Abstract The threat of economic sanctions has traditionally been used to influence the tax reporting decisions of both taxpayers and paid tax preparers. The penalties and reporting requirements faced by preparers have increased significantly in recent years and continue to be the subject of much debate. There is little evidence, how- ever, that such penalties influence the recommendations of paid preparers. In this paper, a preparer model is developed that predicts that the threat of economic sanctions should affect (1) the aggressiveness of recommendations made by preparers when faced with ambiguous issues and (2) the effort invested by preparers in identifying taxpayers' unambiguous reporting positions. Client expectations and rote perceptions held across preparer groups, however, are expected to moderate the impact of economic sanctions. To test the model, commercial tax preparers and CPAs were given an interactive tax preparation task. The model's predictions related to preparer effort were supported for both preparer types. When exposed to a strict liability penalty, commercial tax preparers invested less effort in identifying tax reporting items that were expected to increase the exposure to the penalty. CPAs, however, increased their effort level. The Permian threat had limited effect on the aggressiveness of recommendations regarding ambiguous issues. The results suggest that increased economic sanctions may affect the effort invested by paid preparers in identifying legitimate ways of reducing their client's tax liability while having little effect on how aggressively they interpret ambiguous issues. The results provide evidence of a "backlash" effect of increasing sanctions on paid tax preparers that is contrary to the goals of tax lawmakers and administrators.
Andrew D. Cuccia (Tue,) studied this question.