IRS and corporate taxpayer effects of geographic proximity

• Published in: Journal of accounting & economics 2017-04, Vol.63 (2-3), p.428-453
• Main Authors: Kubick, Thomas R., Lockhart, G. Brandon, Mills, Lillian F., Robinson, John R.
• Format: Article
• Language: English
• Subjects: Budget constraints; Geographic proximity; IRS audit probability; Tax avoidance
• ISSN: 0165-4101; 1879-1980
• DOI: 10.1016/j.jacceco.2016.09.005

We investigate whether geographic proximity between corporate headquarters and IRS regional offices affects corporate tax avoidance and the likelihood and productivity of IRS examinations. Using geographic distance to represent information asymmetry, we find that corporations avoid more tax when located closer to the IRS unless they are close to an IRS industry specialist. This finding is consistent with taxpayers believing proximity provides them with an information advantage over the IRS. From the perspective of the IRS, we find that the Service is more likely to audit nearby companies and to assess more tax per hour from nearby taxpayers, except during constrained budget years. IRS audit likelihood and productivity are unaffected by the presence of nearby industry specialists, consistent with industry specialist proximity already constraining avoidance. Our tax compliance setting provides dual-party evidence on the proximity-information asymmetry hypothesis. •We investigate whether geographic proximity between corporations and the IRS affects tax examinations and tax avoidance.•Our tax compliance setting provides evidence on the effects of proximity-induced information asymmetry on adversarial parties.•Corporations avoid more tax when located closer to IRS territory managers unless they are also close to an IRS industry specialist.•The IRS is more likely to audit nearby firms, and assesses more tax per hour from nearby taxpayers, except during constrained budget years.