Alchian and Allen visit the IRS: costly audits and taxpayer compliance

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This article reports on the results from a small-scale investigation of the compliance effects of a costly pre-audit on tax compliance. The tax compliance game is modelled in three parts: a declaration phase, a pre-selection phase with a cost for taxpayers and an audit selection phase where all evaded income is discovered. While the theoretical predictions are ambiguous, the data from a series of laboratory experiments demonstrate that the presence of pre-audit costs leads to lower tax compliance.