Estimating specific deterrence revenue from additional audits of high-income and highwealth individuals

February 2024

The tax gap, the difference between taxes owed and taxes paid, is projected to be $688 billion in 

tax year 2021. The Inflation Reduction Act of 2022 (IRA) made an investment in the IRS to 

improve enforcement for high-income and high-wealth individuals, large corporations, and 

complex partnerships. If this investment is sustained through Fiscal Year (FY) 2034, the IRS 

estimates that it will raise $390.3 billion in revenue between FY 2024 and FY 2034 using the 

agency’s traditional methods for estimating revenues from additional funding. Of this $390.3

billion, an estimated $54.2 billion is directly from increased audits of high-income and highwealth individuals.

Consistent with previous practice, the $390.3 billion estimate includes only direct revenue and 

revenue protected. Direct revenue is the revenue that results directly from enforcement activities, 

such as audits, document matching, and collections. Revenue protected is the revenue loss 

avoided by stopping invalid refund claims.

While this estimate of audit revenue counts only the assessed tax, penalties, and interest collected 

from additional audits, research studies find that audited taxpayers also report additional tax

liability in the years following the audit. In other words, a taxpayer who is audited in 2024 and 

found to have underreported tax will voluntarily pay more tax in 2025, 2026, and beyond. This 

change in taxpayer behavior after an audit is known as the specific deterrent effect. 

This paper focuses narrowly and conservatively on specific deterrence revenue from increased 

audits of high-income and high-wealth individuals. This paper reviews the literature on specific 

deterrence and describes a method for estimating the revenue effect of specific deterrence for 

audits of individuals. There is less evidence on specific deterrence revenue for other types of 

audits, and the deterrence effects of other enforcement activities, such as automated documentmatching and collections. However, see Boning et al. (2020) for some evidence on deterrence 

effects of other types of enforcement activities.

In addition to specific deterrence, audits are also thought to deter noncompliance by taxpayers 

who are not audited, which is called the general deterrence effect. Estimates of the magnitude of 

the general deterrence effect are rare and vary widely. This paper does not attempt to estimate 

the revenue effect of general deterrence. 

Applying the method described below to the additional audits of high-income and high-wealth 

individuals made possible by the Inflation Reduction Act, assuming funding is sustained through 

FY 2034, yields an estimate of an additional $38.8 billion in revenue collected in the budget 

window from audited individuals due to the specific deterrence effect.
An overview of the literature on taxpayer behavior following an audit

Studies of random audits of individuals around the world and in the United States find that 

audited taxpayers more accurately report and pay taxes owed in the years following an audit.

Kleven et al. (2011) study a Danish field experiment and find increased liability equal to 42

percent of the change in liability made during the audit in the following year. Hebous et al. 

(2020) find that audited taxpayers in Norway reduce the deductions they claim. In the United 

Kingdom, Advani et al. (2021) find that the additional revenue from higher compliance in the 

five to eight years following an audit is at least 1.5 times the tax understatement found by the 

audit. In the United States, DeBacker et al. (2018) find that random audits of individual 

taxpayers conducted by the IRS National Research Program cause taxpayers to report additional 

tax over the five years following an audit that totals more than 1.5 times the direct revenue gain 

from the audit. Using more years of random audits and a longer post-audit period, Boning et al. 

(2023) find that the revenue from specific deterrence in each year following the audit is about 23

percent of the size of the audit revenue. This percentage is stable for more than ten years and 

across taxpayer income levels. Several studies of random audits find that taxpayers whose 

returns are corrected by an audit report additional tax liability following the audit. These studies

either find no change (Hebous et al. (2020), Advani et al. (2021) and DeBacker et al. (2018)) or a 

decline (Gemmell and Ratto (2012), in the United Kingdom) in subsequent liability reported by 

taxpayers found to be compliant by the audit.

