Investigating the Effect of Service Messages on Noncompliant Taxpayers’ Reactions to Declining Audit Effectiveness

• In Event: Tax Research

Abstract

We examine the very real possibility that audits begin to lose effectiveness, which we label “audit productivity,” as tax authorities continue to receive fewer resources. In a simulated compliance environment with real US taxpayers, we predict and find a negative relationship between declining audit productivity and taxpayer compliance in subsequent periods. Although the most obvious solution would be to invest the resources necessary to achieve full audit productivity, this is not feasible in the current budgetary environment. Thus, we propose and test that the inclusion of minimal cost service messages can offset the negative effect of declining audit productivity by influencing how the taxpayers perceive the taxing authority. Specifically, our results show taxpayers who view a service message are more likely to view the Internal Revenue Service as focused on customer service (rather than as focused on punishing criminals). Results contribute to the literature on individual tax compliance behavior, particularly related to the balance between the service and enforcement paradigms.

Authors

• Nina Collum, Louisiana Tech University

• Nancy-Susan Jurney, Oklahoma City University

• Mary Elizabeth Marshall, Louisiana Tech University