Tax enforcement and firm performance: real and reporting responses to risk-based tax audits

Abstract

We analyze firm responses to risk-based tax audits using data on the full population of firms in Finland. We find an immediate and persistent increase in reported profits by the audited firms after audit, compared to matched non-audited firms with a similar development in key outcomes before the audit. This indicates non-compliance in the baseline. Both revenue and labor costs increase after audit, suggesting that some firms follow a strategy of under-reporting their overall scale of operation. Our most novel finding is that audits increase bankruptcies among non-compliant firms, which implies that tax enforcement has real effects on market outcomes.