The Effect of Audit Burden on Subsequent Tax Evasion

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Abstract

In addition to penalties, interest, and additional taxes, tax examination (audit) require individuals to incur other monetary and nonmonetary costs (e.g., time, fees for advice, etc.). We refer to these costs collectively as audit burden, and examine the effect of audit burden on subsequent compliance decisions. Motivated by mental accounting theory, we predict and find that taxpayers who were initially compliant (compliers) on the audited return respond to being audited differently than those who were initially noncompliant (evaders). Specifically, we find high burden audits result in a greater increase in compliance for evaders and maintain compliance of compliers. In contrast, we find low-burden audits are unlikely to increase compliance of evaders (even though the audit includes penalties for evasion) and may lead to a decrease in compliance for compliers.

Authors

• Amy M Hageman, Kansas State University

• Ethan G LaMothe, University of South Carolina

• Mary Elizabeth Marshall, Louisiana Tech University