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Companies Located Near an IRS Office More Likely to Face an Audit and Avoid More Taxes

Companies Located Near an IRS Office More Likely to Face an Audit and Avoid More Taxes
Geographic proximity to Internal Revenue Service offices make it more likely public companies will face an audit, but those companies also engage in greater tax avoidance, according to a study led by a University of Kansas accounting researcher.

"The intuition is that when two parties operate in close proximity there is more information on both sides. I know more about you. We may not have met, but we have mutual friends. And people I know may have dealt with you," said Tom Kubick, assistant professor of accounting in the KU School of Business.

Kubick and his co-authors had their findings published recently in the Journal of Accounting and Economics. They examined tax records of public companies from fiscal years 1996 to 2012 and found a positive association between a company's geographic proximity to an IRS territory manager’s office and IRS audit likelihood as well as tax avoidance.

They found one exception. There is less tax avoidance when companies are also in close proximity to an IRS industry specialist, who has specialized expertise in industry-specific tax issues. For example, oil and gas companies in Texas or technology companies in California would generally be more likely to be near industry specialists because those regions are hubs for those types of companies.

However, Kubick said one might view the findings about geographic proximity and tax avoidance surprising especially in an era when so much business is conducted virtually and online.

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