Behavioral Responses to Taxpayer Audits: Evidence From Random Taxpayer Inquiries

Abstract

prefer the term "direct deterrent effect" to refer to effects on those who are audited, and "indirect deterrent effect" to refer to spillover effects on the non-audited. This paper argues that random audit programs provide income taxpayers with information that alters their perceptions of, and hence their behavioral responses to, audits. Comparing samples of randomly selected audited and non-audited UK taxpayers, the evidence confi rms predictions that audited taxpayers found to be "compliant" reduce their subsequent compliance. The opposite response is observed for taxpayers found to be "noncompliant." The results highlight the importance of testing separately the responses of taxpayers facing different opportunities and incentives to evade tax in order to avoid confl ating their different effects, and to reveal both positive and negative indirect revenue effects from random auditing.

Why so little revenues are obtained from a presumed large shadow economy?

“…This evasion study showed that both past tax audits and probability of current audits affect tax revenues significantly although the general level of tax evasion in Denmark turned out to be relatively low. The deterrence effect was found also in Slemrod et al (2001) and Gemmell and Ratto (2012) studies with U and UK data respectively (although the effect turned out to be quite different for different taxpayer groups). The results on tax evasion may not, of course, be completely applicable to the whole shadow economy.…”

Do Tax Audit Increase Post-Audit Reported Income? Evidence from Indonesia

“…A person builds perception not only from the chance of being audited but also the probable condition when it does happen, in terms of probabilities of evasion and number of detected evasion. If an audit does not reveal tax evasion, the perception of the probability of being detected in the future becomes lower, decreasing the compliance of taxpayers themselves [5]. This is described by Gemmel and Ratto [5] as caused by taxpayers who have not formally received information related to the rules of audit implementation run by a tax authority, so taxpayers could not determine the actual number of audit probabilities.…”

“…If an audit does not reveal tax evasion, the perception of the probability of being detected in the future becomes lower, decreasing the compliance of taxpayers themselves [5]. This is described by Gemmel and Ratto [5] as caused by taxpayers who have not formally received information related to the rules of audit implementation run by a tax authority, so taxpayers could not determine the actual number of audit probabilities. Furthermore, decisions in tax reporting and stating depend on taxpayers' perception in the time being audited and the number of unreported income which is intended to be concealed from an audit.…”

Beyond Deterrence: An Empirical and Experimental Analysis of Tax Compliance Behaviour in Indonesia

“…Alm, Jackson, and McKee (2009) suggest that "direct deterrent effect" refers to effects on those who are audited, and "indirect deterrent effect" refers to spill-over effects on the non-audited. Gemmell and Ratto (2012) argue that direct effect is additional tax yield whereas indirect effect refers to changes in future compliance behaviour.…”

“…For instance, Tauchen et al (1993) found significant general deterrent effects for the high-income earners and not for the other groups. An experimental study in 34 A change in behaviour by the audit taxpayers sometimes also labelled as a "corrective" or "preventive" effect whereas the spill over sometimes labelled as a "deterrent" effect (Gemmell & Ratto, 2012). …”