Amnesties, settlements and optimal tax enforcement

This paper develops a model of tax enforcement in which the tax agency has discretionary power to make pre-audit settlement offers. Settlements can take the form of either general amnesties or individual deals. It is shown that pre-audit settlements allow the agency to overcome its limited control over the enforcement parameters (the agency takes the tax and penalty levels as given) and to increase net revenue. Amnesties prove to be superior to individual deals since they allow the agency not only to extract from taxpayers their defence costs, but also to reduce an excessive tax differential.