Peggy A. Hite

Persuasive Communications: Tax Compliance Enforcement Strategies for Sole Proprietors*

Tax systems such as those found in Canada, the United States, and the United Kingdom primarily rely on the notion of voluntary compliance by taxpayers, but, importantly, the threat of possible audit also serves to “encourage” voluntary tax compliance (Braithwaite 2003). Audits, however, are not without cost to tax administrations, and they may not be an optimal use of government resources for all taxpayers.1 Given limited resources, the tax agency will ultimately be constrained by the extent of audit enforcement strategies, and, as a result, alternative strategies need to be considered. Prior behavioral research using hypothetical cases and taxpayer self-reports has reported mixed results regarding the success of using persuasive communications to encourage compliant tax reporting (Hasseldine and Kaplan 1992; Hite 1989, 1997; Violette 1989). Critiques of that research often focus on the lack of generalizability to real taxpayer data. Few behavioral studies have been able to use actual taxpayer data (Schwartz and Orleans 1967; McGraw and Scholz 1988, 1991; Blumenthal, Christian, and Slemrod 2001). The results from these studies are inconsistent and could be a result of the differing research designs. The current study addresses some of those design issues by using brief, straightforward normative appeals (positive reasons why compliance is advantageous) and sanction appeals (appeals emphasizing the negative consequences of noncompliance) to test for behavioral responses on actual sole proprietors’ tax reports to the UK Inland

Framing, gender and tax compliance

In the context of extensive social science research on framing, we discuss how framing objectively equivalent information can (but does not always) differentially affect individuals attitudes and behaviors. Many of these framing effects have been found in the health communications and marketing literatures. Using a typology of framing developed by Levin et al. [Organ. Behav. Hum. Dec. Proc. 76 (1998) 149], we are able to classify prior tax compliance research, much of it reported in the Journal of Economic Psychology, that suggests decision frames influence tax reporting behavior. This prior research is now known as risky choice framing. Our study differs from this prior literature as, using goal framing, we manipulate two objectively equivalent messages (one positively framed, one negatively framed) that are communicated to adult taxpayers. We find no evidence of a main effect for framing objectively equivalent information. However, in line with prior research, a significant frame by gender interaction effect was documented. We discuss our results in the light of prior framing and tax compliance research and suggest policy implications. A further contribution of this study is that goal framing effects are demonstrated to extend beyond health and consumer behavior settings.

A primer on tax education in the United States of America

The targeted readership of this article are tax educators employed outside the USA and other readers who are interested in tax education and research within the USA. After briefly outlining key features of the US tax system, the article describes the ‘traditional’ approach to tax teaching and documented concerns with this approach. A number of alternative approaches to tax teaching stemming from the work of the Accounting Education Change Commission are described. In addition, a synopsis of prior tax education literature from the USA is presented so that interested readers can further investigate some of the specific techniques described. The pendulum of tax teaching in the USA has swung between a rule-oriented lecture format and a more abstract economic analysis. Now, the current concensus appears to prefer an eclectic approach with a combination of teaching methods, testing techniques, case, economic, and rule-oriented content. Although the underlying tax laws throughout the world obviously differ, it is suggested that the possibility that effective delivery strategies may be universal.

An examination of the impact of subject selection on hypothetical and self-reported taxpayer noncompliance

Abstract Understanding taxpayer noncompliance involves the use of government reported statistics as well as taxpayer self-reported data. Both sets of data are subject to biases, but both have information to offer tax researchers. The present study addressed whether self-reported compliance rates and hypothetical reporting decisions correspond to government reported compliance rates and whether self-reported compliance rates correspond to hypothetical reporting decisions. The relationships were found to be positively correlated, but the results were influenced by the method of sample selection for the subjects. The findings of this study provide additional insight to help researchers cautiously interpret results from behavioral tax studies.

