Grana Presents Income Visibility And The Compliance Response To Declining Audit Coverage Today At Georgetown

Jess Grana (MITRE) presents Income Visibility and the Compliance Response to Declining Audit Coverage (with Alexander McGlothlin (MITRE), Alan Plumley (IRS, RAAS) & Daniel Rodriguez (IRS, RAAS)) at Georgetown today as part of its Tax Law and Public Finance Workshop hosted by Emily Satterthwaite and Dayanand Manoli:

IRS audit rates have fallen for over a decade due to declining resources. In addition to loss of direct revenue, decreased enforcement likely results in increased noncompliance, as well. We contribute to a small literature on the “comprehensive” indirect effects of IRS enforcement on voluntary compliance across the general taxpayer population. Using microdata from random audits conducted for research purposes, we find that noncompliance increases on certain line items as overall audit rates decline. Put another way, a one percentage point increase in audit rates decreases misreporting of wage and salary income by 5.1 percent; this effect grows to a 21.8 percent drop in misreporting of income subject to much less information reporting. Notably, we do not find a discernable deterrence effect for income subject to little or no information reporting. 

Our findings suggest that the deterrence effects of IRS enforcement depend on how well noncompliance is able to be measured and validated.