Corporate tax avoidance subsides when IRS audit threat increases, study finds
U.S. companies that face a higher probability of being audited by the tax-collecting Internal Revenue Service voluntarily pay more taxes, a new study has found.
The finding proved especially true among companies with poor corporate governance, according to the study published in the September/October issue of the American Accounting Association’s Accounting Review.
If that seems obvious, study co-author Jeffrey Hoopes, a doctoral candidate at the University of Michigan, said there was plenty of evidence that seemed to point in the other direction.
For example, prior academic research had found that well-to-do individual taxpayers were more likely to pay lower taxes when their chance of being audited rose, in anticipation of eventually settling with the IRS.
The new study found that when the probability of an IRS audit doubled to 37 percent from 19 percent, corporations facing an audit increased their effective tax rate by almost 2 percent.
The chances any particular company could face IRS audit have dropped significantly in recent years.
A company with assets of at least $250 million had a 54 percent chance of IRS audit in 1992. By 2008, the final year included in the study, that had fallen to a 27 percent chance.
The IRS budget for enforcement has dropped further in the past two years, though the Treasury has requested that money be restored this year.