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Noncompliance by individuals with the U.S. federal income tax laws is an expensive and pervasive problem, with revenue losses projected at $83 billion in 1992 (Internal Revenue Service (IRS) 1988a). It has been estimated that 52 percent of those filing a tax return have engaged in some form of noncompliance (IRS 1988a; American Bar Association (ABA) 1987, 13). The Internal Revenue Service estimates that current enforcement strategies recover only 10 to 15 percent of the compliance gap (IRS 1986). Thus, tax administrators and legislators who have suggested improved compliance as a means of raising revenue (Louden 1990, 609) have a pragmatic interest in learning why some people comply with reporting requirements, while others do not. In addition, academic scholars and practitioners who prepare tax returns and advise clients concerning tax matters continue to expand the framework for analyzing the federal income tax compliance problem (Roth et al. 1989, 1; Slemrod forthcoming).
Traditionally, research focused on tax noncompliance has explored the overall relation between taxpayer characteristics and taxpayer compliance. The development of robust models, however, has been impeded by measurement difficulties and the sheer complexity of the phenomenon. Diverse taxpayer objectives and methods of coping, together with the limited scope of taxpayer information available with audited tax return measures and the potential bias associated with self-reported noncompliance measures, make taxpayer compliance behavior particularly difficult to evaluate.
This paper adds to the tax compliance literature in two ways. First, we introduce an approach for segmenting noncompliant taxpayers based on a contingency model framework. This modeling approach is motivated by the observation that different approaches to the taxpaying process likely lead to variation in the factors influencing compliance behavior. Also, the importance of the tax preparer in the interaction between taxpayers and the IRS is recognized.(1) Therefore, we examine how the contingencies of taxpayer objective (correct return and minimize taxes) as well as tax preparation mode (self-preparation versus use of a professional preparer) affect the relation between taxpayer characteristics and noncompliance behavior. Second, the scope of U.S. taxpayer characteristics tested is expanded to include personality variables.
Based on this framework, we use contingency modeling techniques to explore the relations between compliance and predictors of compliance for each taxpayer subgroup. This process focuses on three related research issues:...