Evidence from research
• Third-party reporting and income withholding are essential for compliance
• Public sector agencies depend on each other in building and maintaining citizens’ trust
• Tax practitioners influence compliance decisions – and are susceptible to actions and communication by tax authorities
Third-party reporting and income withholding are essential for compliance
Third-party reporting – where employers, banks, pension or investment funds report taxable income earned by individuals directly to the tax administration – is incredibly important for securing tax revenue and has been an integral part of developed economies’ tax systems for years. Combined with employers’ withholding of employees’ income, third-party reporting can reduce the degree of non-compliance for personal income tax to only about one (1) percent (IRS 2019, Lederman 2010) by virtually eliminating the opportunity to evade (Kleven et al 2011). In a sense, such a regime dissolves the distinction between voluntary and enforced compliance by dramatically narrowing the scope of choice in the taxpaying situation, establishing automated compliance as a new default.
Tax practitioners influence compliance decisions – and are susceptible to actions and communication by tax authorities
As an intermediary between taxpayer and tax authority, the tax practitioner faces a constant dilemma by being both an advocate for the taxpayer and fulfilling a duty towards the tax system (AICPA 2009). Research on the interaction between tax practitioners – i.e., tax auditors and tax professionals – and their clients documents the important role of the former in shaping compliance decisions of the latter. However, research also shows that practitioners are to a large extent open for persuasion by tax administration actions and conduct.
• Based on a survey of 1373 tax practitioners selected from the Australian Taxation Office’s database, Wurth & Braithwaite (2017) argues that tax practitioners could be divided into three main categories or ‘clusters’ (plus a residual group of outliers): The duteous; the contingent (i.e. conditionally cooperating); and the aggressive. Comprising 22 percent, 63 percent and 14 percent, respectively, the fact that the middle group of contingents is by far the largest suggests considerable potential for tax authorities to affect the behavior of tax practitioners by way of action, communication and conduct in general.
• Bobek et al. (2019) studies contentious interactions between tax professionals and their clients from the professional’s side via two surveys including a total of 229 tax professionals. They find —among other things— that more than two-thirds of the time, tax professionals are able to persuade clients to change their original position, partially or fully.
• Examining the survey results from a sample of 143 tax professionals from various organizational and corporate backgrounds, Blanthorne, Burton & Fisher (2012) show that the ability of tax professionals to reason morally influence their reporting decisions irrespectively of what the client prefers. They find that as the level of moral reasoning increases, the aggressiveness of the reporting position decreases. Combined with the potential for tax authorities to affects tax professionals, this opens up prospects for trust-based engagement with tax professionals.
Public sector agencies depend on each other in building and maintaining citizens’ trust
Trust in the tax authority and tax compliance is not only affected by the tax system and the tax authority’s administration of tax laws. The operation of the public sector in general matters, too. As documented with respect to the dynamics of trust (see guideline #6), trust in government in general can influence taxpayers’ willingness to comply by affecting trust in the tax authority specifically. Perhaps not surprisingly, it appears that there may well be significant spillover effects from trust in public sector institutions in general to trust in the tax authority.
• With respect to trust in government, Jimenez & Iyer (2016) find that trust in government has a significant influence on both perceived fairness of the tax system and compliance decisions based on a sample of taxpayers in the USA.
• Along similar lines, Güzel, Özer & Özcan (2019) find that trust in government in general is systematically linked to tax justice perceptions and tax compliance among independent accounting professionals in Turkey.
• Both studies support an earlier result in the literature found in a study by Scholz & Lubell (1998), who find that trust in government significantly increase the likelihood of tax compliance even when effects of an internalized sense of duty to obey laws and the fear of getting caught evading taxes are also accounted for.
References
AICPA (2009). Statements on Standards for Tax Service. American Institute of Certified Public Accountants, Inc. New York, NY.
Blanthorne, C., Burton, H. & Fisher, D. (2012). The aggressiveness of tax professional reporting: Examining the influence of moral reasoning. William A. Orme Working Paper Series 2011/2012 No. 12, College of Business Administration, University of Rhode Island.
Bobek, D.D., Dalton, D.W., Hageman, A.M. & Radtke, R.R. (2019). An Experiential Investigation of Tax Professionals’ Contentious Interactions with Clients. Journal of the American Taxation Association 41(2): 1-29.
Güzel, S.A., Özer, G. & Özcan, M. (2019). The effect of the variables of tax justice perception and trust in government on tax compliance: The case of Turkey. Journal of Behavioral and Experimental Economics 78: 80-86.
IRS (2019). Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013. Internal Revenue Service: Research, Applied Analytics & Statistics, Publication 1415 (Rev. 9-2019). Washington, DC.
Jimenez, P. & Iyer, G.S. (2016). Tax compliance in a social setting: The influence of social norms, trust in government, and perceived fairness on taxpayer compliance. Advances in Accounting, incorporating Advances in International Accounting 34: 17-26.
Kleven, H.J., Knudsen, M.B., Kreiner, C.T., Pedersen, S. & Saez, E. (2011). Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in Denmark. Econometrica 79(3): 651-692.
Lederman, L. (2010). Reducing Information Gaps to Reduce the Tax Gap: When is Information Reporting Warranted? Fordham Law Review 78(4): 1733-1759. Available at: https://ir.lawnet.fordham.edu/flr/vol78/iss4/3.
Scholz, J.T. & Lubell, M. (1998). Trust and Taxpaying: Testing the Heuristic Approach to Collective Action. American Journal of Political Science 42(2): 398-417.
Wurth, E. & Braithwaite, V. (2017). Tax practitioners and tax avoidance: Gaming through authorities, cultures, and markets, Chapter 21 in: Hashimzade, N. & Epifantseva, Y. (eds.) – The Routledge Companion to Tax Avoidance Research. London: Routledge, pp. 320-339.