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Abstract:
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The specific indirect effect of a tax enforcement activity such as an audit refers to the subsequent compliance or reporting behavior of the audited taxpayer. In this study, we build on prior research to quantify this phenomenon. Further, we consider how this knowledge can be applied to improve IRS audit planning activities to maximize the return on investment. We make several contributions to existing research: first, we exploit knowledge of correspondence audit eligibility and selection processes for five distinct categories of correspondence audit, each with unique operational criteria, to minimize selection bias. Second, we translate linear mixed effects model estimates into actual dollar values representing the estimated difference in total tax over time between audited and not audited taxpayers. We then compare these values to the direct revenue generated from audits. We see evidence of the indirect effect varying across type of correspondence audit. These estimates are crucial for operational decision-making, such as how to efficiently allocate the budget to maximize the combined direct and indirect effects of audits.
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