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Detection probability and taxpayer compliance: A review of the literature

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1.0 INTRODUCTION

Understanding why citizens comply or fail to comply with income tax laws is of great practical and intellectual interest. The tax gap (the difference between taxes owed and taxes paid) was between $84.5 and $96.8 billion in 1988 and is projected to reach from $110. 1 to $127.0 billion in 1 992 [IRS, 1990, p. 2]. From a policy perspective, the magnitude of the problem is considerable: the 1988 tax gap was more than 50 percent of the total budget deficit for that year and exceeded the sum of federal expenditures on education, veterans' benefits, agriculture, and community and regional development [U.S. Bureau of the Census, 1990]. The extent of the revenue loss from noncompliance led candidates in the last two presidential elections to make improved taxpayer compliance a part of their plans to combat the budget deficit.

Concern about taxpayer noncompliance by politicians, social theorists, and scholars is not misplaced. The revenue loss affects the public provision of goods and services and alters the distribution of income. Further, noncompliance is unfair to those who pay, and may ultimately lead to more coercive enforcement. From an intellectual perspective, the study of taxpayer compliance brings together insights from many disciplines, including accounting, economics, decision sciences criminal justice, psychology, and sociology. Methodologically, issues in measurement and validity of inferences provide numerous questions worthy of academic attention.

Highlighting the current importance of this area of research, the National Academies of Science (NAS) convened a panel in 1986 to assess the state of our knowledge about compliance and to suggest directions for future research.(1) Several strategies were suggested for increasing compliance with the tax law, and one of these--increasing the probability of detection--has been the focus of much of the past scholarly work on taxpayer compliance, as the primary research question in...