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Audit Uncertainty, Bayesian Updating, and Tax Evasion


  • Arthur Snow

    (University of Georgia, Athens,

  • Ronald S. Warren Jr.

    (University of Georgia, Athens)


We extend the standard, one-period model of tax evasion to an inter-temporal framework in which an expected-utility-maximizing taxpayer updates expectations about the probability of a future audit based on past audit experience. This framework provides a theoretical grounding for the empirical evidence indicating that tax evasion is affected by taxpayers' perceptions of audit probabilities and is influenced by taxpayers' prior audit experience. We show that for a variety of risk preferences, Bayesian updating increases present and expected future tax evasion and reduces tax payments, inclusive of expected fines. These findings call into question the usefulness of Internal Revenue Service secrecy about audit probabilities for raising taxpayer compliance and expected tax revenue.

Suggested Citation

  • Arthur Snow & Ronald S. Warren Jr., 2007. "Audit Uncertainty, Bayesian Updating, and Tax Evasion," Public Finance Review, , vol. 35(5), pages 555-571, September.
  • Handle: RePEc:sae:pubfin:v:35:y:2007:i:5:p:555-571

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    References listed on IDEAS

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    Cited by:

    1. Dai, Zhixin & Hogarth, Robin M. & Villeval, Marie Claire, 2015. "Ambiguity on audits and cooperation in a public goods game," European Economic Review, Elsevier, vol. 74(C), pages 146-162.
    2. Umberto Galmarini & Simone Pellegrino & Massimiliano Piacenza & Gilberto Turati, 2014. "The runaway taxpayer," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(3), pages 468-497, June.
    3. repec:tur:wpaper:1 is not listed on IDEAS
    4. Edoardo Di Porto, 2009. "Audit, tax compliance and undeclared work: an empirical analysis," LABORatorio R. Revelli Working Papers Series 94, LABORatorio R. Revelli, Centre for Employment Studies.
    5. repec:bpj:bejtec:v:18:y:2018:i:1:p:12:n:2 is not listed on IDEAS


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