An examination of the effort and aggressiveness of professional tax preparers

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Title:
An examination of the effort and aggressiveness of professional tax preparers the effects of economic sanctions and role perceptions
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viii, 230 leaves : ; 28 cm.
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English
Creator:
Cuccia, Andrew Daniel, 1960-
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Subjects / Keywords:
Tax consultants -- United States   ( lcsh )
Tax consultants -- Malpractice -- United States   ( lcsh )
Accountants -- Malpractice -- United States   ( lcsh )
Taxpayer compliance -- Research   ( lcsh )
Accounting thesis Ph. D
Dissertations, Academic -- Accounting -- UF
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Thesis:
Thesis (Ph. D.)--University of Florida, 1990.
Bibliography:
Includes bibliographical references (leaves 219-229).
Statement of Responsibility:
by Andrew Daniel Cuccia.
General Note:
Typescript.
General Note:
Vita.

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University of Florida
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oclc - 24229040
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THE


AN EXAMINATION OF THE EFFORT AND AGGRESSIVENESS
OF PROFESSIONAL TAX PREPARERS:
EFFECTS OF ECONOMIC SANCTIONS AND ROLE PERCEPTIONS


ANDREW


DANIEL


CUCCIA


A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
nt. mnr'^ nrarvr'TT^nrTnrT~m r' ran/ mTrTr nrr~^Tnnr.- aNT















ACKNOWLEDGEMENTS


am indebted


to several


individuals


whose


contributions


facilitated


the


completion


of this


research.


Professor


Sandra


Kramer,


dissertation


committee


chairperson,


provided


both


assistance


and


encouragement


every


stage


the


process.


Her


help


at both


the


dissertation


and


coursework


phases


of the


program


appreciated.


Professor


Gary


McGill


was


also


instrumental


both


the


development


of the


research


project


and


execution.


Professor


McGill


s critical


approach


contributed


to the


quality


the


research


while


his


collegiality


aided


completion.


appreciated.


His


am also


methodological


and


encouragement


grateful


design


and


friendship


Professor


assistance


John


as well


are


Lynch


as his


interest


both


research


and


myself.


Professor


John


Kramer


also


offered


valuable


insight


into


the


research


well


as the


process.


Professor


Doug


Snowball


aided


enlisting


the


participation


greatly


a number


appreciated.


subjects.


Additionally,


His


ass


a special


instance


debt


owed


to those


firms


and


individual


participants


without


whose


whose








The


use


of Professor


Merrie


Bruck


s computer


program


develop


the


task


instrument


contributed


to both


the


timely


completion


the


project


as well


as to its


quality.


also


indebted


the


American


Institute


of Certified


Public


Accountants


their


financial


assistance.


Finally,


am most


grateful


the


technical


assistance


and


continuous


encouragement


wife,


Cindy.


Her


support,


both


as a colleague


and


a companion,


were


invaluable.















TABLE


OF CONTENTS


ACKNOWLEDGEMENTS


ABSTRACT . . . . . vii

CHAPTERS


INTRODUCTION


AND


BACKGROUND


Introduction
Professional
Factors
Service
The Tax
Professional
Compliance a
The Economic
Aggress
The Success
The Research


Tax Prepa
Influenci
s Provided
Preparati
Tax Prepa
nd Aggress


Approach to
iveness .
of the Econom
Questions .


rers . .
ng the Use of
by Preparers
on Industry
rers and Compl
iveness .


Prepare


Sane
iance


Compliance and

ic Approach .


DEVELOPMENT


Introduction .
Taxpayer Compl
Deterrenc
Economic
Fiscal Ps
Economic
Preparer Resea
Economic
Previous


The


Theor


OF RESEARCH


iance
e Theory
Deterrenc


ychol
versu
rch
Model
Attit
y of


ogy . .
s Non-economic


s of the Prepar
udinal Research
Psychological R


Factors


er .
on Prepare
eactance .


The


Present


Research


S. . . 62


THEORETICAL


MODEL


AND


HYPOTHESES


Introduction . .
A Purely Economic Mode


1 of the Preparer


I









Reactance and
An Integrated
Hypotheses .
Summary . .


Profe
Model


ssional
of the


Preparers
Preparer


RESEARCH


DESIGN


AND


METHODOLOGY


S . .4 85


Introduction .
Preliminary Anal
Factor Anal
Discriminan
Experimental Des
Methodology .
Experimenta
Operational
Summary .


sis .

Analys
gn .

Task
zation


Variable


RESULTS


Introduction . .
Descriptive Data .
Subjects
Attitude Patterns
Attitude Differenc
Manipulation Checks
Hypothesis Tests .
The Effect of Pena
Effort .
The Effect of Pena
Aggressivenes
Tests of Competing
Summary . .


* 4 4 4 4
* 4
* 4 4 4 4


across


* .
Ity
* .
Ity
s


Preparer


* .
Threat

Threat


STyp
Typ


Preparer

Preparer


Hypothese


SUMMARY


AND


CONCLUSIONS


Introduction


Summary and Discussion
Description of Sub
The Hypotheses
Contributions and Impli
Research Contribut
Policy Implication
Limitations . .
Future Research .


of Results
jects .


cation
ions
s .


* 4 4 .
S . .
* 4 . .
* . . .


APPENDICES


ANALYTICAL


DERIVATION


OF HYPOTHESES


RESEARCH


J










RESULTS


OF FACTOR


ANALYSIS


REFERENCE


LIST


BIOGRAPHICAL


SKETCH















Abstract


of the


Dissertation


University


Requirements


of Florida


the


Degree


Presented


the


Partial I
of Doctor


Graduate


School


fulfillment of
of Philosophy


the


AN EXAMINATION


OF THE


OF PROFESSIONAL


THE


EFFECTS


OF ECONOMIC


EFFORT


TAX


SANCTIONS


AND


AGGRESSIVENESS


PREPARERS:


AND


ROLE


PERCEPTIONS


Andrew


Daniel


Cuccia


December


1990


Chairperson:


Major


Sandra


Department:


. Kramer


Accounting


The


threat


of economic


sanctions


has


traditionally


been


used


influence


tax


reporting


deci


sions


of both


taxpayers


and


profes


sional


tax


preparers.


The


penalties


faced


preparers


have


increased


significantly


in recent


years


and


are


currently


the


subject


of much


debate.


Stricter


reporting

penalties


standards


were


preparers


adopted


1989


and

There


stronger


little


related

e evidence,


however,


that


such


penalties


are


effective


influencing


the


recommendations


of professional


preparers


A comprehensive


model


the


preparer


developed


which


predicts


that


the


threat


of economic


sanctions


should


affect


not


only


the


aggressiveness


of recommendations


made








unambiguous


reporting


positions.


Different


client


expectations


role


perceptions


held


across


preparer


groups,


however,


are


expected


to moderate


the


form


of the


effect


of economic


sanctions.


test


the


model,


commercial


tax


preparers


and


CPAs


were


given


interactive


tax


preparation


task


and


paid


wage


based


on the


income


the


task


would


generate


performed


related


real


preparer


life.


The


effort


predictions


were


the


supported


model


both


types


preparers.


When


exposed


to a strict


liability


penalty,


those


subjects


who


traditionally


serve


lower-income


taxpayers


invested


less


effort


identifying


tax


reporting


items


that


were


expected


increase


the


exposure


the


penalty.

however,


Those


who


actually


traditionally


increased


their


serve

level


wealthier

of effort.


taxpayers,

There


was


no effect


of the


penalty


threat


on the


aggressiveness


preparers


' recommendations


regarding


ambiguous


issues.


The


results


are


consistent


with


the


theory


psychological


reactance


predicated


on the


expectations


each


preparer-type


s client


base


and


role


perceptions


both


of which


were


identified


the


experiment.


The


reaction


CPAs


and


the


potential


decrease


their


net


wage,


however,


cannot


be attributed


any


economic


motives


The


implications


administrators


and


the


tax


system


are


- -5


-~~~~~ --..A


ft


1


A* 1














CHAPTER
INTRODUCTION AND


1
BACKGROUND


Introduction


The


compliance


role


has


professional


begun


tax


to receive


preparers


increased


securing


attention.


tax


SIn


recent


years


a number


of changes


have


been


proposed


regarding


the


potential


sanctions


faced


preparers


positions


taken


on the


returns


that


they


prepare.


These


sanctions


have


become


increasingly


stronger


since


they


were


first


enacted


1976.


2 However,


there


no evidence


that


IThroughout the remainder of the dissertation, the term
preparer will refer to professional tax preparers and does
not include individuals who prepare their own returns.


2The


Service
include
refund
disrega
amendme
governs
IRS. T
substan
related
under S
sanctio
before


part o
Novemb
civil


f
e
s


c
r
n

h


Tax


(IRS
their
heck
ded
ts w
the
e ch


Reform


)
r
s,
th
er


Act


the power to
identificati
or who negl
e law when p
e proposed t


conduct of
anges woul


tial underpaym
to taxpayers.
section 6661 wo
ns which could
the IRS. The
the Omnibus B
r 22, 1989, in
actions appli


le


tax


of 1976


gavi


penalize
on numbers
igently or
preparing r
o Treasury
preparers


d have
nt pena
Imposi
Id like
include


Reven
budget
clude
cable


tied
Ity o
tion
wise
disb


su
ar


ue Reconci
Reconcili
d a compr
to taxpay


e the Internal Revenue
preparers who failed to
on returns, who cashed
intentionally
returns. In 1986,
Circular 230 which
practicing before the
eparer penalties to the
IRC Code Section 6661
a taxpayer penalty
object the preparer to
ment from practice
liation Act, passed as
ation Act of 1989 on
ehensive revision of th
ers and tax preparers.


e










these


increased


sanctions


actually


discourage


the


type


behavior


they


were


intended


to deter.


