An Empirical Analysis of Federal Income Tax Auditing and Compliance

This paper provides empirical evidence on the relationship between compliance with the Federal Income Tax and auditing by the Internal Revenue Service. It combines a cross-section data set rented to 1969 individual returns assembled by the IRS with data taken from the Annual Report of the Commissioner of Internal Revenue. We find support for an economic approach to tax compliance that incorporates the IRS as a strategic actor. Moreover, after allowing for the simultaneous determination of audit rates and compliance levels, we find significant deterrent effects of auditing on noncompliance.