The Impact of Income Tax Withholding on Taxpayer Compliance: Further Empirical Evidence.

Abstract Prospect theory predicts that an individual's income tax withholding position (additional tax due versus a tax refund) at the time of filing the annual return affects taxpayer compliance behavior. Prior research has produced mixed results. The present research was designed to further clarify this issue by determining the impact a taxpayer's withholding position has on the individual's tax compliance decision across low, medium, and high detection rates and penalties. Adult taxpayers were compared to undergraduate students to determine if the compliance behavior of experienced and inexperienced tax return filers is similar. The results indicate that subjects in a tax due position are more likely to engage in noncompliant behavior than subjects who are in a tax refund position. In contrast to other studies, a withholding effect was found at higher detection rates but was not found at the low detection rate for low and medium penalty amounts. In addition, adult taxpayers engaged in more noncompliant behavior than did undergraduate students, although both groups' compliance decisions were affected by withholding position.