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Endogenous Tax Audits and Taxpayer Assistance Services: Theory and Experiments

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Abstract

In recent years there has been a sharp rise in the information available to individual income taxpayers, such as through tax preparation software provided by third parties and support available by tax agencies, although the effects of this information on tax reporting is not well understood. Within a setting characterized by an endogenous audit process and taxpayer uncertainty, this study uses theory and laboratory experiments to investigate the effects of taxpayer assistance services that better inform taxpayers about their tax liability and the audit process. The endogenous audit rule we study is simple, yet relative to existing work is more likely to characterize the actual incentives facing taxpayers. Among our findings, and in contrast to the case of purely random audits, in theory the effect of information services on tax underreporting is ambiguous, and we find support empirically for increased tax underreporting even in a setting where theory predicts the opposite. When services provide better information on both liability and the audit process, audit information is more salient to participants, negating the strong effects observed when only liability information is provided.

Suggested Citation

  • Christian A. Vossler & Scott M. Gilpatric, 2017. "Endogenous Tax Audits and Taxpayer Assistance Services: Theory and Experiments," Working Papers 2017-01, University of Tennessee, Department of Economics.
  • Handle: RePEc:ten:wpaper:2017-01
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    File URL: http://web.utk.edu/~jhollad3/RePEc/2017-01.pdf
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    Cited by:

    1. Luigi Mittone & Matteo Ploner & Eugenio Verrina, 2017. "When the State Doesn't Play Dice: Aggressive Audit Strategies Foster Tax Compliance," CEEL Working Papers 1702, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.

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    More about this item

    Keywords

    individual income tax; taxpayer assistance services; endogenous audits; tax reporting and enforcement; experimental methods;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration

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