Using IRS Audit Data to Identify Income Shifting Firms

Using IRS Audit Data to Identify Income Shifting Firms

By Lisa De Simone, Lillian F. Mills, Bridget Stomberg
December 15,2016Working Paper No. 3447

We use confidential Internal Revenue Service data on the magnitude of U.S.-foreign intercompany transactions to develop a measure of the likelihood that U.S. multinational entities (MNEs) shift income out of the U.S. Results show that the likelihood of net outbound income shifting is positively related to tax haven subsidiaries, high tech operations, income tax incentives, R&D, and foreign profitability, and negatively related to foreign sales, gross profits, size, and capital expenditures. Supplemental analyses explore cross-sectional differences in IRS audit scrutiny of outbound income shifters and aggressive income shifters. Results suggest outbound and aggressive income shifters are no more likely to be audited than other MNEs and that the rate of audit of both outbound shifters and aggressive shifters has decreased since the financial crisis. Our study provides researchers, investors and tax authorities with a measure of the likelihood that a firm engages in net outbound or potentially aggressive income shifting.