Abstract

http://ssrn.com/abstract=2366325
 


 



Toward a Perspective-Dependent Theory of Audit Probability for Tax Compliance Models


J. T. Manhire


Treasury Executive Institute - U.S. Department of the Treasury

April 18, 2014

33 Va. Tax Rev. 629 (2014)

Abstract:     
The classic deterrence theory model of income tax evasion first articulated in 1972 has met significant criticism because it does not comport with the observed rate of tax compliance. This article argues that the classic expected utility model and its various progeny, including nonexpected utility models, employ too general a notion of taxpayers’ probability of audit by equating the latter to the frequency with which the government audits tax returns. Given that audit probabilities vary significantly based on whether taxpayers underreport tax on their returns, these models should be revised to reflect the conditional nature of audit probability from the taxpayers’ perspective. If one applies this perspective-dependent definition of audit probability to both expected and nonexpected utility models, the theoretical results will more closely reflect the observed rate of tax compliance.

Number of Pages in PDF File: 23

Keywords: tax evasion, tax compliance, audit probability, tax salience, taxpayer perception, heuristics

JEL Classification: C11, C51, C54, H26, K34, K42, P16, Z18

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Date posted: December 12, 2013 ; Last revised: July 7, 2014

Suggested Citation

Manhire, J. T., Toward a Perspective-Dependent Theory of Audit Probability for Tax Compliance Models (April 18, 2014). 33 Va. Tax Rev. 629 (2014). Available at SSRN: http://ssrn.com/abstract=2366325 or http://dx.doi.org/10.2139/ssrn.2366325

Contact Information

J. T. Manhire (Contact Author)
Treasury Executive Institute - U.S. Department of the Treasury ( email )
Washington, DC
United States
HOME PAGE: http://www.linkedin.com/in/jackmanhire
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