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Litigation, Courts, and Bureaucratic Policy: Equity, Efficiency, and the Internal Revenue Service

Georgia State University

Many view courts as institutions that allow individual litigants to achieve equity, or fairness,when the litigant has a dispute with a branch of government. However, many also argue that thisfairness comes at the expense of efficiency and democratic control, particularly when individualssue government agencies. Perhaps no agency exemplifies the competing concerns of equity,efficiency, and policy control as does the Internal Revenue Service (IRS). Taxpayer suits againstthe IRS seek individual fairness but at the expense of IRS efficiency and policy control. However,in using a two-stage least squares analysis of court verdicts, IRS audits, and litigation rates,I find that courts and litigants can achieve both fairness and IRS efficiency. Courts help the taxsystem function, by signaling to the IRS that their audit policy is incorrect and inefficient. Thus,courts aid both fairness and efficiency.

Key Words: courts • litigants • judicial influence • public policy • Internal Revenue Service

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