We study optimal dynamic compliance decisions in an uncertain environment. Contrary to the static literature, greater uncertainty affects consumption, not the optimal tax evasion rule. Thus, audit and sanctions rather than fiscal uncertainty should be used to control tax evasion.

Although tax evasion and auditing are dynamic processes, they have been approached in a dynamic framework only recently. We argue that the decision to avoid taxes is dynamically embedded with consumption decisions, which in turn are driven by consumption habits. The model is cast in a dynamic...