The Endogenous Relationship between Tax Evasion and Audit Selection Rates
Date Issued
2006
Date
2006
Author(s)
Huang, Mei-Zuh
DOI
zh-TW
Abstract
This study uses Taiwan’s business income tax returns data to simultaneously investigate the determinants of audit selection and business income tax evasion behavior. The simultaneous equations model (SEM) that this study employs has two equations; the first equation is a Tobit model for predicting tax evasion, while the second equation is a probit model for predicting the probability that a return will be audited. The data set consists of business income tax returns filed in Taiwan during the period between 2000 and 2002. The simultaneous equations model has the advantage of treating the tax authorities and the taxpayers (firms) as strategic players in the compliance game. It also provides theoretically more robust statistical results on the relationships between audits and tax compliance.
The estimation results provide significant evidence that Taiwan’s tax authorities employ a systematic, even if informal, audit selection process. That is, they use information reported by the taxpayers to select returns for audit. Firms are more likely to be selected for audit as they have larger underreported tax liabilities, as they have tax credits, and as they have net loss. Therefore, it should not be assumed that the behavior of the tax agency is given and exogenous to the tax compliance models.
Corroborating some important findings in main foreign literature, our estimation results also imply that other characteristic variables, such as whether a CPA-attested tax return is used, the legal form, liquidity level, and tax credits status of a firm, have significant negative impacts on the firm’s behavior of tax compliance. On the other hand, the results imply that the income level, debt ratio, whether or not miss filing deadlines, and the withholding status of a firm at filing time have significant positive impacts on the firm’s behavior of tax compliance.
However, in contrast to prior prediction, our results consistently suggest that audit selection rate of tax authorities has a positive relationship with firms’ contemporaneous and subsequent tax evasion. Therefore, this study fails to find that audit has a deterrent effect on tax noncompliance in Taiwan. This result seems to imply that in Taiwan most firms cannot discern the audit process, and consequently they do not modify their tax evasion strategy to reduce their probability of audit. In addition, our results also find that tax auditors can discover more underreporting tax from specific tax returns with their work experience and professional justification. Therefore, the experience and professionalism of tax auditors are important assets for tax authorities in this age of lacking for audit resources. Thus, how to retain outstanding tax auditors and enhance effectiveness and efficiency of audit selection are important matters nowadays.
Subjects
租稅逃漏
選案查核率
聯立方程模型
tax evasion
audit selection rate
simultaneous equations model
Type
other
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