The Relationship between State and Federal Tax Audits

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In this paper we present an econometric analysis of state and federal tax audits. We first present results from a survey of state tax administrators. The survey results indicate that most state tax audit programs are small and rely extensively on information provided by the IRS, although some programs are large and sophisticated. We then present results from a detailed econometric analysis of Oregon state and federal tax returns and tax audits for tax year 1987. Our analysis generates three main conclusions. First, Oregon state and IRS selection criteria are similar, but not identical, suggesting that both tax agencies might benefit from greater sharing of information, especially in some audit classes. Second, Oregon state and IRS audit assessments are strongly positively correlated, as expected. Third, we estimate the shadow values associated with providing additional audit resources to the Oregon Department of Revenue and the IRS in various audit classes, and find that for the IRS the shadow values range from two to five dollars, while for Oregon the values range from one to three dollars.

Published:

• Empirical Foundations of Household Taxation, Martin Feldstein and James M. Poterba, eds., University of Chicago Press, 1996, pp. 235-273 ,
• The Relationship between State and Federal Tax Audits, James Alm, Brian Erard, Jonathan S. Feinstein, in Empirical Foundations of Household Taxation (1996), University of Chicago Press
  

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