Further,


possible


added


that


to the


the


threat


Internal


of penalties


Revenue


Code3


the


1989


type


could


recently


result


consequences


intended


at the


time


they


were


adopted.


The


present


research


concerned


with


effects


increased


penalties


and


sanctions


might


have


on preparers


and


on the


conduct


of tax


practice.


In thi


chapter


, the


research


questions


and


many


the


relevant


issues


will


be developed.


How


the


preparer


came


be viewed


as an


important


factor


tax


compliance


discussed


first.


The


possible


effects


that


preparers


might


have


on the


a brief


level


overview


taxpayer


of the


tax


compliance


return


are


preparation


examined


industry


after


and


some


of its


characteristic


Cs.


Next,


a distinction


made


between


the


traditional


view


of noncompliance


as tax


cheating


and


the


issue


of overaggressiveness


which


addressed


the


current


research.


Finally,


the


methods


which


have


been


used


over


time


to discourage


noncompliance


overaggressiveness,


as well


as the


potential


consequences


of those


methods


are


discussed.


and
mrn.


willful


BrnflrC-4


aC tr


eglect


or reckless


rWI a a


I I


sregard


-a -


the


-,, AA.


rules.


a


II


mm












Professional


Tax


Preparers


Tax


compliance


has


received


much


attention


over


the


years


with


effects


of both


economic


and


non-economic


variabi


on the


level


of compliance


examined


extensively


(See


Jackson


and


Million


[1986]


a review


thi


literature


The


potential


impact


of third


party


preparers,


however,


has


been


a relatively


neglected


factor


until


recently


The


use


of professional


tax


preparers


has


become


increasingly


common,


sing


each


year


since


the


passage


the


Economic


Recovery


Tax


Act


of 1981


(ERTA)


In 1987,


nearly


one-half


the


approximately


million


federal


individual


tax


returns


filed


involved


third


party


preparers


[IRS,


1989,


. V-20].


Understandably,


the


role


preparers


compliance


decisions


has


received


increased


attention


from


the


as well


as academic


researchers.


Regardless


any


direct


effects


preparers


may


have


compliance,


important


their


the


relationship


taxing


with


authorities


taxpayers


can


a number


reasons.


First,


preparers


provide


an important


link


taxpayers


who


may


have


both


the


desire


and


opportunity


to legally


illegally


avoid


paying


taxes.


As such,


they


are


taxpayers


primary


source


of information


about


compliance


requirements










related


tax


compliance.


Thirdly,


the


practitioner


represents


a network


through


which


the


returns


more


than


50 million


taxpayers


can


be affected


[Roth,


1987]


The


interest


professional


preparers


then


can


expected


to be


broader


than


just


their


effects


compliance.


The


following


sections


will


discuss


the


factors


influencing


the


deci


sion


to employ


a preparer,


the


actual


services


desired


from


preparers


taxpayers,


and


the


characteristics


the


preparer


industry


itself


discussion


of the


effects


preparers


on tax


compliance


will


follow.


Factors


Influencing


the


Use


of Preparers


The


increasing


use


of paid


preparers


the


tax


filing


process


ses


the


question


of what


influences


a taxpayer


seek


professional


assistance.


While


may


be asserted


that


increase


complexity


creates


a need


purchase


the


expertise


a tax


preparer,


does


not


explain


why


some


taxpayers


seek


out


prof


ess


ional


preparers


while


others


not.


Trying


to address


question,


Slemrod


and


Sorom


[1984]


found


a positive


relationship


between


income


and


age


the


use


of professional


tax


assistance.


However,










purchasing


tax


assistance,


and


thereby


legally


reducing


taxes,


a purely


economic


deci


sion


which


allows


the


consumption


of other


desired


goods


increasing


after-tax


wealth.


Tax


assistance,


argues,


should


be demanded


more


as tax


rates,


the


opportunity


cost


of time,


and


wage


rates


rise

that


Consistent

expenditures


with t

on tax


his


hypothesis


assistance


he found


were


fact


empirically

positively


related


age,


self-employment


opposed


to being


employee),


marginal


tax


rates


and


negatively


related


education

engaging


level. A

a preparer


apparently,


rise


the e

either


economic

due to


benefits


greater


potential


tax


savings


because


higher


tax


rates


or greater


opportunity


the


costs


probability


the


of paying


form

for


of a higher

a profession


foregone income),

al preparer will


also


se.


Using


Tax


Compliance


Measurement


Program


(TCMP)


data


from


1983,


Long


and


Caudill


[1987]


also


support


Slemrod


s hypothesis.


They


found


the


use


of a paid


preparer


to be significantly


positively


related


income,


marginal


the


tax


complexity


rate


self-employment


of the


return)


(possibly


number


representing


of schedules


included


the


return.


They


conclude


that


reducing


the


marginal


tax


rate


and


simplifying


the


income


tax


laws


will


reduce


the


overall


tax


burden,


the


total


cost


incurred


i


..














Servi


ces


Provided


The


above


findings


give


an indication


the


factors


influencing


the


deci


sion


engage


a preparer,


but


they


not


directly


indicate


what


taxpayers


are


expecting


from


the


preparer


In a national


survey,


Yankelovich


asked


taxpayers


the


reason


engaging


a preparer


Sixty-


three


percent


the


respondents


indicated


that


accuracy


the


fear


of making


a mistake


their


return


was


self-prepared)


was


their


primary


concern.


Only


13 percent


had


tax


savings


as the


primary


motive.


A taxpayer


opinion


survey


conducted


[1988a]


found


similar


results,


with


the


desire


to file


a correct


return


and


tax


savings


given


as the


two


greatest


concerns


taxpayers


who


hired


preparer


Based


on the


results


these


two


studies,


may


that


increased


complexity


the


cause


increased


preparer


use.


Given


the


studies


mentioned


above,


appears


likely


that


inaccuracies


due


to complexity


can


be expected


to effect


taxpayers


of complexity


and


differently


potential


may


cost


the


errors


combination


resulting


from


complexity


that


together


determine


the


taxpayer


deci


sion


use


a preparer.


-


.e.


Preparers


et al. [1984]


,


1


,_____











a survey


limited


to respondents


Oklahoma


and


Pennsylvania,


they


found


that


approximately


70 percent


their


respondents


approached


the


process


with


the


desire


file


an accurate


concerned


with


return,


minimizing


while

their


25 percent


taxes.


were


There


primarily


was


significant


relationship


between


use


a professional


preparer


and


the


taxpayers


' primary


motive


filing,


however.


Thi


suggests


that


the


surveys


cited


earlier


may


have


captured


the


overall


motives


taxpayers


when


filing


their


returns,


and


that


engaging


a preparer


was


merely


attempt


the


taxpayer


to accomplish


primary


objective.


Those


taxpayers


engaging


a preparer


may


have


no greater


desire


to reduce


their


tax


liability


than


those


who


not.


It will


be shown


below


that


taxpayers


' expectations


when


engaging


a preparer


may


an important


factor


the


preparer'


tax


compliance


recommendations.


the


extent


that


services


sanction


threats


expected


made


the


the


taxpayer


I RS,


could


taxpayer


be affected


expectations


may


also


moderate


the


effect


of such


threats.


The


Tax


Preparation


Industry


Many


preparer


studi


ignore


the


fact


that


tax


preparers


actually


represent


very


differentiated


industry


-e S -


a


I ,,


- -


,,











attorneys.


There


currently


no requirement


that


individual


p055


ess


any


formal


qualifications


to sell


tax


services


are


and


a large


unregulated.


proportion


However,


of professional


business


schools


preparers


attract


thousands


of students


each


year


to graduate


tax


programs


which


culminate


at least


five


years


of study


Many


these


students


then


on to become


certified


public


accountants


who


must


complete


annual


continuing


professional


education


standards


set


their


profession.


It i


commonly


believed


that


members


provide,


and


thi


their


diverse


clients


tax


expect


return

, very


preparer

different


industry

services.


These


different


expectations


may


result


different


preparer


types


having


diss


similar


effects


on taxpayers


well


as reacting


differently


to sanction


threats.


However,


these


differences


are


often


ignored


research


examining


tax


preparers.


Professional


Tax


Preparers


and


Compliance


Tax


compliance


received


increasing


attention


recent


years.


The


growing


body


of research


attempting


describe


and


explain


the


tax


compliance


phenomenon


good


news


itself


as are


recent


estimates


of a shrinking


tax


gap,


the


difference


between


taxes


legally


owed


and


those


-


--


m











was


still


billion


[IRS,


1988b],


and


research


the


academic


community


has


offered


little


guidance


to policy


makers


on how


to close


that


gap.


Concerns


include


the


effects


revenue


losses


on the


welfare


of the


economy


and


the


which


continued


many


success


taxpayers


of the


have


voluntary


apparently


tax


begun


system


to lose


itself


respect.


With


the


increasing


role


paid


preparers


have


the


tax


filing


system,


the


question


of their


effect


on the


compliance


problem


arises.


At first


glance,


some


empirical


studies


might


interpreted


as suggesting


a negative


effect


preparers


on compliance.


For


example,


the


surveys


previously


discussed


found


tax


savings


to be a major


reason


that


taxpayers


1984;


IRS,


hired


1988;


profe


ssional


Collins


preparers


et al.,


1988].


[Yankelovich


In a direct


comparison


of self-prepared


versus


paid-preparer


returns,


Long


and


Caudill


[1987]


found


that


after


controlling


complexity,


income


level


and


filing


status,


the


use


paid


preparer


resulted


tax


savings


income


categories


examined.


These


tax


savings,


however,


could


due


the


expertise


the


preparers


concerning


the


tax


and


do not


necessarily


indicate


a negative


effect


preparers


on compliance.


a more


direct


test


of the


effect


preparers











amount


of all


audit


adjustments


CIRS,


1985]


Thi


type


simple


analysis


, however,


doesn


control


at least


two


other


factors


which


may


contribute


the


results


: (1)


possible


differences


in the


types


of returns


prepared


across


two


groups


and


differences


the


taxpayers


across


these


two


groups.


