusses the interaction between voting on taxes and the choice of audit rate by a budget-maximizing bureaucrat.

Tax evasion as ade facto vote of disapproval of PAC contributions

In this study, it is hypothesized that higher (rising) real PAC election campaign contributions may lead the public to increasingly distrust and resent politicians because of the perceived political influence that these contributions exercise. It is further hypothesized that to express that distrust and resentment, the public may make greater efforts to evade income taxation so as to deny tax revenues to the Treasury and “influence-peddling” politicians. Instrumenatal Variable (IV) estimates in first differences that allow for income tax rates, IRS audit rates, IRS penalty assessments on detected unreported income, and the public's dissatisfaction with government per se, find strong, albeit only preliminary, empirical evidence that tax evasion is an increasing function of real PAC election campaign contributions.

Wages, Unemployment, and the Underground Economy

While examining the macroeconomic effects of increased government control of the informal sector, this paper develops a two-sector general equilibrium model featuring matching frictions and worker-firm wage bargaining. Different goods are produced in the formal sector and the informal sector, and workers search for jobs in both sectors. We analyse the impact of higher punishment rates and a higher audit rate on labor market performance, and we find that a higher punishment rate (i) reduces the size of the informal sector and increases the size of the formal sector, (ii) decreases real producer wages in both sectors, and (iii) reduces the unemployment rate. The effect of a higher audit rate is less clear. We find that a higher audit rate (i) reduces the size of the informal sector relative to the size of the formal sector, and (ii) has an ambiguous impact on unemployment and real wages.

Antibiotic prophylaxis in elective colorectal surgery.

Antibiotics are often administered in elective colorectal surgery to prevent wound infection. The tendency for surgeons to prolong the administration of prophylactic antibiotic therapy in the postoperative period is a well-known fact. The aim of this study was to elucidate the pattern of prophylactic antibiotic utilization in elective colorectal surgery and to determine if evidence-based medicine is employed in relation to this practice. A cross-sectional study encompassing general surgeons performing elective colorectal surgery was performed. Questionnaires were distributed to 144 surgeons (national, academic and private health care). Questions pertaining to the type, timing and duration of antibiotic administration were asked. The prevalence of wound infection audit rate and whether or not there were specific guidelines related to antibiotic administration were also determined. The response rate obtained was 67% (n = 96). Although evidence from the current medical literature and recommended national guidelines support the use of single-dose prophylactic antibiotics, 72% of the respondents used more than a single dose. Forty surgeons (42%) claimed that their prescribing practice was supported by the medical literature, 31 respondents (32%) based their practice on hospital guidelines and personal preference was cited as a reason by 21 surgeons (22%). The remaining four respondents (4%) used a similar scheduling policy to that practiced by their colleagues in relation to antibiotic administration. There was no significant difference in antibiotic dose scheduling between national, private and university academic institutions (P = 0.85). These results suggest that a significant proportion of surgeons administer excessive and unnecessary doses of antibiotics in elective colorectal surgery. Further studies are required to uncover the reasons but lack of appropriate guidelines and failure to exercise evidence-based medicine are major factors that account for this practice.

The Advantage of Focusing Law Enforcement Effort

It is shown in this paper that there may exist an intrinsic advantage in focusing law enforcement effort on a subgroup of possible violators of law, rather than applying law enforcement effort uniformly over the relevant population of potential violators. For example, it might be desirable for the tax audit rate to be higher for individuals whose names begin with the letters A-M than for those whose names begin with N-Z. This may be desirable even though, as is assumed, the frequency of violations does not differ between subgroups.

Impact of income-detection technology and other factors on aggregate income tax evasion:the case of the United States

This study empirically investigates the impact of improving income-detectiontechnology, as well as a variety of other factors, on aggregate income taxevasion. The study focuses on the U.S., using available data for the 1975-97 period. The empirical findings indicate that improving income-detection technology appears to have significantly reduced the degree of aggregate income-tax evasion in theU.S. over time. In addition, the estimates indicate that federal income tax evasionappears to be an increasing function not only of the federal personal income tax rate but also of the public's dissatisfaction with government. Furthermore, income taxevasion appears to be a decreasing function both of penalties imposed by the IRS on unpaid taxes and IRS audit rates. JEL Codes: H24, H26, H31 Keywords: Evasion, Income Tax Evasion, Income Tax, Tax Evasion, Tax

ANTIBIOTIC PROPHYLAXIS IN ELECTIVE COLORECTAL SURGERY

Antibiotic administration in elective colorectal surgery is established in preventing wound infection. However, surgeons may have a tendency to prolong the administration of prophylactic antibiotic therapy in the postoperative period. The aim of this study was to elucidate the pattern of prophylactic antibiotic utilisation in elective colorectal surgery and to determine if evidence based medicine was employed in relation to this practice. A cross sectional study encompassing general surgeons performing elective colorectal surgery was performed. Questionnaires were distributed to 144 surgeons (national, academic and private healthcare). Questions pertaining to the type, timing and duration of antibiotic administration were assessed. The prevalence of wound infection audit rate and the presence of specific guidelines related to antibiotic administration were also determined. The response rate obtained was 67% (n = 96). Although evidence from the current medical literature and recommended national guidelines support the use of single dose prophylactic antibiotics, 72% of the respondents employed more than a single dose. Forty surgeons (42%) claimed that their prescribing practice was supported by the medical literature, 31 respondents (32%) based their practice on hospital guidelines and personal preference was cited as a reason by 21 surgeons (22%). The remaining four respondents (4%) used similar scheduling policy as practiced by their colleagues in relation to antibiotic administration. Twenty‐five percent of respondents audited their wound infection rate for elective colorectal surgery. There was no significant difference in antibiotic dose scheduling between national, private and university academic institutions. χ2 = 0.315 (P = 0.854). The above results suggest that a significant proportion of surgeons administer excessive and unnecessary doses of antibiotics in elective colorectal surgery. Further studies are required to uncover the exact reasons but lack of appropriate guidelines and failure to exercise evidence based medicine are major factors that account for this practice.

