How the IRS can reduce tax cheating on the same budget

Some psychologists have proposed that humans suffer from an “illusion of control,” in which they overestimate their ability to control risks that they may or may not have much power over. As an example, humans are more willing to bet on dice that they roll themselves than on the same dice rolled by someone else.

How can this finding be applied to public policy? Two law professors have an idea.

Current IRS policy is to select tax returns for an audit after the return is filed. Thus, individuals complete their tax forms while predicting whether they will be audited. But if the IRS announced that it had already selected the tax‐payers it would audit before the returns were filed, then individuals would complete their tax forms while postdicting whether they would be audited. Given the bias, the policy of announcing that certain taxpayers have been selected for auditing before any returns have been submitted would generate more deterrence than the policy of selecting auditees only after the returns have been submitted, holding constant the actual probability of an audit.

From the new paper Behavioral Criminal Law and Economics referencing the original paper Uncertainty Revisited.

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