Auditing with Signals

We analyse the value of information that can be used to improve the audit selection to better target the tax gap. We consider a tax authority allocating resources in an attempt to identify the taxpayers who are underreporting with more probability and to increase voluntary compliance. In a simple model, we discuss the optimal enforcement policy when the tax authority decides its auditing strategy before the taxpayers fill their report, and identify some results that contrast with the literature on optimal auditing when no signal, in addition to the tax return, is considered. In particular, we discuss the relationship between effective tax progressivity and the informational content of the signal.