A Model of Tax Compliance Under Budget-Constrained Auditors

In the midst of various taxpayer "revolts" and federal budget deficits of unprecedented magnitude, noncompliance with federal and state income tax laws has become an issue of significant policy concern. If the IRS' budget is limited, the probability that any individual taxpayer will be audited depends on the behavior of other taxpayers. Thus the problem of compliance involves a "congestion" effect, which generates strategic interaction among taxpayers as well as between taxpayers and the IRS. This paper reflects an initial attempt to explore how the combination of a strategic IRS and asymmetric information affects the traditional theoretical results on tax compliance behavior.