If taxpayers


who


preparers


are


ess


compliant


than


those


who


do not,


then


the


greater


number


adjustments


attributed


preparer


group


may


be due


taxpayers


themselves


rather


than


the


preparers.


Likewi


, users


preparers


may


have


higher


dollar


items


their


returns


and


above


results


might


only


reflect


thi


difference.


Finally,


users


preparers


may


systematically


involved


more


complex


transact ions


than


those


who


do not


use


preparers,


so that


either


the


facts


application


the


to the


facts


ess


straightforward


Further


analysis


the


data


which


controlled


the


complexity


of the


return


revealed


that


self-prepared


returns


had


the


largest


adjustments


[Smith


and


Kinsey,


1987]


While


using


TCMP


data


may


focus


noncompliance


better


than


merely


examining


reported


liabiliti


, a number


of problems


exis


t with


using


audited


tax


return


data


measure


compliance.


These


problems


include


difficulty


identifying


potential


sources


- K *


,,


..


..










adjustments


that


are


subsequently


overturned


on appeal


acquiesced


to by


the


taxpayer


without


true


resolution


Using


a different


operationalized


approach,


noncompliance


Collins


from


the


et al.


taxpayer


[1988]


s point


view


They


asked


taxpayers


they


had


either


overstated


deductions


or understated


income


the


last


five


years.


The


subjects


' primary


motive


the


filing


process


was


found


to be


significantly


compliance.


Those


correlated with

indicating that


the

tax


reported


level


minimization


was


their


primary


concern


admitted


to cheating


more


often


than


those


indicating


that


accuracy


was


their


main


concern.


Preparer


use,


however,


was


not


significantly


correlated


with


compliance.


Apparently,


taxpayers


who


want


to deliberately


misstate


their


liability


may


just


as easily


so through


professional


tax


preparer


as directly


However,


preparers


have


a direct


effect


on compliance,


asking


taxpayers


about


their


own


noncompliance


may


not


reveal


engaging


a preparer,


the


taxpayer


may


believe


that


the


only


mis


statements


on hi


return


are


the


ones


attributable


to himself


However


, asking


the


taxpayer


about


own


compliance


will


not


reveal


the


preparer


making


determinations


regarding


compliance


of which


the


taxpayer


unaware.












Compliance


and


Aaaressiveness


Much


preparers


the


can


research


viewed


concerning


as extensions


professional


taxpayer


tax


compliance


research


(described


Chapter


Accordingly


, many


preparer


studies


have


implicitly


examined


tax


cheating.


has


come


to be recognized,


however,


that


the


type


noncompliance


which


preparers


may


influence


might


inherently


different


from


that


which


identified


with


taxpayers.


Accordingly


, the


traditional


ways


looking


taxpayer


noncompliance


may


not


be appropriate


when


examining


preparers.


There


may


factors


such


as professional


codes


ethics,


high


visibility


reputation


which


prohibit


the


vast


majority


preparers


from


cheating


most


circumstances.


However,


there


are


innumerable


items


tax


laws


and


an infinite


of factual


situations


which


the


proper


tax


treatment


is not


clear,


so that


two


parties,


each


acting


good


faith


could


have


different


interpretations.


In these


situations


where


the


law


ambiguous,


preparers


may


use


their


expertise


to exploit


ways


which


were


unintended


and/or


unforeseen


when


the


was


passed


(e.g.,


Klepper


Nagin,


[l987])










clients


[Helleloid,


1989]


In such


ambiguous


situations,


difficult


to talk


about


the


correct


tax


liability


or the


level


compliance.


Rather,


administrators


and


researchers


refer


to the


degree


aggres


siveness


exhibited


preparers.


the


aggres


siveness


of recommendations


, not


tax


cheating,


which


examined


this


study


Aggressiveness


is viewed


differently


some


tax


preparers


and


tax


administrators.


While


the


generally


accepted


view


the


preparer


is that


of a taxpayer


advocate,


some


within


the


believe


that


the


preparer


overreaching


and


lost


sight


of a duty


to aid


monitoring


integrity


of the


tax


system


Shapiro,


1987]


Thi


view


demonstrated


the


recent


proliferation


preparer


penalties


Internal


Revenue


Code


as well


the


proposed


changes


to Treasury


Circular


governing


the


tax


practice


before


the


[Coyne,


1987]


the


same


time


, preparers


acknowledge


the


existence


of a duty


to uphold


the


law


exists,


and


also


claim


that


this


duty


should


not


compromise


their


position


client


advocates.


It is sometimes


suggested


preparers


that


increased


preparer


penalties


and


requirements


are


attempts


to have


the


preparer


act


capacity


government


agent.


Such


a perception


could


have


at least


a .


*


II











less


likely


to listen


the


advice


that


given


and


stay


away


from


any


areas


which


are


clearly


noncompliant


since


the


loyalty


the


preparer


giving


the


advice


might


questioned


This


may


mitigate


any


positive


effect


preparers


might


have


on compliance


[Klepper


and


Nagin,


1987]


Secondly,


an extension


a preparer


of the


that


may


adopts


expend


the


less


perception


effort


that


on behalf


of hi


-client


because


sees


incentives


as coming


more


from


the


than


the


taxpayer


An example


of such


a result


might


seen


the


s own


telephone


assistance


program.


During


the


1988


filing


season,


the


GAO


surveyed


responses


phone


personnel


test


questions


assess


the


accuracy


the


information


being


provided.


Only


such


questions


were


answered


correctly


The


primary


cause


of incorrect


answers


was


failure


of personnel


to probe


pertinent


facts.


Such


personnel


are


hired


the


primary


purpose


of assisting


taxpayers,


yet


they


are


still


government


employees


and


taxpayers


have


no way


to motivate


them t

argued


o supply


that


the


there


required


are


effort


different


level


motivations


While

and


could


expert i


level


between


profess


ional


preparers


and


phone


personnel,


a change


relative


influence


the


the


taxpayer


over


the


incentives


preparers


may











interesting


and


useful


to investigate


those


factors


which


might


influence


possibility


preparer


of other


aggressiveness.


unintended


or unforeseen


Additionally,


effects


specific


influence


attempts


may


be at least


as important


their


effects


on aggressiveness.


course,


aggressiveness


not


limited


that


described


above.


Another


type


which


has


been


attributed


preparers


the


willingness


take


positions


on returns


without


insuring


that


the


taxpayer


has


adequate


substantiation.


asking


may


documentation


include


items


everything


the


from


legitimacy


merely


of which


the


preparer


has


no particular


reason


to doubt,


to looking


the


other


way


when


he believes


the


item


fabricated.


One


might


also


include


as aggressiveness


such


things


as the


suggestion


a preparer


to fabricate


support


deduction


or to


take


advantage


the


audit


lottery


and


report


taxable


income.


Failure


to ask


documentation


actively


suggesting


inaccurate


reporting,


however,


should


seen


as qualitatively


different


from


each


other


and


from


the


aggressiveness


described


above


and


should


be considered


separately.


The


Economic


Avnroach


to Compliance


and


Auaressiveness














of penalties


and


detection


risk


are


sought


so as to


encourage


maximum


voluntary


compliance.


Given


heightened


budgetary


constraints,


overall


audit


rates


have


fallen


from


roughly


5.5%


1964


[Steuerle,


1986]


.92%


1988


[IRS,


1990]


However,


the


has


instituted


a number


of taxpayer


and


preparer


penalties


intended


increase


compliance


well


as curb


aggre


ssiveness.


The


number


of separate


penalties


included


Internal


Revenue


Code


exceeded


1989,


from


1954


[IRS,


1989,


v-i)]


and


1975


[IRS,


1989,


I-1] .


While


most


these


deal


primarily

combat ag


with


noncompliance,


gressiveness


For


penalties


example,


are


Sec.


also


6661,


used

added


1982


, call


a 25%


penalty


any


substantial


underpayment


of taxes


A substantial


underpayment


defined


as one


sing


due


to the


taking


of a position


on a


return


which


there


no substantial


authority


contained


the


tax


law


Understandably,


meaning


of the


phrase


substantial


authority


use


as a standard


of reporting


has


been


the


subject


of much


debate


[e.g.,


Podolin,


1988;


Johnson,


1989].


In addition


number


penalties


added


to the


Code


recently,


might


be argued


that


penalties


are


being


more


vigorously


enforced.


former


Commissioner


- -


r


..


I


i











increased


them


substantially


And


agents


the


field


have


administered


these


a strong


and


forceful


manner"


[Wilde,


1988,


The


first


preparer


penalties


included


the


Internal


Revenue


Code


were


enacted


1976


These


included


Sec.


6694


covering


the


understatement


of a taxpayer


s liability


preparer


due


failure


to negligence


a preparer


or frau

to sign


and


Sec.


a return


6695


and


the


covering


filing


an incorrect


information


return.


In 1986


, there


were


total


12,065


preparer


penalties


assessed


[IRS,


1986,


17].


Also


1986,


of all


paid


preparer


returns


were


prepared


preparers


who


had


penalties


proposed


assertion


were


prepared


preparers


who


actually


had


penalties


assessed


against


them


[IRS,


1987,


. 73-74]


In addition


to these


relatively


objective


penalties


aimed


at compliance,


there


been


a trend


try


use


penalties


influence


the


aggressiveness


p05


itions


recommended


preparers.


Treasury


Circular


contains


the


governing


the


right


to practice


before


the


CPAs


, attorneys


and


enrolled


agents,


and


includes


certain


penalti


related


to these


groups


In 1986,


the


Treasury


proposed


that


the


penalties


included


Circular


severely


strengthened


and


tied


to Sec.


6661.


As proposed,


, ,-


a -


- a a -


v


--


L


._ __










Sec.


