Some academics and politicians have proposed that taxpayers should be reimbursed for costs of randomly imposed tax audits, because, they argue, randomly imposing audit costs is unfair. But none of those proposing audit compensation has explained why randomly imposed audit costs are unfair, or why, if these randomly imposed costs are unfair, this unfairness necessarily means that taxpayers should be compensated. These are important questions, because explicit randomness is an essential tool for tax enforcement, and for other areas of law, but its use may be limited if randomness is equated with unfairness.
The Article argues that it is fair not to compensate randomly audited taxpayers for their audit costs, because the available of insurance against random audit costs cures fairness concerns under luck egalitarianism. Fairness may nonetheless matter for a less obvious reason: notwithstanding philosophical arguments to the contrary, individuals may perceive random audits as unfair. Empirical work has shown that individuals have a taste for fairness in tax law, and that the perception that tax law is unfair may reduce tax compliance. Therefore, perceived unfairness should be of concern to welfarists, among others.
Based on a comparison of random audits with other burdens randomly imposed by the government, the Article concludes that perceived unfairness may warrant nominal compensation for random audit costs. The costs of the perceived unfairness of random audits, as opposed to other types of randomly imposed burdens, may be particularly high because of general ignorance about, and negative perceptions of, our tax system. Compensation for random audit costs is therefore warranted not because it is actually unfair to impose audit costs randomly, but rather because such compensation may help to overcome perceptions of unfairness and thus to increase overall tax compliance.