Do audits enhance compliance? An empirical assessment of VAT enforcement

Research on the effects of audits on individual compliance has been inconclusive. In this paper, we analyze for the first time VAT tax return information and enforcement data to assess the impact of audits on subsequent compliance of taxpayers in Argentina and Chile. The evidence of this unique data set shows that audits have the undesired effect of furthering noncompliance behavior among cheaters but a more positive effect among those prone to compliance. Descriptive and multivariate analysis supports the assumption that the effects of additional assessments on individuals are offset by higher subsequent evasion presumably to compensate for taxpayers' costs incurred in audits.