6661


The


newest


penalties


added


the


Code


1989


include


accuracy


-related


penalties


preparers


for


the


first


time.


While


standard


used


not


the


substantial


authority


standard


of Sec.


6661,


preparers


are


subj ect


penalties


recommending


positions


which


are


later


deemed


to be without


"realistic


probability


success.


It i


apparent


then


that


penalties


are


not


only


being


used


what


was


traditionally


thought


as noncompliance


but


also


what


some


believe


to be aggressive


but


legitimate


interpretations


the


law.


The


Success


the


Economic


Approach


In spite


approach


of the


encourage


reliance


placed


compliance


and


on the

curb a


economic


aggressiveness,


policy


makers


note


the


lack


of empirical


evidence


supporting


the


use


the


economic


approach


[IRS,


1988c].


The


success


the


economic


approach


influencing


preparers


might


judged


the


answer


two


questions


: (1)


Have


preparers


been


encouraged


recommend


positions


which


are


more


compliant


and


Have


there


been


any


other


effects


increased


sanctions


on the


functioning


of professional


preparers


the


tax


system?


These


two


questions


will


addressed


briefly


here.










Penalties


and


compliant


recommendations


The


difficulty


with


examining


the


compliant


nature


positions


recommended


professional


preparers


was


addressed


previously


Even


thi


problem


could


solved,


observing


and


comparing


actual


decisions


professionals


before


and


after


the


adoption


a new


penalty


experimentally


impossible.


Rather


than


asking


preparers


recommendations


economic


are


sanctions,


more


compliant


an easier


as a result


question


might


of the


be whether


professionals


perceive


that


economic


penalties


have


changed


positions


that


they


recommended,


or whether


the


economic


penalties


are


salient


preparers


when


making


recommendations.


Three


studies


are


relevant


answering


these


questions.


Survey


an analysis


Practitioners


of data


[Jackson


taken


et al.


from


p1988],


the


was


suggested


that


penalties


are


viewed


quite


seriously


types


preparers.


was


interesting


to note,


however,


that


the


three


groups


used


the


study


differed


when


asked


how


effective


such


penalti


were.


The


most


expert


group


thought


them


to be slightly


ess


effective


than


did


the


least


expert


group


In a laboratory


experiment


using


tax


profe


ssional


, McGill


[1988a]


demonstrated


that


penalties










has


also


been


shown


that


the


least


expert


tax


preparer


group


believes


most


strongly


the


deterrent


ability


of penalties


[IRS,


1987]


and


serves


clients


who


have


relatively


less


complex


returns


with


potentially


fewer


ambiguous


situations


and


who


are


most


concerned


with


the


accuracy

intended


their


to deter


return.


paradoxical


overaggressiveness


might


that


be most


penalties

effective


on this


group.


the


only


examination


to date


the


direct


influence


of penalties


on preparers,


O'Neil


and


Collins


[1989]


asked


small


-firm


preparers


about


the


changes


that


the


threat


penalties


may


have


brought


about


their


practi


ces.


They


found


that


of their


subjects


agreed


that


penalties


had


decreased


the


number


of aggressive


positions


taken


returns


at least


some


extent.


The


current


research


empirically


examines


the


effect


economic


sanctions


on the


aggressiveness


of positions


recommended


professional


preparers


Unlike


previous


studi


setting


the


and


effects


any


are


directly


differential


effects


observable


of sanctions


laboratory

across


preparer


Other


types


effect ts


can


be captured.


of economic


sanctions


The


second


question


suggested


above


how


to evaluate











may


have


on preparers


and/or


taxpayers.


As alluded


earlier,


seems


that


increased


penalties


may


have


caused


increased


tension


and


hostilities


on the


part


preparers.


It is


sometimes


suggested


preparers


that


"The


using


the


attempt


tool


to shift


preparer


the


role


penalties


tax


and


sanctions


practitioners


from


in an


the


traditional


role


of client


advocate


toward


one


of government


agent"


[Jackson


and


Million,


1987].


Many


preparers,


however,


not


see


role


as appropriate


[Coyne,


1987]


The


has


recently


revised


the


existing


penalty


structure,


doing


away


with


certain


compound


penalties


and


simplifying


others.


Thi


revi


sion


resulted


from


and


Congress


recognizing


perilous


situation


which


both


taxpayers


and


practitioners


find


themselves


when


trying


understand


cope


with


the


numerous


penalties,


and


the


difficulty


administering


them


fairly


and


consistently


The


current


system


intended


to establish


a three-tiered


penalty


structure


based


areas


enable


care


or failure


make


closure


authority,


of positions


mis


conduct


which


which


lack


substantial


intentional


or willful


and


fraud


[IRS,


1989]


Even


such


a simplification


not


seen


relieving


the


tensions


that


underlie


the


current


system











aggressive


is consistent


interests,


such


and


a position


clashes w
alignment
otherwise


ith


our


between
common


with


' (but


our


not


economic


to excessively


when


fails


Risk-Reward


our


tax


our


fraudulent)


values


penalize


to
valu


system


culture.


position


and


or threaten


be sustained


e


and


and


precludes


values


[Bernsley,


1989,


104]


possible


that


tensions


or hostilities


on the


part


any


of the


parties


involved


may


cause


penalty


threats


result


unintended


consequences


used


as an influence


attempt.


The


Research


Questions


appears


threats


difficult


of economic


to determine


sanctions


the


encourage


success


the


of using


desired


behavior


of professional


tax


preparers.


The


first


research


question


addressed


here


will


s: What


effect


will


sanctions


have


on the


aggressiveness


of recommendations


made


preparers


their


clients?


possible


that


such


threats


may


result


other


unanticipated


consequences


addition


any


effect


they


may


have


on preparer


aggressiveness.


Agency


model


used


the


area


of tax


compliance


and


tax


preparer


research


Reinganum


and


Wilde,


1988) ,


as well


those


used


more


traditional


principal-agent


work


[e.g.


, Ross,


1973;


Holmstrom,


1979],


suggest


that


economic


sanctions


which


even










research

question


will

will


be reviewed


this:


Chapter


Do economic


The


sanctions


second

have a


research


n effect


the


level


of effort


exerted


professional


preparers


when


advi


sing


clients


and


preparing


tax


returns?


Finally,


suggests


the


that


diversity


effects


the


may


tax


not


preparation


consistent


industry


types


preparers.


The


third


research


question


will


this


sanction


threats


have


different


effects


on different


preparer


groups.


Chapter


will


examine


the


prior


research


relevant


the


above


questions.


As much


tax


preparer


research


extension


taxpayer


compliance


research,


some


related


taxpayer


compliance


research


will


also


be discussed.


Both


economic


and


non-economic


approaches


will


reviewed,


well


as a psychological


approach


not


previously


applied


taxpayer


or preparer


research.


In Chapter


a theoretical


model


the


preparer


is offered


which


integrates


principles


from


both


economic


and


non-economic


domains


and


recogni


zes


the


differences


across


preparer


types.


Several


specific


hypotheses


are


generated.


Chapter


describes


the


research


design


and


methodology


used


to test


the


hypotheses.


Chapter


5 describes


dissertation


the


and


results


the


the


implications


experiment.


are


summary


presented


of the


Chapter















CHAPTER


DEVELOPMENT


OF RESEARCH


Introduction


Actual


thought


research


to date


as addressing


three


involving


broad


preparers


questions


can


: (1)


what


factors


influence


the


taxpayer


s decision


engage


preparer


[Slemrod


and


orum,


1984;


Slemrod,


1985;


Long


and


Caudill,

preparer


1987];


what


[Yankelovich


services


et al


are


1984;


provided


IRS,


1988;


the


Collins


al.,


1988];


and


what


the


influence


preparers


the

deci


compliance


sion


deci


engage


sion


[Mazur


a preparer


and


and

the


Nagin,

servi


1987]


ces


The


provided


preparers


were


discussed


efly


Chapter


The


most


commonly


addressed


issue,


however,


the


relationship


between


preparers


and


tax


compliance.


Most


preparer


compliance


research


may


be viewed


as an extension


the


work


done


on taxpayer


compliance.


For


that


reason,


the


previous


work


done


on taxpayer


compliance


will


reviewed


here


so.












Taxpaver


Compliance


Taxpayer


compliance


has been


viewed


from


a number


theoretical


perspectives.


The


three


most


common


are


deterrence


theory,


economic


deterrence


model


and


fiscal


psychology


The


work


done


using


each


these


approaches


summarized


Deterrence


below.


Theory


Noncompliance,


as originally


considered


the


literature,


was


illegal


tax


evasion.


Accordingly,


the


area


of criminal


justice


was


a logical


place


to start


examining


the


issue,


with


deterrence


theory


being


an appropriate


domain.


Deterrence


theory


is concerned


with


the


effects


actual


sanctions


and


the


threat


sanctions


on criminal


undesirable


behavior


The


basic


idea


that


people


try


maximize


their


rewards


and


minimize


their


costs.


sanctions


are


probable


enough


and


the


costs


severe


enough


outweigh


the


rewards


an act,


the


act


will


not


performed.


While


such


a relationship


between


sanction


and


actions


was


assumed


the


general


public


and


legal


professionals


no underlying


theory


seemed


to exist.


Academics


generally











people


fear


punishment


and


will


obey


the


law


provides


a sufficient


sanction


threat.


However,


to be characterized


as a theory,


more


needed


than


to be able


to postulate


relationships.


"The


deterrence


problem


really


consists


three


parts:


identifying


sanctions


or sanction


threats


meaningful


way,


determining


how


much


and


what


kind


of effect


they

which


have

the


on deviance,


effect


and


occurs"


specifying


[Tittle,


the


1980,


mechanisms

. 5].


In spite


of several


theoretical


and


methodological


shortcomings,


findings


early


deterrence


research


were


fairly


consistent.


