Audit Certainty, Audit Productivity, and Taxpayer Compliance

Abstract

Strategies for dealing with evasion include such standard policies as stricter enforcement (e.g., increased audit rates, more extensive audits, larger penalties). However, the exact responses of taxpayers to these enforcement measures are quite difficult to measure with existing field data, and so are not known precisely. In this paper we use experimental methods to examine how individuals respond in their compliance decisions to a certain probability of audit and to information concerning the of an audit. Our design informs some individuals that their return will be audited with certainty prior to making their compliance decision, while other individuals receive information that they will not be audited; we also inform individuals of the productivity of the audit by stating how much unreported income will be discovered via the audit. We find that the announcement of audits increases the compliance rate of those who are told that they will be audited. However, the compliance rate of those who know that they will not be audited falls, and the net effect is that overall compliance falls.