FLORIDA TAX REVIEW Volume 20 2016 Number 1 ARTICLE CAN AUDITS ENCOURAGE TAX EVASION?: AN EXPERIMENTAL ASSESSMENT Emily Satterthwaite Untitled-4 1 1/31/17 1:11 PM FLORIDA TAX REVIEW Volume 20 2016 Number 1 INFORMATION FOR SUBSCRIBERS The Florida Tax Review is a publication of the Graduate Tax Program of the University of Florida Levin College of Law. For Volume 20, the subscription rate is $125.00 in the United States and $145.00 elsewhere. If a subscription is to be discontinued at expiration, notice to that effect should be sent; otherwise, it will be automatically renewed. For Volume 20, subscriptions and changes of address should be sent to Florida Tax Review, University of Florida Levin College of Law, Post Office Box 117627, Gainesville, Florida 32611. Requests for back issues should be sent to William S. Hein & Co., Inc., 1285 Main Street, Buffalo, NY 14209. Please notify Florida Tax Review of your changes of address one month in advance. Beginning with Volume 21, the Florida Tax Review will be published by the University of Florida Press on behalf of the Graduate Tax Program of the University of Florida Levin College of Law. For subscription information and queries relating to Volume 21 and subsequent volumes, please contact the Johns Hopkins University Press, P.O. Box 19966, Baltimore, MD 21211; phone 1-800-548-1784; jrnlcirc@press.jhu.edu. All correspondence of a business nature, including advertising, should be addressed to the University of Florida Press, 15 NW 15th St., Gainesville, FL 32603; phone 352-392-1351; http://upress.ufl.edu. Untitled-4 2 1/31/17 1:11 PM FLORIDA TAX REVIEW Volume 20 2016 Number 1 EDITOR-IN-CHIEF Charlene Luke Professor of Law University of Florida ASSOCIATE EDITORS University of Florida Yariv Brauner Professor of Law Karen Burke Richard B. Stephens Eminent Scholar Dennis A. Calfee Professor of Law Patricia E. Dilley Professor Emeritus Michael K. Friel Professor Emeritus David M. Hudson Professor Emeritus Lawrence A. Lokken Emeritus Hugh Culverhouse Eminent Scholar Grayson McCouch Gerald Sohn Professor of Law Martin J. McMahon, Jr. James J. Freeland Eminent Scholar Adam Smith Visiting Assistant Professor Lee-ford Tritt Professor of Law Samuel C. Ullman Adjunct Professor of Law Steven J. Willis Professor of Law BOARD OF ADVISORS Jennifer Bird-Pollan University of Kentucky Bradley T. Borden Brooklyn Law School Deborah A. Geier Cleveland State University Leandra Lederman Indiana University– Bloomington Omri Marion University of California, Irvine Gregg D. Polsky University of Georgia James R. Repetti Boston College Kerry A. Ryan St. Louis University Reed Shuldiner University of Pennsylvania GRADUATE STUDENT EDITORS Emily Snider Carvalho Brandon C. Gardner Devon Goldberg Jessica E. Griffin William Carroll McDonald Philip Nodhturft, III Benjamin M. Parnell Katheleen Duggan Pfahlert Untitled-4 3 1/31/17 1:11 PM FLORIDA TAX REVIEW Volume 20 2016 Number 1 INFORMATION FOR SUBSCRIBERS The Florida Tax Review is a publication of the Graduate Tax Program of the University of Florida Levin College of Law. For Volume 20, the subscription rate is $125.00 in the United States and $145.00 elsewhere. If a subscription is to be discontinued at expiration, notice to that effect should be sent; otherwise, it will be automatically renewed. For Volume 20, subscriptions and changes of address should be sent to Florida Tax Review, University of Florida Levin College of Law, Post Office Box 117627, Gainesville, Florida 32611. Requests for back issues should be sent to William S. Hein & Co., Inc., 1285 Main Street, Buffalo, NY 14209. Please notify Florida Tax Review of your changes of address one month in advance. Beginning with Volume 21, the Florida Tax Review will be published by the University of Florida Press on behalf of the Graduate Tax Program of the University of Florida Levin College of Law. For subscription information and queries relating to Volume 21 and subsequent volumes, please contact the Johns Hopkins University Press, P.O. Box 19966, Baltimore, MD 21211; phone 1-800-548-1784; jrnlcirc@press.jhu.edu. All correspondence of a business nature, including advertising, should be addressed to the University of Florida Press, 15 NW 15th St., Gainesville, FL 32603; phone 352-392-1351; http://upress.ufl.edu. Untitled-4 2 FLORIDA TAX REVIEW Volume 20 2016 Number 1 EDITOR-IN-CHIEF Charlene Luke Professor of Law University of Florida ASSOCIATE EDITORS University of Florida Yariv Brauner Professor of Law Karen Burke Richard B. Stephens Eminent Scholar Dennis A. Calfee Professor of Law Patricia E. Dilley Professor Emeritus Michael K. Friel Professor Emeritus David M. Hudson Professor Emeritus Lawrence A. Lokken Emeritus Hugh Culverhouse Eminent Scholar Grayson McCouch Gerald Sohn Professor of Law Martin J. McMahon, Jr. James J. Freeland Eminent Scholar Adam Smith Visiting Assistant Professor Lee-ford Tritt Professor of Law Samuel C. Ullman Adjunct Professor of Law Steven J. Willis Professor of Law BOARD OF ADVISORS Jennifer Bird-Pollan University of Kentucky Bradley T. Borden Brooklyn Law School Deborah A. Geier Cleveland State University Leandra Lederman Indiana University– Bloomington Omri Marion University of California, Irvine Gregg D. Polsky University of Georgia James R. Repetti Boston College Kerry A. Ryan St. Louis University Reed Shuldiner University of Pennsylvania GRADUATE STUDENT EDITORS Emily Snider Carvalho Brandon C. Gardner Devon Goldberg Jessica E. Griffin William Carroll McDonald Philip Nodhturft, III Benjamin M. Parnell Katheleen Duggan Pfahlert FLORIDA TAX REVIEW Volume 20 2016 Number 1 INFORMATION FOR CONTRIBUTORS The Florida Tax Review is a