The


certainty


of sanctions


being


imposed,


but


not


necessarily


their


severity,


inversely


related


the


Much


crime


thi


rate


early


[Erickson


work


was


and


done


Gibbs,


on a macr


1976].

o level,


using


crime


statistics,


arrest


rates,


prison


record


etc.


across


legal


involved,

specific


jurisdictions.


however,

competing


researchers

hypotheses.


Because


were

For


the


methodologies


unable to rule

instance, while


out

a fear


of sanctions


may


one


possible


explanation


finding


hypothesized


relationships


, deviance


may


also


be curtailed


sanctions


incapacitated.


due


individual


In other


words,


offenders


may


being


be a lack


opportunity


due


to sanctions,


rather


than


a fear










strongly


about


behavior


may


also


those


individual


who


perceive


the


sanctions


to be strongest.


Asking


subj ects


about


potential


sanction


threats


and


their


own


behavior


macro


level


study


then


could


merely


uncover


spurious


correlations


involving


attitudes


about


the


behaviors


being


studied


[Tittle,


1980].


Other


issues


deterrence


research


have


to do


with


the


relative


effects


severity


versus


certainty


[Logan,


1972


Grasmick


and


Bryjak,


1980],


informal


sanctions


versus


formal


sanctions


[Tittle,


1980;


Anderson


et al.


1977;


Kraut,


1976],


the


method


of communicating


the


sanction


threat,


the


type


norms


involved,


socioeconomic


and


personality


variables,


peer


influences


and


perceived


fairness


the


Many


these


factors


are


ignored


the


early


model


tax


compliance.


They


were


either


assumed


to be irrelevant,


too


difficult


capture


and/or


measure,


or not


under


the


direct


control


of authority


and


therefore


uninteresting


Economic


Deterrence


Tax


compliance


offered


researchers


an opportunity


solve


some


of the


problems


associated


with


general


deterrence


research.


instance,


while


a basic


utilitarian


approach


was


heart


f all


deterrence











expected


utility


maximization


becomes


the


mechanism


which


potential


sanctions


operate.


Not


only


does


the


tax


setting


allow


quantification


of sanctions,


but


can


explicitly


include


the


analysis


another


important


variable


ssing


from


most


other


deterrence


research--the


benefit


derived


from


the


deviant


behavior.


One


might


argue


that


there


would


no undesired


behavior


there


were


no benefits


to be derived


the


actor.


In the


tax


setting,


the


tax


savings


benefit


can


easily


identified


and


quantified.


The


traditional


model


The


expected


utility


model


assumes


actors


who


conform


to a set


von


Neumann-Morgenstern


[1944]


utility


functions.


Becker


[1968]


applied


this


model


to illegal


behavior


as one


general,


of optimal


describing


resource


the


problem


allocation.


of enforcement


While


crimes


involve


some


benefit


the


offender,


white-collar


crimes


conveniently


generalizable


looked


involve


units.


benefits


As Becker


as an "industry"


measurable


describes


market


where


constant


crime


participants


and


can


may


to optimize


their


utility,


and


a crime


will


be committed


the


expected


utility


exceeds


the


utility


that


could


derived


from


devoting


energies


elsewhere.


the


tax











the


traditional


economic


view


of tax


compliance,


applied


Allingham


and


Sandmo


[1972]


and


Srinivasan


[1973],


deci


the


sion.


evasion

rationa


decision


taxpayer


seen as a purely

chooses among co.


economic


mbinations


of a riskless


asset--reported


income--and


a risky


asset--


unreported


income--so


as to maximize


his


after-tax


income.


The


ultimate


decision


the


amount


risky


asset


purchase


(i.e.


the


degree


noncompliance)


determined


solely


the


probability


of detection


and


the


penalty


structure,


which


are


both


exogenously


determined,


and


the


individualistic


risk


attitudes


taxpayer.


the


expected

Expected


cost


rises,


utility


noncompliance


maximization


should


the


decrease.


operative


paradigm.


Since


utility


functions


are


individualistic,


other


non-


pecuniary


factors


which


might


affect


the


taxpayer'


utility


function,


The


and


difficulty


therefore


compliance,


measuring


and


were


quantify


originally

nc such fa


C


ignored.


ctors,


well


as the


difficulty


observing


them


consistently


aggregate,


macro


level


data


prevented


their


inclusion


early


empirical


works.


Consistent


with


deterrence


theory,


has


been


shown


analytically


the


that


probability


noncompliance


of detection


should


or the


decrease


penalty


as either


increase










[e.g.,


Witte


and


Woodbury,


1985;


Friedland


et al.,


1978;


Christiansen,


1980].


The


same


economic


model


can


also


be used


to predict


the


effects


of other


factors


on taxpayer


compliance.


Factors


which


have


been


examined


include


true


income


[Allingham


and


Sandmo,


1972;


Mork,


1975],


the


relative


effects


the


severity


and


the


certainty


of penalty


[Christiansen,


1980;


Friedland


et al.,


1978],


marginal


tax


rates


[Allingham


and


Sandmo,


1972;


Yit


zhaki,


1974;


Christiansen,


1980;


Clotfelter,


1983;


Koskella,


1983],


and


the


progressivity


the


tax


[Srinivasan,


1973].


Interactive


models


One


criticism


of early


economic


models


was


that


they


took


some


parameters


such


as the


probability


of detection


exogenous


when,


fact,


they


may


determined


endogenously.


This


could


have


had


the


effect


of making


early


models


misspecified.


For


example,


was


customarily


assumed


that


the


audit


rate


was


exogenously


determined,


the


compliance


decision


made


response


to it.


If the


probability


of detection


not


exogenous,


but


rather


determined


the


government


based


on the


level


of reported


income,


any


model


ignoring


this


endogeneity


would


misspecified.











endogenous


at least


some


audit


categories.


However,


the


probability


of audit


still


positively


correlated


with


compliance


actor


even


the


after


process.


allowing


While


not


for


the


specifically


as a strategic


incorporating


the


preparer,


Dubin


and


Wilde


point


out


the


possibility


that


there


may


be others


involved


the


tax


reporting


environment


whose


actions


will


have


a bearing


on compliance.


Two


approaches--a


general


equilibrium


model


and


principal-agent


framework--have


been


used


to model


the


interaction


taxpayers


and


the


government.


In a general


equilibrium


model


the


and


taxpayers


simultaneously


audit


rates


and


compliance


levels


response


to each


other


[Graetz,


Reinganum


and


Wilde,


1986;


Reinganum


and


Wilde,


1986]


. In


an optimum


the


audit


principal-agent


strategy


model


in order


the


pre-commits


encourage


compliance


[Townsend,


1979;


Baron


and


Besanko,


1984;


Border


and


Sobel,


1987;


Reinganum


and


Wilde,


1985]


The


qame-theoret ic


approach


Using


a game-theoretic


approach,


found


that


the


level


of fines


are


still


positively


related


to compliance


[Graetz,


Reinganum


and


Wilde,


1986]


Thi


consistent


with


the


more


traditional


model


Within


a given


audit


class,


also


shown


that


the


expected


marginal


benefit










result


a lower


probability


of audit.


Within


a single


audit


class


unreported


income


should


decline


as true


income


rlses


since


likelihood


of audit


will


also


increase.


Scotchmer

reporting


[1987]

lower


notes

income


that


the


within


inclination


an audit


class


to audit


can


those


result


"regressive


bias"


effective


tax


rates,


with


those


with


lower


incomes


paying


greater


effective


taxes


due


to higher


expected

Agencv m


penalties.


odels


The


agency


framework


differs


from


the


above


equilibrium


models


that


the


government


(i.e.


the


principal)


does


not


audit


rates


response


to compliance


levels


but


instead


precommits


an audit


strategy


order


encourage


maximum


compliance.


instance,


Reinganum


and


Wilde


[1985]


look


the


taxpayer


as an agent


the


government


who


has


private


knowledge


of his


own


income.


The


government,


however,


cannot


observe


actual


income


without


costly


investigation.


They


show


that,


under


certain


assumptions,


weakly


induce


the


dominate


truthful


use


a random


a cut-off

audit st


reporting


auditing


rategy


taxpayers


strategy


that


the


least


will

will


cost


the


government.


In addition


to the


desirable


effect


compliance,


such


a strategy


would


enhance


horizontal


equity










interestingly,


the


level


of fines


becomes


irrelevant


as only


those


reporting


truthfully


will


audited.


Fiscal


Psvcholoav


Recently,


great


deal


of attention


has


also


been


given


the


effects


attitudes


and


perceptions


taxpayers


on compliance.


Referred


to collectively


as fiscal


psychology,


this


line


of research


often


viewed


terms


of its


relationship


to the


economic


models


described


above


but


from


two,


slightly


different


perspectives.


First,


some


suggest


that


the


attitudes


perceptions


of economic


actors


will


act


as moderating


variables


between


economic


stimuli


economic


results.


Without


an understanding


how


individuals


actually


view


their


environment


their


reactions


cannot


predicted


with


any


accuracy.


described


Schmolders


his


seminal


piece,


"The


main


task


of fiscal


psychology


remains


to analyze


the


direct


resistance


to direct


taxation


of individuals


and


nations


according


their


general


'tax


mentality'"


[Schmolders,


1959,


341]


Alternatively,


some


may


suggest


that


fiscal


psychology


variables


actually


provide


the


motivation


noncompliance.


Recall


was


suggested


that


economic


models,


allowing











disagrees.


argues


that


an economic


model


such


as the


one


described


Allingham


and


Sandmo,


tax


evasion


behavior


still


assumed


and


will


only


deterred


sufficient


chances


of detection


and


fines.


