As part of their ordinary enforcement activities, tax authorities around the world use letters and other forms of personalised communications to elicit tax compliance at a low cost. The literature shows that the impact of a threat-of-audit letter (TAL) depends critically on the credibility of the letter which, in turn, depends on the information disclosed to the taxpayer. We study a TAL that is credible because it also uses third-party information to target a form of cost manipulation but, at the same time, incentivises alternative forms of cost manipulation by not targeting them. We find that the direct impact on the targeted cost manipulation is stronger than the strategic increase in other costs, and therefore the overall effect of the TAL on taxable income is positive. Our approach can be applied to any letter or enforcement action that reveals information to taxpayers and thus prompts their strategic responses. By observing the taxpayers’ responses along all relevant dimensions, the tax authority can evaluate the impact of the strategy and also obtain valuable information to target future enforcement activities.

Fiorio, C., Santoro, A. (2023). Tax enforcement activities: Evidence on the impact of a threat-of-audit letter. ECONOMIC AND POLITICAL STUDIES, 1-17 [10.1080/20954816.2023.2192559].

Tax enforcement activities: Evidence on the impact of a threat-of-audit letter

Santoro, Alessandro
2023

Abstract

As part of their ordinary enforcement activities, tax authorities around the world use letters and other forms of personalised communications to elicit tax compliance at a low cost. The literature shows that the impact of a threat-of-audit letter (TAL) depends critically on the credibility of the letter which, in turn, depends on the information disclosed to the taxpayer. We study a TAL that is credible because it also uses third-party information to target a form of cost manipulation but, at the same time, incentivises alternative forms of cost manipulation by not targeting them. We find that the direct impact on the targeted cost manipulation is stronger than the strategic increase in other costs, and therefore the overall effect of the TAL on taxable income is positive. Our approach can be applied to any letter or enforcement action that reveals information to taxpayers and thus prompts their strategic responses. By observing the taxpayers’ responses along all relevant dimensions, the tax authority can evaluate the impact of the strategy and also obtain valuable information to target future enforcement activities.
Articolo in rivista - Articolo scientifico
difference-in-differences; small business taxation; Tax compliance by businesses; threat-of-audit letter;
English
18-apr-2023
2023
1
17
none
Fiorio, C., Santoro, A. (2023). Tax enforcement activities: Evidence on the impact of a threat-of-audit letter. ECONOMIC AND POLITICAL STUDIES, 1-17 [10.1080/20954816.2023.2192559].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/411803
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