Indiana Law Journal

Document Type


Publication Date

Fall 2020

Publication Citation

96 Indiana Law Journal 105 (2020)


In a mandatory tax penalty insurance regime, taxpayers would be required to find insurers to certify portions of their tax returns. A certifying insurer would be subject to a governmental auditing regime insurers of randomly selected filings would pay an amount equal to the inverse of the selection probability multiplied by the underpayment, or they would receive money from the government in the case of overpayment. The insurers function as private auditors with no incentive to underestimate their customers' tax liability. Such a regime will consume real resources, ultimately paid by taxpayers, and thus should not be imposed universally. But this regime might be especially useful in contexts where valuation is inherently subjective or where inevitable loopholes allow taxpayers to disguise economic substance. For example, if a wealth tax is too easily evaded by undervaluation of assets, a mandatory tax penalty insurance requirementf or certain high-value assets could help. With insurers bearing the risk of penalties, inconsistent treatment of taxpayers should be less of a concern, and tax law can embrace standards in some contexts in which rules would be needed with a conventional enforcement approach