Efficient Targeting of Tax Audits : Evidence and Implications of Heterogeneity in Compliance Responses

I study the long-run effects of tax audits on revenue and explore the heterogeneity in taxpayer compliance responses. This is done using waves of randomised audits of selfemployed by the Danish Tax Agency from 2006 to 2017 and leveraging novel information provided by compliance officers on taxpayers’ perceived willingness to comply with tax rules. I find that unintentional non-compliers who under-report due to inattention or misunderstandings of the tax rules have higher compliance in subsequent years. This leads to a significant increase in revenue equivalent to more than 3 times the tax uncovered from the audit after 5 years. In contrast, intentional non-compliers who deliberately evade taxes and are typically targeted for operational audits do not respond to audits and have a low recovery rate of evaded taxes. Based on these findings, I demonstrate how risk scores derived from pre-audit information can be employed to target taxpayers expected to respond strongly to audits, resulting in increased revenue gains of 87 pct. compared to the current approach that focus on initial revenue from audit