There are fewer studies of the specific deterrence effects of operational audits, for which 

taxpayers are selected based on suspected underreporting. Compared to random audits, 

operational audits are more difficult to study because the effort to identify and audit taxpayers 

who have underreported tax makes it more difficult to construct a control group of unaudited 

taxpayers whose behavior can be compared to the audited group to estimate the effect of the 

audit. Beer et al. (2019) compare individuals selected for operational audits in the U.S. to 

matched controls. Like studies of random audits, they find that operational audits on average

raise revenue from specific deterrence, although taxpayers found to be compliant reduce reported 

liability. This result suggests an additional benefit from initiatives to update audit selection 

models: increasing the fraction of audits that make corrections is likely to boost specific 

deterrence. While it is difficult to ensure that the matched controls are a good comparison for 

taxpayers deliberately selected for audit, the available evidence supports the view that, on 

average, operational audits of individuals increase future reported tax liability. 

There is little evidence on the behavior of small- and medium-sized firms following an audit and

evidence on the behavior of large corporations following an audit is mixed. Hoopes, Mescall, 

and Pittman (2012) find that increasing the probability of an IRS audit of a corporation from 19 

percent to 37 percent increases the ratio of cash taxes paid to pretax income by nearly two 

percentage points. Ayers, Seidman, and Towery (2018) find that corporations assigned to a 

continuous audit program do not change their reporting behavior relative to propensity-matched 

controls but do set aside more money to cover potentially uncertain tax positions. Belnap et al. 

(2022) study small corporations and find increased reported tax liability following an audit 

alongside an increased likelihood that a firm goes out of business. In contrast, DeBacker et al. 

(2015) find that U.S. corporations reduce reported tax liability immediately following an audit 

before eventually returning to reporting liability similarly to before the audit. This behavior is
consistent with firms assuming that they are less likely to be audited again immediately after an 

audit. As the business audits examined in these studies are operational and thus selected rather 

than random, different choices of comparison group may explain the differences between studies' 

results.

A method for estimating specific deterrence revenue from changes in IRS audits

For audits of individuals, studies provide robust evidence of specific deterrence that supports an 

estimate of specific deterrence revenue. Based on U.S. data, recent work by Boning et al. (2023) 

estimates that the specific deterrence revenue in each of thirteen years following an audit is 23

percent of the direct audit revenue (in deflated constant dollars). The method this paper uses to 

estimate specific deterrence revenue from an expansion in individual audits is to multiply the

estimates of the direct revenue from expanding audits by fiscal year by 23 percent in each 

following fiscal year in the budget window and then adjust for inflation. Thus, the specific 

deterrence revenue resulting from an audit in the ten-year budget window varies depending on 

when the audit occurs. As shown in Table 1, for every $100 of audit revenue generated in 2025, 

$207 of deterrence revenue is collected during the budget window spread equally over the next 

nine years. For every $100 of audit revenue generated in 2033, $23 of deterrence revenue is 

collected in the last year of the budget window. Of course, the large difference in deterrence 

revenue in the budget window is an artificial effect resulting from the 10-year budget window. 

An audit in 2033 would continue to raise deterrence revenue outside the budget window.

Moreover, as shown in Table 1, the ratio of specific deterrence revenue to direct revenue is 

highly sensitive to the time pattern of direct revenue over the budget window. This illustration 

omits inflation-adjustment for simplicity.

Table 1. Illustration of Specific Deterrence Revenue 

Fiscal Year 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Total

Audit in 2025

Direct revenue $100 $100

Deterrence revenue $23 $23 $23 $23 $23 $23 $23 $23 $23 $207

Total $307

Audit in 2033

Direct revenue $100 $100

Deterrence revenue $23 $23

Total $123

Boning et al. (2023) find that the specific deterrence effect is consistent for random audits of 

taxpayers at all income levels. While the taxpayers Boning et al. (2023) study are audited by the 

IRS’ Small Business/Self-Employed division, global high-wealth individual taxpayers audited by 

the IRS’ Large Business & International division are likely to behave similarly to other highincome individual taxpayers. Therefore, it is reasonable to apply the same estimate of specific 

deterrence revenue to global high-wealth audits. 
The available evidence on the specific deterrence effects of audits of businesses is much more 

limited, so it is not possible to construct an estimate of the specific deterrence revenue generated 

by increasing audits of large corporations and complex partnerships at present. It may become 

possible to construct such an estimate as the literature develops. In the meantime, the lack of an 

estimate of specific deterrence revenue for other types of audits does not imply that other types 

of audits have no specific deterrent effect or that audit resources should be shifted from auditing 

businesses to auditing individuals. 

