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The Relationship between State and Federal Tax Audits

In: Empirical Foundations of Household Taxation

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  • James Alm
  • Brian Erard
  • Jonathan S. Feinstein

Abstract

In this paper we present an econometric analysis of state and federal tax audits. We first present results from a survey of state tax administrators. The survey results indicate that most state tax audit programs are small and rely extensively on information provided by the IRS, although some programs are large and sophisticated. We then present results from a detailed econometric analysis of Oregon state and federal tax returns and tax audits for tax year 1987. Our analysis generates three main conclusions. First, Oregon state and IRS selection criteria are similar, but not identical, suggesting that both tax agencies might benefit from greater sharing of information, especially in some audit classes. Second, Oregon state and IRS audit assessments are strongly positively correlated, as expected. Third, we estimate the shadow values associated with providing additional audit resources to the Oregon Department of Revenue and the IRS in various audit classes, and find that for the IRS the shadow values range from two to five dollars, while for Oregon the values range from one to three dollars.
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Suggested Citation

  • James Alm & Brian Erard & Jonathan S. Feinstein, 1996. "The Relationship between State and Federal Tax Audits," NBER Chapters, in: Empirical Foundations of Household Taxation, pages 235-277, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:6242
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    References listed on IDEAS

    as
    1. Jonathan S. Feinstein, 1991. "An Econometric Analysis of Income Tax Evasion and its Detection," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 14-35, Spring.
    2. Dubin, Jeffrey A. & Graetz, Michael J. & Wilde, Louis L., 1990. "The Effect of Audit Rates on the Federal Individual Income Tax, 1977-1986," National Tax Journal, National Tax Association;National Tax Journal, vol. 43(4), pages 395-409, December.
    3. Dubin, Jeffrey A. & Graetz, Michael J. & Wilde, Louis L., 1990. "The Effect of Audit Rates on the Federal Individual Income Tax, 1977-1986," National Tax Journal, National Tax Association, vol. 43(4), pages 395-409, December.
    4. Alm, James & Bahl, Roy & Murray, Matthew N., 1993. "Audit selection and income tax underreporting in the tax compliance game," Journal of Development Economics, Elsevier, vol. 42(1), pages 1-33, October.
    5. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-373, August.
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    Cited by:

    1. James Alm, 2019. "What Motivates Tax Compliance?," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 353-388, April.
    2. Matti Viren, 2015. "Why so little revenues are obtained from a presumed large shadow economy?," Economics of Governance, Springer, vol. 16(2), pages 101-123, May.
    3. Brian Erard & Jonathan S. Feinstein, 2007. "Econometric Models for Multi-Stage Audit Processes: An Application to the IRS National Research Program," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0723, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    4. James, Simon & Edwards, Alison, 2010. "An annotated bibliography of tax compliance and tax compliance costs," MPRA Paper 26106, University Library of Munich, Germany.

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