The Effects of Prefilled Tax Returns on Decision Reference Points and Taxpayer Compliance

• In Event: 4.04 Behavioral Tax Research and Regulatory Guidance

Abstract

This study examines the consequences on taxpayer decision making of a recent proposal by United States Senators to institute a prefilled tax return policy. Under this policy, the government would prepare returns and provide these prefilled returns to individuals for review and certification. Based on omission theory, we hypothesize that tax compliance will be lower for prefilled returns than self-completed returns. We also hypothesize that prior findings about the behavior of taxpayers—that individuals receiving a refund behave as if they are in a gain position and individuals who still owe taxes act as though they are in a loss position—will no longer hold when taxpayers are given prefilled returns. We conduct an experiment with 297 experienced taxpayers to test our hypotheses. We demonstrate that prior findings on taxpayer behavior do not apply to taxpayers who have been given prefilled returns and that compliance is lower under the proposed legislation. However, we also use the results from our experiment to show that including an estimate of unknown income on the prefilled return, which is a modification to the current proposed legislation, actually increases taxpayer compliance. These findings suggest that the details of a prefilled return tax policy could have significant effects on taxpayer decision making.

Authors

• Marcus M. Doxey, University of Alabama-Tuscaloosa

• James Gregory Lawson, University of Alabama-Tuscaloosa

• Shane Ryan Stinson, University of Alabama-Tuscaloosa