Tax audit expectation updating: Direct and indirect effects of an audit

摘要

In recent years, an emerging body of empirical research has shown that tax audits, in addition to recovering unpaid taxes (the direct effect), increase future tax compliance (the indirect or dynamic effect). This literature also suggests that the revision of expectations about future audits induced by audit experience plays an important role in explaining this indirect effect. However, how exactly taxpayers form their beliefs and adjust them based on audit experience remains an open question. This paper extends tax evasion theory by introducing a novel framework embedded with a Bayesian audit belief updating mechanism. This allows us to formally model how taxpayers internalize past audit experiences to dynamically adjust their perceived probability of an audit. Applying this model to analyze the dynamic impact of audits on tax evasion behavior, we find that our predictions align with all patterns of the indirect effect observed in the empirical literature: it is positive for non-compliant taxpayers, and it persists but attenuates over time.