faculty-edited law review published by the Graduate Tax Program of the University of Florida Levin College of Law. The Florida Tax Review invites the submission of manuscripts addressing issues of tax law and policy. The Florida Tax Review prefers electronic submissions sent via ExpressO (law.bepress.com/expresso); articles may also be e-mailed to FTR@law.ufl.edu as a Microsoft Word document. If a hard copy submission is necessary, please mail your article to Editor-in-Chief, Florida Tax Review, University of Florida Levin College of Law, 309 Village Drive, Gainesville, FL 32611. Although the Florida Tax Review has no minimum or maximum page requirements for submissions, it does have a strong preference for submissions that are 30,000 words or less, including text and footnotes. All citations should follow The Bluebook Uniform System of Citation (20th ed.); some modifications will, however, be made by our editors to conform to the Florida Tax Review Style Manual (available to contributors on request). All tax law and policy positions presented are solely those of the authors. The Editors and the University of Florida Levin College of Law do not approve of or adopt such positions merely through the act of publishing the articles in the Florida Tax Review. FLORIDA TAX REVIEW Volume 20 2016 Number 1 All references and citations to sections in this issue are to sections of the Internal Revenue Code of 1986, as amended, unless otherwise indicated. All references and citations to regulations are to Treasury Regulations promulgated under the Internal Revenue Code of 1986, as amended, unless otherwise indicated. 1/31/17 1:11 PM FLORIDA TAX REVIEW Volume 20 2016 Number 1 INFORMATION FOR CONTRIBUTORS The Florida Tax Review is a faculty-edited law review published by the Graduate Tax Program of the University of Florida Levin College of Law. The Florida Tax Review invites the submission of manuscripts addressing issues of tax law and policy. The Florida Tax Review prefers electronic submissions sent via ExpressO (law.bepress.com/expresso); articles may also be e-mailed to FTR@law.ufl.edu as a Microsoft Word document. If a hard copy submission is necessary, please mail your article to Editor-in-Chief, Florida Tax Review, University of Florida Levin College of Law, 309 Village Drive, Gainesville, FL 32611. Although the Florida Tax Review has no minimum or maximum page requirements for submissions, it does have a strong preference for submissions that are 30,000 words or less, including text and footnotes. All citations should follow The Bluebook Uniform System of Citation (20th ed.); some modifications will, however, be made by our editors to conform to the Florida Tax Review Style Manual (available to contributors on request). All tax law and policy positions presented are solely those of the authors. The Editors and the University of Florida Levin College of Law do not approve of or adopt such positions merely through the act of publishing the articles in the Florida Tax Review. Untitled-4 4 FLORIDA TAX REVIEW Volume 20 2016 Number 1 All references and citations to sections in this issue are to sections of the Internal Revenue Code of 1986, as amended, unless otherwise indicated. All references and citations to regulations are to Treasury Regulations promulgated under the Internal Revenue Code of 1986, as amended, unless otherwise indicated. Untitled-4 6 FLORIDA TAX REVIEW Volume 20 2016 Number 1 CAN AUDITS ENCOURAGE TAX EVASION?: AN EXPERIMENTAL ASSESSMENT by Emily Satterthwaite* Abstract Governments and tax administrators around the world rely on the premise that audits will deter tax evasion. This Article presents experimental evidence that this premise may be, at least in part, misguided. Counterintuitively, I find that audits presented as random may induce taxpayers to cheat more. Where audits were described as being conducted at random, participants increased their levels of evasion in the tax periods immediately following the audit. This effect, however, did not plague nonrandom audits. When a separate group of participants faced audits that were presented as being nonrandom—participants were told that detected evasion would “flag” a participant for one or more future audits— participants cheated less in the periods immediately following the audit. Overall, average compliance in the nonrandom audit condition systematically and significantly dominated average compliance in the random audit condition. By revealing, under experimental conditions, strong behavioral responses to the way tax audits are presented, this Article highlights the potential enforcement benefits of being more transparent with taxpayers about the nature of audit selection. * Assistant Professor, University of Toronto Faculty of Law. For helpful comments, thank you to Benjamin Alarie, James Alm, Lisa Austin, Joseph Bankman, Wei Cui, Yasmin Dawood, Angela Fernandez, Brian Galle, Andrew Hayashi, Erich Kirchler, Jack Manhire, Susan Morse, Shuyi Oei, Jason Oh, Leigh Osofsky, Mariana Mota Prado, Diane Ring, Ted Seto, Daniel Shaviro, Stephen Shay, Michael Trebilcock, Albert Yoon, and workshop participants at the 2015 Law & Society Association Annual Meeting, the 2015 Junior Tax Scholars’ Workshop, the 2015 Canadian Law & Economics Association Meetings, the National Tax Association 108th Annual Conference, and the Tulane Tax Roundtable. Special thanks to Leandra Lederman for feedback and questions. The author is grateful for generous support from the University of Toronto’s 2015–16 Connaught New Researcher Award. Dennis (Zhenyu) Luo provided outstanding research assistance. All errors and omissions are mine. 1/31/17 1:11 PM