Audited by Association: IRS Activity Across the Supply Chain

Abstract

This study investigates IRS attention up the supply chain and responds to calls for more research on the role of taxpayer networks in tax enforcement and deterrence activity. We use 10-K disclosure of material customers to identify customer-supplier relationships and IRS downloads of firm 10-Ks to proxy for IRS attention. We find that prior IRS attention toward a customer firm is positively associated with IRS attention toward the supplier firm in the current year. We also find that prior customer settlements (a signal of audit conclusion) are positively associated with IRS attention toward the supplier in the current year. Taken together, our results are consistent with the IRS leveraging information gained from one audit to assist in the audit selection process of other firms in the supply chain.