The effects of tax rates and enforcement policies on taxpayer compliance: A study of self-employed taxpayers

This paper presents an econometric analysis of taxpayer compliance, exploring its relationship with audit rates, penalties if detected, tax rate schedule, income level, and sources of self-employment income. Using data drawn from theAnnual Report of the Commissioner of Internal Revenue Service [IRS, various] and theData Book [IRS, various] for 1980 to 1995, the audit rate and penalty rate are both effective deterrents to noncompliance. The effectiveness of these two policy instruments depends upon the individual's level of income. It seems the higher the income level, the more effective these instruments are. In general, compliance increases with the level of income but at a decreasing rate. It is also found that individuals tend to comply less as the marginal tax rate rises. Again, such tendency is more pronounced for high-income taxpayers than for low-income taxpayers.

Wealth, Power, and the Internal Revenue Service: Changing IRS Audit Policy through Litigation

Objectives. Although scholars have recognized that the wealth and power of litigants has substantial influence on litigation outcomes, there has been less recognition of the ability of the wealthy to sway agency policy through litigation. I argue that the wealthy, through lawsuits and the outcomes from the litigation, influence Internal Revenue Service (IRS) audits of the wealthy and the less affluent. Methods. I examine IRS state audit rates and use ordinary least squares regression with panel corrected standard errors. Results. I show that wealthy litigants can influence the IRS to decrease audits of the wealthy and increase audits of the less affluent. Conclusions. The wealthy appear to have the ability to influence IRS policy through lawsuits. Litigation can influence agency policy.

Tax evasion, fiscal competition and economic integration

This paper examines the implications of tax evasion for fiscal competition and tax harmonization policies in an economic union. First, for symmetric countries, it proves that the equilibrium values of the tax and audit rates are less than optimal. Tax harmonization alone will also lead to a less than optimal audit rate. Second, for asymmetric countries, the paper shows that integration may turn an honest country into an evading one. It argues that tax harmonization alone may be a bad policy in that it can make both countries worse off. It may also cause an otherwise honest country to turn to evasion.

Strategic Auditing in a Political Hierarchy: An Informational Model of the Supreme Court's Certiorari Decisions

We examine how the Supreme Court uses signals and indices from lower courts to determine which cases to review. In our game theoretic model, a higher court cues from publicly observable case facts, the known preferences of a lower court, and its decision. The lower court attempts to enforce its own preferences, exploiting ambiguity in cases' fact patterns. In equilibrium, a conservative higher court declines to review conservative decisions from lower courts regardless of the facts of the case or the relative ideology of the judges. But a conservative higher court probabilistically reviews liberal decisions, with the “audit rate” tied, to observable facts and the ideology of the lower court judge. We derive comparative static results and test them with a random sample of search-and-seizure cases appealed to the Burger Court between 1972 and 1986. The evidence broadly supports the model.

Audit and recurrence rates after hernia surgery.

To study the effect of quality assurance on the recurrence rate after hernia repair. A prospective longitudinal cohort study. District hospital, Sweden. All (n = 1232) patients aged 15-80 years operated upon for inguinal or femoral hernia in Motala 1984, 1986-1988, 1990, and 1992-1994. A questionnaire enquiring about pain or a lump in the operated area was sent 3-6 years postoperatively to all patients, excluding those who had already been operated on for recurrence and those who had died. Selected cases were examined depending on the answers to the questionnaire. Recurrence rate estimated by adding already confirmed recurrences to those found at the clinical examination; reoperation for recurrence; hospital stay; and number of day cases. Cumulative incidence of reoperation was analysed by actuarial analysis of all patients operated on from 1986-1997. The recurrence rate decreased from 18% in 1984 and 1986 to 3% in 1993 and 1994. The reoperation rate for recurrence at three years was 10.8% (95% confidence interval, CI: 9.3 to 12.2%), 3.6% (2.6 to 4.4%) and 2.2% (1.7 to 2.7%) for patients operated on between 1986-1988, 1989-1991 and 1992-1997, respectively. Differences between the first and the second and between the first and the third period were both highly significant (p < 0.001) whereas the difference between the second and third period was not (p = 0.09). Mean hospital stay decreased from 3.5 days in 1984 to 0.9 days in 1994. By recording recurrence rate or its surrogate endpoint, reoperation rate for recurrence, or both, hospital stay, and number of day cases, and presenting these results to participating surgeons, we provided incentives to improve outcome. This has resulted in a rapid decrease in recurrence rate and a shortened hospital stay, thereby improving cost-effectiveness.