"Own and Neighbor Audit Spillover Effects on Tax Compliance Behavior"

We investigate the effect of the special type of tax audits ("mystery shopping") among the closest neighbors on the reported daily revenues of small business taxpayers. While the audits are non-random for the audited, the geographical location is not a factor in the rule based approach adopted by the revenue collecting authority to choose audit destinations. In this regard, the "randomness" of the audit among the neighbors is used to understand the causal link between the latter and the tax reporting behavior of the taxpayer. We use daily revenues as reported by cash receipt machines installed in businesses selling goods and services for final consumption. This data is merged with tax audits and spatial data and the time period covers 2019. Using the event study approach with taxpayer level fixed effects we obtain marginally significant but yet noticeable change in behavior caused by neighbor audits - increase in reported revenues for up to 10 days after the date of audit. Additionally, we try to understand to what extent the fact of audit remains concealed from the audited and to whether the audits really capture the full picture of misreporting tax revenues.