Sales tax enforcement: An empirical analysis of compliance enforcement methodologies and pathologies

Most research on tax evasion has focused on the income tax. Sales tax evasion has been largely ignored and dismissed as immaterial. This paper explored the differences between income tax and sales tax evasion and demonstrated that sales tax enforcement is deserving of and requires the use of different tools to achieve compliance. Specifically, the major enforcement problem with sales tax is not evasion: it is theft perpetrated by companies that act as collection agents for the state. Companies engage in a principal-agent relationship with the state and many retain funds collected as an agent of the state for private use. As such, the act of sales tax theft bears more resemblance to embezzlement than to income tax evasion. It has long been assumed that the sales tax is nearly evasion free, and state revenue departments report voluntary compliance in a manner that perpetuates this myth. Current sales tax compliance enforcement methodologies are similar in form to income tax compliance enforcement methodologies and are based largely on trust. The primary focus is on delinquent filers with a very small percentage of businesses subject to audit. As a result, there is a very large group of noncompliant businesses who file on time and fly below the radar while stealing millions of taxpayer dollars. ^ The author utilized a variety of statistical methods with actual field data derived from operations of the Southern Region Criminal Investigations Unit of the Florida Department of Revenue to evaluate current and proposed sales tax compliance enforcement methodologies in a quasi-experimental, time series research design and to set forth a typology of sales tax evaders. This study showed that current estimates of voluntary compliance in sales tax systems are seriously and significantly overstated and that current enforcement methodologies are inadequate to identify the majority of violators and enforce compliance. Sales tax evasion is modeled using the theory of planned behavior and Cressey’s fraud triangle and it is demonstrated that proactive enforcement activities, characterized by substantial contact with non-delinquent taxpayers, results in superior ability to identify noncompliance and provides a structure through which noncompliant businesses can be rehabilitated.^

Audit pricing, reporting quality, and auditor switches in the post -SOX period

The Sarbanes-Oxley Act represents an important watershed event in the history and regulation of the accounting profession. In this dissertation, I develop arguments as to why we can expect differences in auditor behavior before and after SOX and empirically test if indeed there were differences in auditor behavior before and after SOX. My dissertation consists of three essays. For the three essays, I investigate issues related to auditor independence, audit pricing, the impact of auditor changes in the post-SOX period. The motivation for the first part of my research comes from the SEC's assertions that there are differences between types of non-audit services in terms of their potential to adversely impact auditor independence. The first part of my dissertation empirically validates the SEC's assertions that auditors would be more conservative in those instances where the tax and other non-audit services fee ratios are high but not when the audit-related fee ratio is high. The second part of my study examines if auditors are less likely to "low ball" their audit fees in the period after SOX than in the period preceding SOX. Legislators, regulators, and the media have expressed concerns that auditors "low ball" the fees for initial year audits and that such low-balling can lead to reduced audit quality. I find that there is significant initial year audit fee discount in pre-SOX period and but the fee discount does not hold in post-SOX periods. The third part of my dissertation examines the association between auditor switches and auditor conservatism. I find that a large portion of Big 4 clients switch to non-Big 4 auditors and there is no significant evidence indicating that successor auditors are more conservative in the post-SOX period.