Evidence-Based Threat-of-Audit Letters : Do Taxpayers Respond Strategically in a Complex Environment?
We study the impact on tax compliance of a letter sent by the Italian Revenue Agency in 2009 to taxpayers suspected to have overreported some costs in order to decrease their taxable income without increasing the probability to be audited. We find strong and robust evidence that the letter did reduce manipulation of targeted costs, but that the impact on taxable income was much smaller. This difference is likely due to a strategic response by the taxpayers who increased other costs that they perceived were not targeted by the Revenue Agency and were able to do so without increasing the probability to be audited. This shows that strategic responses are likely to appear also in an institutionally complex environment