Do Audits Improve Future Tax Compliance in the Absence of Penalties? Evidence from Random Audits in Norway

The Norwegian Tax Administration conducted multi-year random audits on a specific item in the personal income tax return. We exploit this exceptional randomized setup to es-timate the effects of tax audits on future compliance explicitly distinguishing between dynamic responses of compliant and noncompliant audited taxpayers. A priori, the liter-ature has suggested two competing effects: a post-audit deterrence effect, whereby audits prompt taxpayers to comply in subsequent years, or a "bomb-crater" effect, whereby audits lower taxpayers' subjective perception of the probability of future evasion being detected and hence weaken compliance. Our results show improved future compliance for six post -audit years by those found noncompliant in the audits, despite the absence of penalties. Although the findings are consistent with a deterrence effect, mainly stemming from be-ing caught in wrongdoing rather than being penalized, we argue that there could also be a "learning effect" involved. An important implication of our study is that better information for taxpayers critically should complement tax audits.(c) 2023 International Monetary fund. Published by Elsevier B.V.