Thus
pursued
about b
social
prefer
evasion
how att


the causes of t
; the model is
behavior and con
psychologist th
ing to assess a
, the way such
itudes affect b


ax evasion
concerned
straints u
is is unli
attitudes t
attitudes
behavior. [


are
with
pon
kely
owar
are
1982


n
a
it
t
ds
fo
b,


ot rea
ssumpt
. To
o do;
tax
armed,
p. 75


lly
ions
the


and
]


The proponents
accused of tre
same can be sa
tax evasion by
of detection o
manipulate beh
why that behav
incomplete as
policy directed
also be less e
consequences)


behavior


therapy


eating symptoms and
id of tax policies
increasing fines


f evaders.
avior with
ior came a
explanation
d only at
effective (
in the ion


They
out dis
bout.
ns but
curtail
and may
g run.


are
cov
Not
tre
ing


ot causes
imed at r
the like
attempts
ering how
only are


often


atment or
symptoms


The
tducing
ihood
to
and
they
tax
may


even have negative
[1982a, p.127]


Others


seem


to totally


dismiss


the


economic


model


compliance


favor


a pure


fiscal


psychology


approach.


instance,


Dean


et al.


claim


they


... are no
seeing the
automaton
however, t
in ignoran
influence
attitudes
been ratio
interested


t


t
is
ha
ce
on
th
na
ii


concerning
myths about


totally


free


taxpayer as
not one of
t expressed
or not, ar
taxpayers'
at taxpayer
1 economic
n taxpayers


taxation


thal


taxpayers.


from


preconceptions,


a highly rational economic
them...We do believe,
attitudes, whether founded
e a more important
behavior than the
s might have had, had they
men. In short we are more
' ideas and myths
n we are in economists'


[1980,


. 30]


P


have


been


but










laws


become


important


in predicting


the


individual


compliance

extensive


behavior.


review


Jackson


of the


and


research


Million

concerning


[1986]

the e


provide


effects


various


socio-economic,


demographic


and


attitudinal


variables


on compliance.


As such,


only


those


with


relevance


to the


proposed


research


will


be discussed


here.


Some


general


comments


about


the


research


and


methodologies


employed

Various


will


follow.


democraohic


variables


A host


of demographic


variables


have


been


tested


their


effects


on compliance,


with


consistent


findings.


Two


exceptions


are


age


and


sex.


Older


taxpayers


are


relatively


more


compliant


than


their


younger


counterparts


[Tittle,


1980;


Vogel,


1974;


Mason


and


Calvin,


1978;


Clotfelter,


1983],


and


females


are


relatively


more


compliant


than


males


[Tittle,


1980;


Vogel,


1974;


Mason


and


Calvin,


1978]


Perceived


morality


noncompliance


reasonable


to believe


that


the


perceived


seriousness


of tax


noncompliance,


and


the


norms


of behavior


held


taxpayers


will


affect


the


extent


noncompliance


found


the


population.


This


factor


has


been


referred


a number


of different


names


and


operationalized


a host











one


the


earliest


national


surveys


tax


compliance,


Vogel


[1974]


found


that


to 90 percent


of the


respondents


felt


illegal


tax


evasion


was


a serious


problem


because


resulted


increased


taxes


and


reduced


government


revenues.


However,


nearly


the


same


number


defended


the


action


on the


basis


frequency,


gaps


the


collection


process


and


the


heavy


tax


burden.


the


author


put


"The


large


percentage


actually


[cheating]


demonstrates


the


breakdown


the


public


sense


of justice


this


area"


512].


Song


and


Yarbrough


[1978]


attempted


measure


tax


ethics


analyzing


subjects'


responses


seven


questions


regarding


illegal


evasion.


After


converting


the


responses


a 100


point


scale,


the


average


score


was


a 60.4,


interpreted


the


authors


"barely


passing"


While


was


believed


to be useless


to ask


subjects


about


their


own


evasion


behavior,


subjects


' tax


ethics


scores


were


found


be significantly


and


negatively


related


to the


degree


suspicion


that


others


violate


tax


laws.


More


recently,


Yankelovich


et al.


[1984],


a national


survey


of U.S.


taxpayers,


used


a 15 question


measure


reflect


a variety


of endorsements


tax


cheating.


They


found


that


one-third


the


taxpayers


surveyed


strongly


[P










relationship


between


the


perceived


morality


of evasion


and


evasion


behavior


has


been


demonstrated


laboratory


studies


however.


Kaplan


Reckers


[1985],


for


instance,


show


that


the


evasion


intention


of subjects


given


particular


tax


reporting


scenarios


was


significantly


affected


their


personal


beliefs


regarding


the


morality


of evasion.


Effects


of "informal"


sanctions


Closely


related


to tax


ethics


the


idea


that


other


sanction

deviant


besides


behavior.


economic

These sa


penalties


nations


may


include


serve

guilt


to deter

feelings


imposed


the


actor


on himself


and


disapproval


the


actor


relevant


studies


others


indicate


the


that


act


informal


discovered.


sanctions


A number


may


effective,


not


more


effective,


than


formal


sanctions


deterring


tax


evasion.


one


the


earliest


and


most-often


quoted


studies


kind,


Schwartz


and


Orleans


[1967]


tested


see


whether


formal


sanctions


or "appeals


to conscience"


were


more


effective


deterrents


potential


tax


evaders.


Two


groups


were


given


different


questionnaires


between


two


actual


tax


return


filings.


One


questionnaire


prompted


formal


sanction


threats


while


second


prompted


moral


appeals


conscience.


While


the


sanction


group


showed


an increase










appeals


found


to conscience


other


were


researchers


more

such


so.


Similar


as Tittle


results


[1980],


who


are

found


that

they


when

were


sanctions


the


are


strongest


defined


"interpersonal"


determinant


subj ects


sanctions


' evasion


intentions.


Effects


perceived


fairness


Fairness


the


tax


law


can


be described


at least


three


ways:


hori


zontal


equity,


vertical


equity


and


equality


of exchange


with


the


government


benefits


received


taxpayer


terms


servi


ces


are


equitable


given


the


amount


taxes


paid)


Since


these


dimensions


of fairness


are


not


always


examined


individually


however,


they


will


be discussed


together.


As might


be expected,


taxpayers


generally


feel


that


tax


laws


are


unfair


For


instance,


ong


and


Yarbrough


[1978]

behind


found


that taxpayers

taxes, property


ranked

taxes


the

and


federal

state


income


income


tax


taxes


terms


of fairness.


Dean


et al.


[1980]


found


that


their


subjects


felt


the


general


level


tax


was


"much


too


high"


while


said


that


was


at least


"a little


too


high"


Whether


on not


these


feelings


result


in noncompliance,


however,


uncertain.


Dean


et al. [1980]


found


that


people











causes


tax


evasion.


Million


and


Toy


(1988],


however,


used


the


same


variables


to explain


both


evasion


and


perceived


fairness.


They


found


that


they


could


explain


variance


fairness


perceptions,


but


only


of the


variance


evasion


deci


sions.


This


suggests


that


while


perceptions


of fairness


may


be low,


they


may


not


necessarily


result


noncompliance


Lewis


[1979],


Vogel


[1974]


and


Mason


and


Calvin


[1978]


found


no evidence


that


a measure


of fairness


the


taxpayer-government


exchange


was


related


to attitudes


about


evasion


or actual


behavior,


while


Spicer


and


Lundstedt


Finally


[1976]


should


found


be noted


significantly


that


even


related


if perceived


to both.


fairness


was


found


to be related


to either


attitudes


toward


tax


evasion


or self-reported


prior


evasion,


would


still


not


be conclusive


whether


perceptions


regarding


equity


were


actually


causing


evasion


behavior


or were


simply


rationalizations


General


comments


rewarding


fiscal


Psvcholo.v


While


insightful


fiscal


view


psychology


compliance,


offers


two


a different


concerns


and


must


considered


The


first


has


to do


with


the


fact


that


much


the


research


deal


with


the


measurement


of attitudes


rather


than


actual


behavior


. Whil


this


may


sometimes


necessary










made,


any


inferences


from


this


line


of research


will


difficult


to make.


Relatedly,


reliance


on direct


responses


difficult


when


people


are


asked


about


specific


behavior.


Due


the


nature


the


subject,


respondents


may


react


different


ways


the


social


interaction


which


responses


are


given.


Surprisingly,


has


been


shown


that


not


only


will


evaders


not

not


confess,

taken.


but

For


compliers

instance,


may


Elffers


actually


et al.


boast

[1987


about

1 were


actions


able


identify


a group


of actual


evaders


through


the


taxing


authorities


The


Netherlands.


They


found


that


one


group


of attitudinal


variables


called


"personal


instigation"


variables


were


correlated


with


verifiable


evasion,


but


not


with


self-reports


of evasion.


Another


of "personal


constraint


measures"


were


correlated


with


self-reports


but


with


verifiable


behavior.


Self-reports


and


actual


behavior


were


uncorrelated


with


both


evaders


and


compliers


giving


inaccurate


self-reports.


The


present


research


attempts


to examine


only


attitudes


and


perceptions


but


their


direct


Economic


effects


versus


on behavior.


Non-economic


Factors


While


a number


of non-economic


factors


may


affect











stimuli o

moderated


r motivators


economic


of behavior which

variables, their


may


themselves


relative


strength


becomes


an interesting


issue.


Several

economic


studies


and


indirectly


non-economic


test


factors


the


relative


mostly


finding


strength

g economic


factors


to be


weaker


determinants


of evasion


behavior


[Schwartz


and


Orleans,


1967;


Tittle,


1980].


Million


and


Toy


[1988]


survey.


included


They


found


a set

that


variables


a hypothetical


from

tax


both

system


models


comprised


of factors


suggested


fiscal


psychology,


including


reduced


tax


rates


and


a simpler


and


flatter


tax,


preferred


system


emphasizing


economic


deterrents


such


as increased


penalties,


higher


probabilities


of detection


and


higher


tax


rates


to reduce


evasion.