The IRS estimates that the investments in enforcement functions outlined in the Inflation 

Reduction Act Strategic Operating Plan, provided funding is sustained through FY 2034, will 

generate $390.3 billion in direct or protected revenue in FY 2024 – FY 2034. Of this $390.3

billion, an estimated $54.2 billion is from increased audits of high-income and high-wealth 

individuals. Following the proposed method, the specific deterrence revenue associated with

these individual audits is approximately $38.8 billion in tax receipts collected in FY 2024 – FY 

2034. 

As shown in Table 2, the direct revenue from individual audits grows from $0.1 billion in FY 

2024 to over $8.0 billion annually after FY 2030 as enforcement personnel increases 

incrementally until FY 2030. About 63 percent of the direct revenue associated with individual 

audits is realized in the last four years of the period. The specific deterrence revenue also grows 

over the period, from $0.1 billion in FY 2026 to $11.3 billion in FY 2034. Specific deterrence 

revenue lags audit revenue because an audit necessarily must occur first before deterrence occurs 

in subsequent years. In addition, substantial growth in deterrence revenue results because 

taxpayers remit additional tax for as long as 13 years following the audits and thus the deterrence 

revenue rises over time as the effect of previous audits accumulates. About 82 percent of the 

deterrence revenue associated with the direct audit revenue raised in this period is realized in the 

last four years of the window.

In Table 2, the ratio of the total deterrence revenue to the total direct revenue is about 72 percent, 

or $38.8 billion divided by $54.2 billion, over the years 2024-2034. This ratio does not capture 

the full impact of the long-lasting specific deterrence effect - Boning et al. (2023) find a stable 

estimate of the effect for 13 years following an audit, though data are thinner and estimates more 

uncertain after ten years. For example, for the direct audit revenue raised in 2033, the $38.8

billion estimate includes only one year of the specific deterrence effect associated with it in 2034 

and misses the additional receipts that will be collected in the next 12 years outside the budget 

window. For each dollar of direct revenue, applying the 23-percent factor for 13 years would 

result in a total of nearly $3 in deterrence revenue (in deflated constant dollars) in the long run. 

These estimates, like any estimates, are uncertain. One important source of uncertainty is the 

extent to which deterrent effects many years after operational audits are similar to the deterrent 

effects of the random audits that form the basis for these estimates. However, the available 

literature supports the existence of specific deterrence effects—and an uncertain estimate of the 

effect is more accurate than excluding specific deterrence effects entirely. 
Table 2. Specific Deterrence Revenue from Increased Audits of High-Income and High-Wealth Individuals 

Fiscal Year 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Total, 

2024-2035

Direct revenue and revenue 

protected from all enforcement 0.9 4.1 9.6 16.9 25.2 35.1 46.3 57.1 61.7 66.5 66.9 390.3

 Of which, direct revenue

from individual audits 0.1 0.5 1.4 2.5 3.7 5.0 6.7 8.2 8.1 9.0 9.0 54.2

Specific deterrence from

individual audits 0 0 0.1 0.5 1.1 2.0 3.2 4.8 6.9 8.9 11.3 38.8

Total after including specific 

deterrence from individual audits 0.9 4.1 9.7 17.4 26.3 37.1 49.5 61.9 68.6 75.4 78.2 429.1

 Specific deterrence from 

individual audits as percentage of 

direct revenue from individual 

audits

0% 0% 7% 20% 30% 40% 48% 59% 85% 99% 126% 72%

Note: all money amounts are in billions of dollars. 
References

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