Wednesday, December 5, 2012

Research on Positive Link Between Corporate Audits and Compliance

Jeffrey L. Hoopes, Devan Mescall, and Jeffrey Pittman, Do IRS Audits Deter Corporate Tax Avoidance? (SSRN 11/

The Stephen M. Ross School of Business at the University of Michigan

University of Saskatchewan

Memorial University of Newfoundland (MUN) - Faculty of Business Administration

November 2011


We extend research on the determinants of corporate tax avoidance to include the role of Internal Revenue Service (IRS) monitoring. Our evidence from large samples implies that U.S. public firms undertake less aggressive tax positions when tax enforcement is stricter. Reflecting its first-order economic impact on firms, our coefficient estimates imply that raising the probability of an IRS audit from 19 percent (the 25th percentile in our data) to 37 percent (the 75th percentile) increases their cash effective tax rates, on average, by nearly 2 percentage points, which amounts to a 7 percent increase in cash effective tax rates. These results are robust to controlling for firm size and time, which determine our primary proxy for IRS enforcement, in different ways; specifying several alternative dependent and test variables; and confronting potential endogeneity with instrumental variables and panel data estimations, among other techniques.

Number of Pages in PDF File: 64

Keywords: tax enforcement, corporate governance, IRS audits, taxes, agency costs

JEL Classification: M40, G34, G32, H25

working papers series

SSRN Link for download here.

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