Whil

economic


integrate


these


variables


two.


studies


the


include

same a


While


some


both


analysis


economic

, they


settings


one


and

fail


factor


non-


truly


may


dominate an

alternative


other,


pitting


hypotheses


the


does


two


not


against


give


eithe


each

r its


other


deserved


accord,


nor


does


allow


the


investigation


of potential


interactions


when


individuals


are


faced


with


both,


possibly


conflicting,


motives.


Each


perspective,


however,


does


have


ability


to address


areas


which


are


neglected


the











factors


to influence


individual


behavior.


The


present


research

economic


attempts


theory


to integrate


and


psychological


aspects


of both


research


ass


to create


ical

a more


complete


and


descriptive


model


of the


preparer


Prenarer


Research


In the


previous


section,


some


theoretical


and


empirical


background


of tax


compliance


research


was


discussed.


Preparer


research


can


categorized


along


two


the


same


dimensions


attitudinal


and


thought


work


as extensions


taxpayer


of the


compliance.


economic


this


section,


the


research


directly


related


to professional


preparers


and


the


present


research


will


discussed.


A number


of studies


have


attempted


to examine


the


effects


preparers


on compliance


looking


the


relationship


between


preparer


use


and


reported


liability


[Long


use


and


and


Caudill


identified


, 1987],


audit


the


relationship


adjustments


[IRS,


between


1985;


preparer


Smith


Kinsey,


1987]


and


the


relationship


between


taxpayers


self-


reported


evasion


preparer


use


[Collins


et al.,


1988]


Many


of these


studies


and


their


results


were


discussed


Chapter


While


examining


possible


relationships,


none


research


offers


a model


the


preparer


which


might











research


which


attempts


to explain


the


impact


professional


preparers


may


have


on compliance


advancing


more


comprehensive


models


the


preparer


and


identifying


mechanisms


through


which


influence


may


work.


Such


models


are


a necessary


first


step


to developing


theory


and


being


able


to hypothesize


what


effects


a change


the


status


quo


might


have


on this


relationship.


Economic


Models


the


Preparer


While


the


preparer


could


be considered


the


main


actor


the


tax


reporting


process,


seems


more


appropriate


economic


models


of compliance


to consider


him


as an agent


taxpayer


who


aids


the


taxpayer'


compliance


decision.


As such,


the


principal-agent


framework


seems


especially


suited


to examine


issue.


The


tax


preparer


models


described


below


can


classified


as economic


models


that


they


are


based


on assumptions


of rational,


utility-


maximizing


decision


makers


involving


the


preparer


some


way


as an agent


the


taxpayer.


Reinganum


and


Wilde


[1988]


include


the


taxing


authority,


the


taxpayer


and


the


preparer


their


model.


taxing


responds


authority,


the


whose


reports


goal


taxpayers


to maximize


setting


revenues,


an optimal











rate


based


on the


unreported


income.


He also


faces


costs


preparing


the


return


and


potential


costs


addition


fines


and


penalties


the


return


audited.


The


preparer


seeks


maximize


net


profits


which


are


based


on the


charged


to clients,


the


costs


of preparation


and


the


potential


costs


incurred


a return


prepared


him


audited.


The


preparer


provides


representation


for


taxpayers


before


the


and


therefore


offers


some


protection


against


audit


costs.


It is


shown


that


the


amount


income


reported


will


depend


Because


on who

amount


controls


which


the


would


final


reporting


be reported


decision.


the


taxpayer


increases


with


an increase


in the


perceived


costs


audit,


and


since


the


use


a preparer


can


shield


the


taxpayer

income b


from


eing


these c

reported


costs,


using


so long


a preparer


as the


taxpayer


resulted


controls


less

the


final


final


Since


reporting


reporting


decision.


decision,


preparer'


the


two


profit


preparer


equilibria


will


decrease


controls


are


the


possible.


as the


probability


audit


increases,


and


the


probability


of audit


increases


as reported


income


decreases,


the


amount


of income


reported


could


rise


a preparer


used.


the


other


hand,


the


taxpayer


may


compensate


the


preparer


the


risk


involved











may


charge


a lower


and


report


a higher


amount


income.


The


above


model


deals


explicitly


with


tax


evasion.


However


the


same


principles


could


extended


the


level


of aggressiveness


exhibited


ambiguous


situations.


Ayers


et al.


[1987]


invoke


an agency


perspective


examining


preparers


' interpretations


the


tax


status


of certain


ambiguous


items.


They


ask


preparers


to evaluate


the


deductibility


(taxability)


of certain


expenditures


(receipts)


but


change


context


the


decision


across


subjects.


one


context,


subjects


are


told


that


they


are


making


the


decision


relation


to their


own


tax


return;


a second,


the


decision


being


made


a client


s return;


third,


they


are


asked


to evaluate


relevant


"substantial


authority.


as Reinganum


and


Wilde


suggest,


higher


incomes


are


reported


when


a preparer


control


the


final


reporting


deci


sion


than


when


controlled


the


taxpayer,


preparers


have


the


same


utility


functions


as other


taxpayers


in filing


their


own


returns,


then


seems


that


preparers


would


choose


more


aggressive


positions


on their


own


returns


than


they


would


recommend


to clients.


The


results


reported


Ayers


et al.


support


the


agency










interesting


finding


was


that


both


CPAs


and


non-CPAs


recommended


reporting


positions


consistent


with


their


evaluations


of substantial


authority.


While


this


might


seem


to be a very

were within


predictable


subjects,


result


may


the


more


context


credible


manipulation


the


between-subjects


manipulation


used


Ayers


et al.


and


suggests


that


preparers


do not


see


themselves


as being


overly


aggressive


or unreasonable


advising


their


clients.


course,


the


results


could


also


simply


be due


to the


manipulated


variable


not


being


salient


across


subjects.


Klepper


Mazur


and


Nagin


Nagin


[1987]


[1987],


advance


Klepper


another


et al.


model


[1988]


of the


and


preparer


which


explicitly


deal


with


compliance


and


aggressiveness


separately.


This


might


called


the


enforcer/exploiter


model.


They


describe


the


preparer


as being


similar


investment


advisor


who


informs


taxpayers


of possible


risk-


return


combinations


available


to them,


except


that


the


use


a preparer


may


limit


the


use


of certain


options


which


would


otherwise


available.


this


model,


taxpayers


are


endowed


with


two


types


income--ambiguous


and


unambiguous.


They


face


penalties


underreporting


income


with


penalties


related


underreported


unambiguous


income


being


greater


there










differences


of opinion


and


are


not


subject


as severe


penalty.


reducing


taxpayer


culpability,


preparers


in this


model


serve


to reduce


the


severity


of penalties


to which


taxpayers


are


subject


and


therefore


increase


their


after-tax


income.


However,


preparers


themselves


are


subj ect


penalties


risky


expected


and


must


positions.


taxpayer


be compensated


assumed


penalties


taxpayers


that


the


achieved


reporting


reduction


engaging


a preparer


is greater

incurring


than

the i


the


compensation


increased


risk.


paid


However,


preparers

preparers


for

cannot


reduce


the


penalties


associated


with


unambiguous


items


since


they


are


not


subject


to varying


interpretations.


Preparers


then


can


be expected


to enhance


compliance


unambiguous


items


but


exploit


ambiguous


aspects


of the


law.


The


authors


empirically


test


their


model


constructing


a measure


of ambiguity


each


line


item


the


tax


return.


Using


TCMP


data,


they


find


that


differences


between


the


voluntary


reporting


percentages


of self-prepared


and


paid-preparer


returns


are


related


to the


relative


ambiguity


of each


line


item


with


the


relationship


the


hypothesized


direction.


The


authors


fail


to consider,


however,


that


there


may


be inherent


differences


between


the










differences


the


voluntary


reporting


percentages


may


due


these


inherent


differences


and


not


to the


use


preparers.


Scotchmer


penalties


[1989]


on taxpayers


deals

and


specifically


preparers.


with


Her


the


model


effects


similar


to that


of Reinganum


and


Wilde


except


that


the


taxpayer


unsure


of his


true


tax


liability


and


has


the


option


"guessing"


or hiring


an advisor.


This


decision


based


the


relative


ex ante


expected


utility


of each


option.


She


shows


that


advice


were


costless


and


there


were


preparer


penalties,


the


taxpayer


would


be better


off


using


a preparer


since


the


risk


he faces


would


be reduced.


However,


their


taxpayers


income


are


distribution,


reporting


retaining


or above


a preparer


the


will


mean


result


lower


total


tax


revenues


since


penalties


are


asymmetric


(i.e.,


penalties


are


assessed


underpayments


but


there


are


no "rewards"


paid


taxpayers


overpayments).


to legal


responsibilities


and


professional


codes


ethics,


preparers


do not


cheat


but


are


"prevented


from


taking


entirely


riskless


tax


positions"


their


"duty


act


the


interest


of the


client"


(Scotchmer,


1989


, p.


190]


They


balance


their


legal


obligations


with


market


forces


permitting


underreporting


but


demanding


compensation










compound


penalty


(their


own


penalty


plus


the


additional


compensation


required


preparers)


Second,


they


discourage


the


retention


preparers


due


to the


preparers


higher


cost.


Reduced


preparer


use


also


results


higher


effective


taxes


as discussed


above.


Third,


they


serve


as a


quality


assurance


mechanism.


While


taxpayers


may


be unable


to judge


the


quality


preparers


until


too


late


and


they


are


audited,


penalties


will


serve


to drive


low-quality


preparers


who


are


frequently


penalized


from


the


market.


As discussed


Chapter


, O'Neil


and


Collins


[1989]


found


that


small


-firm


preparers


adhered


the


predictions


these


economic


model


These


preparers


admitted


recommending


response


fewer


aggressive


to increasing


preparer


reporting


penalties.


decisions


Likewi


Million


[1987]


found


that


CPA


subjects


felt


that


preparer


penalties


were


one


the


most


important


factors


influencing


their


recommendations


clients.


