The shadow economy, due to its hidden nature, has extensive effects on the efficiency of economic policies and social equity. One of the key factors driving this phenomenon is geographical location, particularly the border status of provinces, which can provide favorable conditions for smuggling, informal transactions, and tax evasion. This study examines the impact of geographical location on the size of the shadow economy across Iranian provinces during the period 1999–2022 (1399–1401 in the Iranian calendar). Results from panel data analysis indicate that the border status of provinces has a significant effect on the size of the shadow economy, with the share of the shadow economy in GDP being higher in border provinces compared to non-border provinces. Further findings show that an increase in the unofficial exchange rate raises the share of the shadow economy in GDP, while improvements in corruption control reduce it. Based on these results, targeted regulatory policies and attention to the geographical characteristics of provinces—especially border regions—can play an effective role in reducing the underground economy.