Tax Compliance: An investigation of Key Features.

Abstract This paper addresses the problem of tax noncompliance by individuals through an examination of CPAs' perceptions of seven key compliance features: deductions permitted, IRS information services, withholding and information reporting, preparer responsibilities and penalties, the probability of audit, tax rates, and taxpayer penalties. The relative importance of these features, support for implementation, and overall compliance system preferences were addressed by using three different methodologies. Hybrid conjoint analysis was used to determine the relative salience of each of the compliance features. A choice simulation model was then applied to these results to project preferences for alternative compliance systems. In addition, subjects responded to a series of questions regarding their attitudes about various compliance features of the tax system. The results indicate that CPAs consider reducing tax rates to be the single most important feature for increasing tax compliance. When the results are modeled in a compliance system Context, a flat tax system that maintains or reduces the penalty structure emerges as the most popular choice. The competing perspectives of economic deterrence and fiscal psychology are discussed for assessing the results. Economic deterrence models assume individuals are utility maximizers who will evade tax whenever the projected benefit exceeds the cost. Fiscal psychologists, however, maintain that taxpayer belief in the system rather than the penalty structure is more salient in generating compliance. The results are consistent with the fiscal psychology paradigm. which suggests that changing the tax structure, not increasing penalties, is the key to improving tax compliance.