Tax audit impact on voluntary compliance

Abstract

This study examines the impact of the New York State tax audit on voluntary compliance in one segment of the New York State economy, Food Services and Drinking Places (NAICS 722). It takes a new and different approach from previous studies in the literature. Both the Ordinary Least Squares (OLS) and Time Series Cross Section (TSCS) autoregressive modeling methods are applied. The results of both methods suggest that after an audit, a firm reports a higher sales growth rate. The TSCS approach shows that in the year of the audit, a typical firm reports a sales growth rate which is 2.63 percentage points higher than a firm that was not audited. This percentage is found to decline by a rate of 1/3 each year thereafter. These findings suggest that the audit productivity reported in many research papers, where only the direct audit collections are considered, may be underestimated.