Behavioral Factors in Tax Preparer and Tax Compliance Choices

What tax preparer characteristics are most important to taxpayers in their decision to use a tax preparer, and how does this choice of a tax preparer affect subsequent taxpayer compliance? We use laboratory experiments to examine these questions. We find that individuals in this environment simultaneously choose a preparer and their compliance based in part on factors predicted by the standard expected utility theory of individual behavior under uncertainty. However, we find that factors based on psychological considerations –- which we refer to as “behavioral factors” -– also play an important role in this setting: participants prefer tax preparers who are “credentialed,” even when the cost is high or the credential has no impact on outcomes; participants fear an audit, regardless of its likelihood; participants often choose high-cost preparers even when they are fully compliant; and many participants forego substantial expected earnings rather than underreport income.