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 this fairness comes at the expense of efficiency and democratic control, particularly when individuals sue government agencies. Perhaps no agency exemplifies the competing concerns of equity, efficiency, and policy controlas does the Internal Revenue Service (IRS). Taxpayer suits against the 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 tax system function, by signaling to the IRS that their audit policy is incorrect and inefficient. Thus, courts aid both fairness and efficiency.
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