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How Do Firms Respond to Risk-based Tax Audits?

Author

Listed:
  • Jarkko Harju

    (Tampere University)

  • Kaisa Kotakorpi

    (Tampere University)

  • Tuomas Matikka

    (VATT Institute for Economic Research)

  • Annika Nivala

    (VATT Institute for Economic Research)

Abstract

We analyze firm responses to risk-based tax audits – a central tool in regular tax enforcement – using full-population data on tax audits and tax returns in Finland. We find an immediate and persistent increase in reported profits by the audited firms after being audited compared to matched non-audited firms with a similar development in key outcomes before the audit. This is an indication of significant non-compliance in the baseline. We also examine the anatomy of non-compliance and find that both revenue and labor costs increase after audits, suggesting that some firms may follow a strategy of under-reporting their overall scale of operation. We use novel data on bankruptcy petitions and court decisions to investigate whether stricter tax enforcement has implications for real economic activity. We find a large increase in the likelihood of bankruptcy after audits among non-compliant firms, but no increase in bankruptcies for compliant firms.

Suggested Citation

  • Jarkko Harju & Kaisa Kotakorpi & Tuomas Matikka & Annika Nivala, 2024. "How Do Firms Respond to Risk-based Tax Audits?," Working Papers 22, Finnish Centre of Excellence in Tax Systems Research.
    • Handle: RePEc:fit:wpaper:22
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    References listed on IDEAS

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    More about this item

    Keywords

    tax compliance; tax evasion; tax enforcement; firm behavior;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration

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