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ABSTRACT
The purpose of this study is to determine if taxpayers' risk perceptions and subsequent reporting decisions are influenced by the type of reporting decision (income or deduction), framing effects (win or lose), and level of certainty (a 33, 55, or 75 percent chance of withstanding an IRS challenge). Over 400 taxpayers completed and returned a mail survey that requested the respondents to decide how they would report either an ambiguous income or an ambiguous deduction item. The results indicate that when taxpayers' risk propensities are considered, taxpayers' risk perceptions differ for ambiguous income and deduction items and their reporting decisions are influenced by those differences. In addition, taxpayers' decisions are influenced by level of certainty but not by framing effects. The respondents indicated a greater willingness to take aggressive positions for an ambiguous deduction than for ambiguous income. They also took significantly more aggressive positions when the level of certainty increased from 33 to 55 percent. There was no significant difference in decisions when the level of certainty increased from 55 to 75 percent.
The Internal Revenue Service (IRS) has set a goal to increase the taxpayer compliance rate from 82.3% to 90 percent by the year 2001 (Federal Managers Quarterly 1994). To accomplish this goal, it is important to understand the factors that influence the reporting decisions of individual taxpayers. Tax preparers and tax researchers have observed that while most taxpayers are risk averse and prefer conservative tax reporting positions, there are a substantial number of taxpayers who appear to have higher risk propensities and prefer aggressive tax reporting (Chang et al. 1987; Collins et al. 1990; Hite and McGill 1992; Hite and Stock 1996).
Sitkin and Pablo (1992) suggest that risk behavior stems directly from two factors: an individual's risk propensity (risk-taking tendencies) and an individual's perceptions of inherent risk. Thus, in addition to risk propensity, taxpayers' decisions may be affected by related perceptions of the level of risk surrounding a particular decision, e.g., whether to report an ambiguous income or deduction item (Fischer et al. 1992; White et al. 1993; Dusenbury 1994; Carnes and Englebrecht 1995; Hite et al. 1995). Sitkin and Pablo (1992) also suggest that how a problem is framed ("formulation effects" (Kahneman and Tversky 1984))...