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Previous research has investigated the influence of detection risk and penalty sanctions on tax compliance using various methodologies. While some evidence suggests that there is a positive relation between these factors and compliance, several recent reviews of this literature have concluded that the results are mixed (Roth et al. 1989; Fischer et al. 1992) and propose several suggestions for future research that could help clarify the nature of these relations. Alm et al. (1992a, 24) note that it may be advantageous for researchers to set parameters such as the detection rate and penalty levels at values that are similar to those that individuals actually face.
Based on these suggestions, the purpose of this research is to operationalize detection risk and penalty sanctions in a more realistic manner than the previous literature to investigate the generalizability of previous results. Additionally, while previous research has suggested that there should be a relation between perceptions of detection risk and income visibility (Roth et al. 1989, 106-110), we empirically investigate this relation and test the joint effects of these variables on tax compliance.
This research differs from previous research in several important ways. First, the amounts used for penalty sanctions in prior research have often been inflated when compared with actual penalty rates in the United States (Fischer et al. 1992). Also, the change in the magnitude of penalty sanctions that has been used to investigate the effect of changes in sanctions on compliance have tended to be very large. Although the previous studies have provided some important insights into the effect of penalty sanctions on compliance, these results may not be generalizable to the United States tax system. This research proxies penalty sanctions as the actual civil penalty rates imposed by Congress for the omission of income due to negligence or fraud. This permits an investigation of whether sanctions are salient at lower magnitudes and a determination of whether smaller increases in sanction levels than those used in previous research are effective deterrents.
Second, most of the previous literature that has investigated the influence of detection risk on compliance has operationalized this variable as an objective rate set by the researcher. However, the variable that actually influences taxpayers' behavior is their perceived detection risk for a given...