Abstract: Tax authorities typically concentrate enforcement resources on large businesses, yet small business evasion generates tax revenue losses that often exceed those from multinational profit shifting. We show that authorities can improve small business compliance by strategically disclosing audit-relevant information. We study audit rules that inform taxpayers that audit risk drops discontinuously above a threshold based on predicted revenues. A theoretical model identifies conditions under which disclosure outperforms secrecy and provides a test based on changes in the audit probability jump. We then use more than 26 million tax files (2007–2016) from Italy’s Sector Studies, a policy with a disclosed threshold-based design. Taxpayers bunch sharply at the threshold, and bunching correlates with evasion proxies, evasion technologies, and tax incentives. Exploiting a staggered reform that increased the audit risk discontinuity, we find that compliance rises below the threshold and falls above it, yet average reported profits grow by 16.2% in treated sectors over six years. Interpreted through the model, this evidence implies that disclosure outperforms nondisclosure. Estimating the model, we show that by strengthening incentives at the threshold, the Tax Authority could cut the audit budget by up to two-thirds without reducing compliance, freeing resources to target larger firms, and that the reform brought the policy close to the optimum.

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