An Investigation of Moral Suasion and Vertical Equity Arguments on Intended Taxpayer Noncompliance

A statewide telephone survey was used to obtain data on self-reports of hypothetical prize income. One-third of the subjects were read a moral argument, one-third were read information on the level of taxes paid by the “wealthy,” and one-third of the subjects were treated as the control group. Both the moral and the wealthy-pay arguments increased compliance for some of the subjects. There was no apparent backlash effect from the moral argument as suggested by Tittle and Rowe (1973). The wealthy-pay strategy was effective for taxpayers with tax balances due rather than for those receiving tax refunds. The study also provides evidence on how college education moderates the effects of tax balances due as well as evidence on how a moral argument can negate the noncompliance effects of tax balances due.

The preparer effect on IRS customer satisfaction

This study summarizes an IRS database that includes over 500 Customer Satisfaction Surveys (CSS) from individual taxpayers who were field audited in 1998. Descriptive statistics are provided indicating that most taxpayers were satisfied with the audit process. Most questions on the IRS survey were associated with overall audit attitude. Two variables affecting audit attitudes were additional tax assessments and use of a paid preparer. Those owing additional taxes as a result of the audit were more likely to have a negative attitude toward the audit process. Those using a paid preparer also tended to have a more negative attitude. The paper discusses reasons why those with preparer assistance were more disappointed (e.g. IRS examiner was not knowledgeable, audit took too long, and the audit outcome was worse than expected).

An investigation of how incorrect examples can enhance tax rule comprehension

Abstract Based on Poppers (1962) falsification theory, this study tests whether tax students perform better when examples that fail to satisfy technical requirements are presented rather than examples that do satisfy the requirements. Rule application problems were given to the students immediately after instruction, a few days later, and at the end of the semester. To test for potential intervening effects, GPA and overall course performance were statistically controlled. The results indicate that presenting examples which do not satisfy certain tax rules generally leads to better test performance than presenting correctly applied examples. Moreover, this tended to be true for all students, regardless of their overall course performance.

Inherent Outcome-Favorable Biases and Mitigating Effects of Principles-Based Standards: A Study of Accounting Students’ Tax Decisions

Abstract This study documents that an outcome-favorable bias is greater when the quantity of information describing a balanced tax-decision context is substantially increased. Second, the study demonstrates that an outcome-favorable bias can be offset by the use of principles-based ethical standards. Specifically, we examine the effect of AICPA Code of Conduct Section 54 for integrity and Rule 102-6 for advocacy. Students volunteered to participate in this study examining the manner in which accounting novices initially process principles-based standards. Prior studies using student subjects in an audit setting have found that principles-based standards were effective only when students had high levels of moral reasoning (Herron & Gilbertson, 2004), and rules-based technical standards had no impact on student subjects when making financial adjustments (Pflugrath, Martinov-Bennie, & Chen, 2007). If professional standards increasingly rely on principles-based standards, then understanding the impact of such standards on future entrants into the profession would provide guidance in the creation and implementation of future standards, as well as assist educators in the development of accounting curricula. We extend the pattern of past research to a tax setting and show that tax-saving recommendations are a function of the presence of a professional standard and the level of contextual detail.

Taxing Non-Residents: A U.S. Perspective

As globalisation increases, so does the need for understanding multijurisdictional taxation. Which countries will try to tax the international traveller’s income? Treaties can clarify the tax implications, but too many treaties could become overwhelmingly complex. When treaties do not exist, each host country must establish a set of rules for taxing non-citizens. This chapter describes the basic U.S. income tax laws for taxing resident and nonresident aliens who come to the United States. If international visitors meet the criteria for being a ‘resident alien’, then the U.S. tax system will tax them on their worldwide income and allow them the same deductions and credits that U.S. citizens enjoy. On the other hand, ‘non-resident aliens’ are only taxed on their U.S. source income, and they are entitled to fewer deductions and credits. This chapter explains the general concepts along with a few details about how these rules are applied.