An Investigation of the Effect of Detection Risk Perceptions, Penalty Sanctions, and Income Visibility on Tax Compliance.

Abstract It may be advantageous for those who are investigating tax compliance to set parameters such as detection rate and penalty levels at values similar to those that individuals actually face. We use penalty levels proxied at the sanction levels stipulated in the Internal Revenue Code (IRC) for omission of income to determine if penalties are an effective deterrent and to see if changes in magnitudes are salient. We measure detection risk as perceived detection risk. Additionally, we investigate the influence of income visibility on compliance and explore the relation between income visibility and detection risk. The results indicate that low levels of penalty sanctions influence compliance behavior. Increases in sanction levels appear salient even when those increases are relatively small. Perceptions of detection risk and income visibility were also significantly related to compliance. After controlling for income visibility, taxpayers' compliance behavior was very strongly influenced by their detection risk perceptions.