Study: Audits Have Deterrent Effect Only if Additional Tax Assessed

Chris Gaetano
Published Date:
Mar 27, 2017
Lying Man

An IRS study has found that people who have been audited become much more honest on their taxes for years after the fact, but this is only if the engagement ended with them having to pay more money. If the audit ended with no additional tax assessed, the opposite happens, with the taxpayer becoming less likely to comply with the law. The findings come from the most recent IRS Research Bulletin, which compiled academic papers developed by the service's researchers. 

More specifically, if an audited taxpayer received a positive recommended additional tax assessment, they increase their reported taxable income by an average of 250 percent. While this effect fades over time, it remains potent, as three years later, the average income reported is still 120 percent higher than before. Conversely, however, audited taxpayers who did not received an additional assessment will be less honest on their taxes. While the researchers said the short-term impact is difficult to determine, they said that in the medium-term such taxpayers reduce their reported taxable income by an average of 35 percent three years after an audit. 

The IRS suggested three possible reasons why this might be. First, coercive enforcement activity could reduce "tax morale" among honest taxpayers, leading them to report less after receiving no additional tax assessment. Second, the audit process might give compliant taxpayers reason to believe that the risk of future examinations is low, given that no adjustments were made during the recent audit, driving some to understate their income on subsequent returns. Third, dishonest taxpayers who are audited without additional taxes assessed may become emboldened and become more aggressive in further reducing reported taxable income. 

The IRS said it is unable to determine which of these explanations is most likely, given the current data available. 

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