What Do We Know about Tax Fraud? An Overview of Recent Developments QUESTIONS ABOUT TAX FRAUD HAVE BEEN AROUND AS LONG AS TAXES

them selves and will rem ain an area of discovery as long as taxes exist. To understand the impact of a tax system, it is im portant to know who complies w ith the tax law as well as who does not. Tax fraud is a large and growing problem in almost all countries. Consider the example of the US annual growth rate of unpaid federal individual and corporate income taxes since 1973 (reported by Aim, 1999). Reliable estimates by the Internal Revenue Service (IRS) suggest a tax gap of the federal income tax of some $257 billion to $298 billion in 2001, which equals a noncompliance rate of about 15.5 percent to 16.6 percent for the federal income tax (IRS, 2005). The exploration of tax fraud is relevant for many reasons. Tax fraud reduces tax collection and tax performance w ithin a country. It may lead to externalities such as an increase of alternative taxes, which leads to an increase in the tax burden of compliant taxpayers. Tax fraud can create misallocations in resource use whenever individuals mak