EFFECTS OF TAX AUDITING: DOES THE DETERRENT DETER?

Abstract

The literature on tax compliance agrees that tax audits have two effects, direct and indirect. Direct effects of auditing are additional revenue collected as the result of a tax audit. Indirect effects refer to the deterrence effects, i.e. auditing deters potential tax evaders from cheating on their taxes. The research is based on the data from the USA. The objective of the paper is to determine (1) whether federal individual income tax audits are effective in improving voluntary tax compliance (2) whether the deterrent effects of those audits spill over to compliance with state individual income taxes. The results of multiple regression indicate that higher Internal Revenue Service (IRS) audit rates improve state individual income tax compliance. Other findings include evidence that opportunities to evade taxes, complexity of the tax code, as well as higher educational achievement are correlated with higher non-compliance.