Digital Transformation and Taxation – The Effects of Prefilled Tax Returns on Tax Compliance Behavior and Tax Compliance Costs

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The obligation to pay taxes goes hand-in-hand with the question of compliance. In most countries, individuals must file tax returns to determine their tax liability. As a consequence of the digital transformation, taxpayers often start their tax declarations with prefilled forms. Customers who use tax software or file their tax returns online (with e-filing services) find that electronic tax return programs usually carry over the previous year’s values to the subsequent year as an orientation aid. Consequently, a current tax return is initially prefilled with last year’s numbers (e.g., salary, business income, expenses, deductions, tax credits). However, prefilled data is often incorrect, as data carried forward from the previous year does not fully reflect the conditions of the current year. Furthermore, prefilling plays a significant role in the work of revenue bodies in many countries. Automatic data exchanges between the tax authority and employers, social insurance agencies and banks enable systems to create tax returns that are prefilled before they are sent to taxpayers. Consequently, instead of completing blank forms manually, taxpayers receive tax returns that are already prefilled with data. Although tax returns prefilled by tax authorities should be highly trustworthy, errors in data input and data transmission can occur. In the proposed project we aim to test a novel framework of tax compliance decisions by means of a large-scale survey with approx. 100,000 German taxpayers and several controlled laboratory experiments. We will examine the following main research questions. First, how frequently are electronic and prefilled tax returns used and which individual characteristics determine this usage. Second, do prefilled tax returns simplify the filing of tax returns? Third, how do electronic and prefilled tax returns affect tax compliance behavior? Here, we will focus on both correctly and incorrectly prefilled income and deduction items. Fourth, how do incomplete information about true tax return items alter the influence of prefilled tax returns on compliance behavior? Finally, we will investigate how the use of electronic and prefilled tax returns influences tax compliance costs?