Do Small Businesses Respond to a Change in Tax Audit Rules? Evidence from Italy

Abstract

Tax evasion by small businesses can be tackled using different approaches. A traditional one would recommend to increase the probability of an audit which is perceived by small businesses. Clearly, this entails high administrative and compliance costs. Another possibility is to reduce the room for accounting manipulation by adopting more stringent accounting standards for small businesses. This, however, is likely to generate even higher compliance costs for small businesses. Although these two policies are not mutually exclusive, an obvious way to implement the second one is to introduce more stringent accounting standard in exchange for a reduced probability to be audited. This is exactly the policy that we study in this paper, along with its repeal. This paper uses a panel of administrative data concerning 71,000 Italian small businesses observed in tax years [2005][2006][2007][2008]. The aim of the paper is to evaluate the impact of a reform of audit rules implemented in 2006. Until 2005, small businesses adopting more stringent accounting standards were granted a special audit regime such that the probability to be audited was particularly low. This special regime was repealed in 2006. It is shown that the reform increased profits and turnover as reported by the subset of businesses which were more likely to perceive the reform as an increase in the probability of an audit.JEL CLASSIFICATION: H25,H26, H32

The Presumptive Tax Regime on Micro, Small and Medium Enterprises in Indonesia

“…Comprehensive supervision, followed by tax audits for taxpayers who are signalled as committing fraud, can ensure that this policy is implemented properly. Several kinds of research have shown that the implementation of tax audits can improve taxpayer compliance and has a positive effect in preventing tax avoidance efforts (Niu, 2011), (Santoro, 2017), (D'Agosto, Manzo, Pisani, & D'Arcangelo, 2018). However, the large number of MSME taxpayers which have different characteristics from the general taxpayers requires the tax authorities to adopt a special approach in conducting audits of MSME taxpayers.…”

The Effect of Audit Activity on Tax Declaration

“…Each of these segments is characterized by different organizational structures and economic behavior that may generate different tax compliance behaviors. For this reason, it is necessary to analyze them separately (Slemrod 2007; Santoro 2016).…”

“…This segment is very large and mainly characterized by taxpayers with small activities; their output is mostly directed at final consumption. Few studies have devoted attention to this portion of taxpayers, despite its numerical relevance (e.g., Santoro 2016). In fact, this huge number of taxpayers, four million, is particularly important in Italy, as the micro-enterprises (those with less than 10 employees) represent almost 85 percent of the total production units Italian National Institute of Statistics (ISTAT 2015).…”

Searching for informal work using administrative data *

“…The tax agency audits and eventually fines only firms whose reports are below this threshold. Conversely, if firms' reports are above this threshold, that firms do not receive any audit (Santoro (2008); Santoro and Fiorio (2011); Santoro (2017); Battaglini et al (2020); Di Gregorio and Paradisi ( 2021)). Similar to Sector Studies, I will process data in order to compute the "benchmark" used to discriminate if a certain value of contracts declared by firms is regular or not.…”