The Effect of Audit Activity on Tax Declaration

Abstract

This article provides an empirical contribution to deterrence analysis by evaluating the effect of tax audits on compliance taxpayer behaviors over the 2004 to 2009 period. We use two unique databases: the Tax Return Register (Anagrafe Tributaria) and Italian Revenue Agency (IRA) audits data, with a focus on self-employment and sole proprietorships. The difference-in-differences approach has been applied as estimation strategy to evaluate the effect of three IRA audit policies: on-site audit (i.e., soft audit), desk audit (i.e., deep audit), and a combination of on-site and desk audit activities. Our results show an overall positive effect of tax audits in terms of deterrence. In particular, the contemporaneous presence of soft and deep audits has the greatest effect on compliance reporting behaviors. Moreover, on-site audits show greater effects compared to desk audit activities. Reasons can be found in different purposes for which various policies are designed.