Abstract
This chapter’s purpose is to answer several basic questions. First, does CI have a measurable effect on voluntary compliance, which includes both civil and criminal tax laws? Second, if CI does have a measurable effect on voluntary compliance, what mix of CI investigations has the greatest influence on voluntary compliance? CI investigates two broad categories of cases: tax violations and money laundering violations. A subsidiary inquiry is whether either one or both types of cases have an effect on voluntary compliance with the tax laws.
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Notes
- 1.
The Webster Report (Review of the IRS’ Criminal Investigation Division (William Webster), April 1999, observed that a previous lack of empirical evidence “makes it impossible to prove that the cases CI has investigated previously and is currently investigating either do or do not foster compliance.” In this chapter, I provide the empirical evidence that Judge Webster sought.
- 2.
As discussed in Chap. 5, the effects of these variables on reported taxes per return are based on conventional theoretical considerations.
- 3.
I expected increases in the federal audit rate (IAR2) to increase taxpayer compliance (and thus reported taxes per return). However, audit rates presumably respond to compliance levels. Therefore, I treat the federal audit rate as an enodogenous factor.
- 4.
Our finding that CI enforcement levels are significant determinants of taxpayer compliance would reinforce the assurance theory aspects of behavior rather than the deterrence theory. Conversely, the empirical support for significant audit rates found in this study and others suggest that deterrence theory is valid for some types of taxpayer behavior.
- 5.
At the margin, the estimated audit rate effects are approximately ten percent higher in the 1988–2001 period as compared to the 1977–1986 period. This result is expected when there are increasing returns to examination and a general decline in examination rates.
- 6.
This model requires the use of a third instrument as discussed above.
- 7.
The percentage of tax or money laundering cases not resulting in prison or probation was also not statistically significant in these models.
- 8.
The shortened time period available to study media effects on the subcomponent of examinations did not allow me to precisely measure these effects. Given the large general deterrence effect found for CI activities, there is indirect evidence of a large media effect, even if the econometric model did not have sufficient data to isolate this result.
- 9.
For instance, some CI factors appear in the filings equation with negative but insignificant coefficients.
- 10.
The simulations rely on two simultaneous predicted changes in all cases. As discussed, the simulation affects the level of assessed liabilities per return filed or reported liabilities per return filed. However, the simulation also affects the estimated number of returns filed per capita. In conjunction with estimates of population (and after conversion from real to nominal terms), the product of population, predicted returns per capita, and collections per return filed yields the final dollar figures in Table 7.3. Hence, in some cases, the sign on a single variable in a model is not sufficient to understand the overall significance of increasing one or more components in the model.
- 11.
Plumley’s (1996) estimate of the return to audits was similar. He found a marginal indirect revenue to cost ratio of 55.
- 12.
The elasticity of audit rates with respect to IRS budget, as determined in the reduced form audit equation, implies that the incremental cost of an audit may be twice as large as that assumed here. This would significantly lower (by half) our estimates of the dollar return to doubling the audit rate. Nonetheless, with estimated elasticity’s greater than one, the IRS is likely operating in an increasing returns to scale range wherein increased budgets can readily expand the rate of individual audits.
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© 2012 Springer Science+Business Media, LLC
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Dubin, J.A. (2012). IRS Criminal Enforcement Activities and Taxpayer Noncompliance. In: The Causes and Consequences of Income Tax Noncompliance. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-0907-7_7
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DOI: https://doi.org/10.1007/978-1-4419-0907-7_7
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