Abstract

This study investigates two hypotheses － first, whether tax avoidance is related to audit hours and second, whether the additional tax penalty amounts are correlated to audit hours. We compared a sample of firms that were tax audited and not tax audited and constructed a data set with a one－to－two correspondence between the sample firms and control firms. We selected control firms and sample firms that are similar in asset size and sales. Study results indicate that the overall audit hours of firms caught breaking tax laws are significantly lower than audit hours of firms that kept tax laws. The coefficient of tax avoidance is significantly (p＜0.10) negative (－0.106, t＝－1.66). From these results, perhaps most interestingly, firms identified as practicing tax avoidance frequently tend to recognize economic transactions with conservative accounting to decrease their tax burden. We also examined the results of national tax service audits to identify whether the assessed corporate tax penalties are related to audit hours of firms. Results indicate that the size or the rates(assessed penalty amount/total tax before audit) of assessed penalty amounts are not significantly related to the amount of audit hours. Our study makes a significant contribution to audit planning. In many instances of low tax earnings, the audit plan may assume conservative accounting practices and allocate minimal time, however, in some cases, low tax earnings may also be correlated with tax avoidance, in which case longer allotment of time is needed for the audit.

Keywords

• tax avoidance
• tax audit
• assessed amount
• audit hours

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