Thursday, September 5, 2019
Andrew Belnap (North Carolina), Jeffrey L. Hoopes (North Carolina), Edward L. Maydew (North Carolina) & Alex Turk (IRS), Real Effects of Tax Audits: Evidence from Firms Randomly Selected for IRS Examination:
Tax audits are a necessary component of the tax system but have potentially adverse real effects on the firms selected for audit. We examine the effects of tax audits on whether small firms continue to operate as a going concern. We use IRS data from both random and nonrandom tax audits and find that audited firms are less likely to persist as going concerns following the audit. However, we find that the effect is entirely isolated to firms that underreported their tax liability.
We find no evidence that the administrative costs of an audit are associated with more firms ceasing to operate. Finally, we consider whether tax audits could also benefit firms, and we find evidence that in certain cases tax audits help firms learn and make important changes following the audit.