Ian Ayres (Yale Law School) & Barry Nalebuff (Yale School of Management), Winning the Audit Lottery: Compensation Could Turn Audit Participation Into an Act of Patriotism (Forbes):

The chance your tax return will be audited is 2 in 1,000–and we think that's far too low. Really. In 2008 the average field exam of an individual return generated $19,000 in additional taxes. Even if incremental audits were only half as productive, doubling the rate would bring in another $3 billion in revenue. Higher audit rates would also indirectly generate revenue by motivating taxpayers to be more honest. Lots more honest. Jeff Dubin at Caltech estimates that an additional dollar directed toward audits would return $58 through higher compliance.

To make matters worse, we're relying on outdated data in deciding whom to audit. Every three years until 1988 the IRS randomly selected 100,000 returns for nasty, intrusive reviews, the purpose being not so much to squeeze every last penny from those unfortunates as to find out where the chiseling was going on. These extreme audits provided the IRS with statistical profiles of noncompliance that formed the basis for the agency's formulas used to target returns with the highest chance of underreporting.

The problem was that extreme audits were an unfair burden for those who were selected. These audits took twice as long as the usual ones. Anti-IRS pressure mounted, and the superaudit was firsst delayed and then canceled in 1995. The program has been replaced with a smaller and less-data-intensive program that imposes fewer costs on taxpayers but produces much less useful compliance information.

Society would probably be better off with double the number of audits, but no one wants to have his or her number called. What is to be done?

Pay people for being audited–say, $3,000 for the extreme audit. Stanford tax guru Joseph Bankman notes that this sum would overcompensate almost all taxpayers; someone getting that much for 40 hours of trouble would be getting $75 an hour. To be sure, the richest taxpayers and people with the most complicated returns would be only partially compensated, and the money wouldn't necessarily cover the fee of a tax attorney or accountant. But $3,000 of compensation would go a long way in reducing the public opposition to auditing.

(Hat Tip: Josh Blank.)  Peter Pappas does not like the idea:

[H]ere’s my initial response to Ayres and Nalebuff: What the hell have you two been smoking?

First, the IRS can simply pass these audit compensation fees back to the taxpayer by more aggressively disallowing tax deductions. Second, because IRS auditors and their group managers have discretion as to whether or not to assess penalties against taxpayers it’s reasonable to assume that they they will be more aggressive in assessing those penalties and denying reasonable cause abatements so as to offset the cost of compensating the auditees

 I hope American taxpayers are not stupid enough to trust a program that purports to compensate them for being audited when the compensator, the IRS, is the entity responsible for determining the amount of their indebtedness to the government.