Tax Compliance: The Role of Opportunity, Sanctions and Tax Practitioners

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Why taxpayers do or do not comply with tax laws is emerging as a focal point of scholarly research. The patterns of noncompliance are influenced by incentives and opportunities. To a considerable extent the anatomy of noncompliance can be uncovered by empirical inquiry into line-by-line statements on tax returns which are influenced by enforcement efforts and the quality of opportunities to conceal income or exaggerate deductions. Paid third parties prepare nearly half of all tax returns and these returns account for about 75 percent of the tax deficiencies identified in all returns submitted to the Internal Revenue Service. Concentrating on the factors that affect compliance behavior for those individuals who voluntarily file a tax return and who also account for the large majority of estimated noncompliance and utilizing information from a variety of sources importantly including Taxpayer Compliance Measurement Program audit data; Drs. Nagin and Klepper develop, formalize, and test the limits of the perspective that incentives and opportunity play an important role in compliance behavior, and they examine the role of tax practitioners as an information conduit by which threats of audit and fine are channeled into changes in reported income and deductions. Since, for the sake of simplicity, modelling in the area of tax compliance has generally been based on an idealized tax code, an important scientific contribution that the research of Drs. Nagin and Klepper makes is in linking the wide variation in opportunities available for noncompliance to the detailed structure of the actual tax code.