Surprise! More IRS Auditing of Large Companies Results in More Taxes Paid

Wednesday, October 10, 2012

It might seem like common sense, but researchers have validated the assumption that cracking down on deadbeat companies by the Internal Revenue Service (IRS) will result in more taxes being paid.

In a paper published by Accounting Review, three academics concluded more IRS audits yields more government revenues. Conversely, the authors found that fewer audits will result in less corporate taxes paid to the federal treasury. The study covered 1992-2008 and found a “clearly decreasing trend in audit coverage” over the years.

Also, they argued that corporate boards should want an aggressive IRS, because it keeps executives on their toes and out of trouble.

“The idea that shareholders benefit from having their companies audited by the IRS may seem strange to some investors,” Jeffrey Hoopes of the University of Michigan, who co-authored the study, told Accounting Today. “Our research, however, suggests that strict tax enforcement promotes good financial reporting and tends to check managers’ proclivities to divert corporate resources for their personal use under the guise of saving taxes.”

In 2011, large corporations were audited more than smaller ones, according to IRS data. One percent of corporations with assets under $10 million were audited, compared to 28% of corporations with assets of $250 million and higher.

–Noel Brinkerhoff


To Learn More:

IRS Audits Keep Companies Honest, Says Research (by Michael Cohn, Accounting Today)

Do IRS Audits Deter Corporate Tax Avoidance? (by Jeffrey L. Hoopes, Devan Mescall and Jeffrey Pittman, Social Science Research Network)


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