Tuesday, September 29, 2009

Role of Paid Preparers in Tax Compliance: Literature Review

TaxProf Paul Caron posted a link to an interesting new paper available on SSRN,
The Role Paid Preparers Play in Taxpayer Compliance in the United States: An Empirical Investigation with Policy Implications

Here's a fascinating excerpt from their literature review:

Using 1979 Taxpayer Compliance Measurement Program (TCMP) database, Erard (1993) found that noncompliance was greater on paid, than self, prepared returns, with the highest predicted mean level of noncompliance occurring on CPA or lawyer-prepared returns. If a taxpayer’s preparation mode changed from self to using a CPA or lawyer, noncompliance increased by a factor of about 4.5! In contrast, the noncompliance of a taxpayer switching from self to some other preparer increased by only 15 percent.

More recently, the IRS reported a higher error rate on paid (56 percent)—as compared with self—prepared (47 percent) returns. This disparity in error rates translated to different dollar amounts taxpayers owed after audit. For Tax Year 2001 taxpayers using a paid preparer were liable for a median of $363 after audit, while those who self-prepared owed a median of $185 per return.

The authors of the study are Sagit Leviner, a law professor at Tel Aviv University, and Kyle Richison, an IRS researcher. (IRS Office of Research, Analysis, and Statistics) have posted The Role Paid Preparers Play in Taxpayer Compliance in the United States: An Empirical Investigation with Policy Implications

After making the observation above, they observe the possible negative externality effects from spreading "infectious" negative attitudes towards tax compliance. In other words, when tax pros encourage their clients to violate tax law, their clients may spread those attitudes to others in casual discussions.

As an important aside: the evidence cited above from the old TCMP study is especially interesting because the TCMP data was based on a random selection of returns for audits. In other words, TCMP audits are not subject to sample selection bias.

This is all quite interesting. I will need to go look at the original sources the authors cite as their sources for the passages above. One of the sources may be an IRS internal research study not available to the public, however.

Here are the footnoted sources for the passages above:

Brian Erard, Taxation With Representation: An Analysis of the Role of Tax Practitioners in Tax Compliance, 52(2) JOURNAL OF PUBLIC ECONOMICS 163 (1993).

Id; see also Internal Revenue Service, Survey of Tax Practitioners and Advisers (1987); Ayres et al. (1989), supra note 11. But cf. Andrew D. Cuccia, The Effects of Increased Sanctions on Paid Tax Preparers: Integrating Economic and Psychological Factors, 16(1) THE JOURNAL OF THE AMERICAN TAXATION ASSOCIATION 41 (1994); Richars G. Broody and John J. Masselli, Tax Preparers: Whose Team Are They On?, 41 THE NATIONAL PUBLIC ACCOUNTANT 18 (1996).

National Research Program (2001)

This is just their literature review of prior work done by others. In my next post, I'll go on to discuss the results of their new contribution to the literature.

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