Excerpt
2025, Paper: "We estimate the returns to IRS audits of taxpayers across the income distri- bution. We find an additional $1 spent auditing taxpayers above the 90th income percentile yields more than $12 in revenue, while audits of below-median income taxpayers yield $5. We construct our estimates by drawing from comprehensive internal accounting information and audit-level enforcement logs. We begin by estimating the average initial return to all audits of U.S. taxpayers filing in tax years 2010–2014. On average, $1 in audit spending initially raises $2.17 in rev- enue. Audits of high-income taxpayers are more costly, but the additional revenue raised more than offsets the costs. Audits of the 99–99.9th percentile have a 3.2:1 initial return; audits of the top 0.1% return 6.3:1. We then exploit the 40% audit reduction between tax years 2010 and 2014 to examine the returns to marginal audits. We find they exceed the returns to average audits. Revenues remain rel- atively unchanged, but marginal costs fall below average costs due to economies of scale. Next, we use randomly selected audits to examine the effect of an ini- tial audit on future revenue. This individual deterrence effect produces at least three times more revenue than the initial audit. Deterrence effects are relatively."