Small Firms’ Response to Real-World Operational Tax Audits

Understanding tax noncompliance and the effect of different enforcement strategies is relevant for improving the efficiency and efficacy of tax policy. Using administrative data provided by Chile’s tax authority I analyze the dynamic effects of real-world tax audits for the universe of micro and small firms. The results show that audits have significant impacts on the corporate income tax base and sales of audited firms. The largest effects are found among micro firms and last up to one year after the audit. I exploit the rich panel data set to alleviate concerns about nonrandom audits.