The Impact of Tax Audits on Compliance Dynamics in a Developing Economy

This research evaluates the impacts of tax audits on compliance among individual taxpayers in Indonesia using a difference-in-differences approach with administrative data from the Indonesian tax authority. Our findings indicate that audits generally decrease compliance, but the effect is heterogeneous. While audits show backfiring effects on compliant taxpayers, compliance increases in non compliant taxpayers subsequent to an audit. Moreover, risk-based and third-party data audits are effective in enhancing compliance, whereas automatic audits related to refund claims have the opposite effect. These findings underscore the importance of customizing audit strategies in developing economies, with profound implications for both tax policy and administration.