However,


laboratory


experiments


Kaplan


et al


. [1988]


and


Duncan


et al. [1989]


both


found


that


manipulating


the


probability


audit


did


not


affect


professional


preparers


' recommended


reporting


positions


regarding


tax


shelter


items.


Previous


Attitudinal


Research1 nLL PrnRra


- a


RF~SC~il r~h


nn PrPn~ rpre










decisions


when


advi


sing


clients.


This


line


of research


predominately


state-descriptive


and


consists


mostly


attitudes

interviews


these


between


cause


and

and


attitudes


perceptions


surveys.


can


economic

preparer


collected


taxpayer


viewed


stimuli

action


various


preparer


compliance


as moderating


and response

which itself


research,


variable


or as the


can


primary


be moderated


economic


factors.


Either


way


, however,


appears


that


the


interaction


of these


variable


which


will


prove


to be


most


important


to the


researcher.


Thi


interaction


will


explored


depth


research


project.


The


relevant


factors


which


have


been


examined


can


classified


demographic


and


motivational


client


characteristics,


attitudes


the


tax


preparer


toward


the


and


responsibilities


to the


tax


system


and


deci


sion


context


features


[Jackson


and


Million,


1987]


While


the


distinction


among


these


categories


may


not


always


be clear,


classification


facilitates


discussion


the


factors.


Client


characteristics


Different


preparer


types


have


been


found


serve


markedly


different


client


bases


[Kinsey,


1987b;


Coyne,


1987]


For


example,


large


public


accounting


firms


serve











salary


income.


With


the


different


client


bases


come


different


client


expectations.


As discussed


earlier,


most


individual


expressed


accuracy


and


'safety


as their


primary


concerns


when


filing


their


tax


returns.


Thi


view


held


most


clients


of commercial


servi


ces


[Jackson


and


Million,


1987;


Coyne,


1987].


These


taxpayers


are


more


likely


see


the


preparer


as an agent


of the


government


rather


than


as an advocate


[Westat,


1980,


55],


and


are


more


likely


to defer


to the


preparer


s judgement


However,


larger


accounting


firms


believe


that


their


clients


expect


degree


tax


savings


and


aggressiveness


from


them.


These


clients


are


willing


pay


the


risk


involved


reporting

preparers


aggressive

to obtain


positions


[Jackson


and

and


may


be willing


Million,


1987


change


Coyne,


1987]


Note


that


these


two


extremes


bear


a similarity


the


two


possible


equilibria


described


Reinganum


and


Wilde


their


from


agency


preparers,


model.

however,


These

rathe


client

r than


attitudes

directly


were

from


obtained

clients,


and

Hite


are

and


actually

McGill


preparers'


[1989],


perceptions


surveying


of client


taxpayers


attitudes.


directly,


suggest


that


even


clients


of large


CPA


firms


may


desire


ess


aggressive

Practitione


advice.

r attitudes










in what


might


sometimes


seen


as an adversarial


confrontation


with


the


government.


This


view


reinforced


when


other


preparers


face-to


also


-face


represent


proceedings


their


with


clients


the


audits


[Coyne,


and


1987;


Kinsey


, 1987a]


76 percent


In a recent


of all


survey,


professionally


preparers


prepared


returns


representing


indicated


that


that


they


have


would


"resolve


a reasonable


questionable


basi


favor


items


the


on a return


client"


[Westat,


1987]


However


, thi


advocacy


view


not


equally


shared


preparers.


Those


serving


low-income


taxpayers


express


greater


government


loyalty


and


do not


see


themselves


as strong


client


advocates


which


is consistent


with


their


clients


' attitudes


toward


them


[Westat,


1980;


Coyne,


1987;


IRS,


1987]


Based


on these


attitudes


and


the


statement


regarding


the


resolution


of questionable


items,


reasonable


to believe


that


decisions


made


preparers


the


compliance


process


may


vary


based


on the


degree


loyalty


felt


toward


the


client.


It should


noted


that


the


apparent


consistency


between


preparers


own


role


prescriptions


and


client


expectations


preparers


discussed


earlier


may


give


rise


an identification


problem.


While


may


be important


determine


which


one


of these


factors,


either


, might


drive











subjects


that


study


were


also


told


that


the


hypothetical


client


believed


the


potential


tax


shelter


deduction


was


questionable.


Given


that


an aggressive


client


himself


questioned


the


legality


of the


deduction,


inappropriateness


may


have


been


highlighted.


That


the


combination


of the


client's


aggressiveness


with


his


concern


over


the


deduction


may


have


provided


the


subj ect


with


diagnostic


evidence


as to the


appropriateness


the


deduction


addition


the


effect


of the


client


attitude.


It might


appear


that


the


preparer


curbed


the


aggressiveness


the


client,


suggesting


may


the


preparer'


attitude


rather


than


the


client's


attitude


which


more


important


determining


the


aggressiveness


decisions.


However,


may


have


been


the


interaction


client


attitudes


and


client


representations


that


caused


the


observed


results.


Million


C 1987


however,


asked


preparers


directly


the


what


client's


influences


attitude


them.


toward


She


risk


reports


the


evidence


single


that


most


important


determinant


of the


aggressiveness


of a position


that


a preparer


takes.


A second


preparer


attitudes


of interest


that


related


preparer


penalties.


It has


been


suggested


that


preparers


who


believe


the


deterrence


value


of sanctions










process


while


resulting


no substantive


change


how


tax


practice


is conducted


[Coyne,


1987]


CPAs


generally


feel


that


such


penalties


are


ineffective


[Milliron


and


Toy,


1988;


Coyne,


1987]


As with


whether


compliance


preparers


taxpayer


differences


levels.


feel


compliance,

attitudes


not,


different


the

cause


then


ultimate


any


question


differences


inconsequential


responsibilities


toward


that


clients


see


themselves


As stated


as filling


earlier,


most


different


preparer


within


research


thi


the


are


system.

a has


been


state-descriptive


interviews


and


surveys.


Those


studies


which


attempt


to test


the


effect


preparers


compliance


have


been


conflicting


and


inconclusive.


Deci


sion


context


This


category


includes


most


the


factors


mentioned


the


economic


models


described


earlier


including


audit


probabilities,


the


' position


on an item,


and


the


degree


of ambiguity


The


most


consistent


finding


that


the


ambiguity

recommended


surrounding


the


an item


will


practitioner


effect


[Beck


the


et al


position


1988;


Klepper


Nagin,


The


1987;


Theory


Scotchmer,


Psychological


1985]


Reactance










the


theory


suggests


that


a person


who


faced


with


threat


or loss


freedom


will


be motivated


to restore


that


freedom.


This


may


be manifested


a variety


ways,


one


of which


to actually


exercise


the


freedom


threatened.


The


theory


attempts


predicts


can


cause


that


people


under


certain


to react


conditions


the


opposite


influence


manner


that


intended


the


influencing


party


so that


compliance


actually


lower


than


before


the


influence


attempt.


Responses


consistent


with


reactance


theory


have


been


observed


empirically


many


times


with


a variety


of subjects


different


situations.


For


example,


threats


examined


have


[e.g


ranged


Brehm


from


and


mere


expressions


Sensenig,


1966]


of another'


the


opinion


passage


restrictive


legislation


[Mazis,


1975;


Mazis,


Settle


and


Leslie,


1973]


and


monetary


penalties


[Heilmann


and


Toffler,


1976].


Freedoms


have


ranged


from


the


measurement


of taste


preferences


[Goldman


and


Wallis,


1979;


Reizenstein,


1971]


evaluations


of detailed


administrative


proposals


relevant


student


subjects


[Petty


and


Cacioppo,


1979;


Biondo


and


Macdonald,


1971]


weighing


legal


evidence


as a juror


[Sue,


Smith


and


Caldwell,


1973;


Wolf


and


Montgomery,


1977].


Those


seen


as potentially


subject


to reactance


arousal


range


from


young


children


[e.g


. Goldberg


and


Lewis,


1969;


Brehm


and











discussing


the


conditions


necessary


arouse


reactance,


issues


will


be addressed.


First,


reactance


may


manifested


ways


other


than


actually


exerci


sing


the


threatened


freedom.


As explained


below,


very


low


level


of reactance


may


result


reaction


at all


. Higher


level


may


lead


to attitude


changes


but


no behavioral


responses.


Extreme


threats


or 1


losses


freedoms


may


so severe


as to prohibit


behavioral


responses


altogether


Even


behavioral


responses


are


warranted,


the


response


may


merely


be in


the


form


of reduced


compliance


compared


a no reactance


setting)


but


with


still


more


compliance


occurring


than


the


absence


threat.


Only


when


the


magnitude


of reactance


is increased


to such


a degree


that


the


reactance


forces


are


stronger


than


compliance


forces


will


there


be a negative


change


away


from


the


behavior


being


advocated.


This


effect


referred


as a boomerang


effect


[Brehm


and


Brehm,


1981]


Secondly


reactance


theory


deal


only


with


the


protection


motivations


of existing


to expand


freedoms.


the


It does


of existing


not


suggest


freedoms,


or how


or why


those


freedoms


are


originally


obtained.


People


are


merely


seen


as motivated


to protect


that


which


they


already


possess.











may


cause


a degree


of reactance),


or when


the


cost


exercising


the


freedom


outweighs


the


benefits


of retaining


Finally,


as suggested


above,


reactance


theory


does


not


discount


the


importance


of coercion


(economic


or otherwise).


It merely


suggests


that


there


are


other


concerns


which


may


more


important


than


the


cost


of not


complying.


Conditions


necessary


arouse


reactance


Not


threats


can


be expected


arouse


reactance


individuals.


Several


conditions


are


necessary


arouse


reactance,


and


can


thought


as either


characteristics


the


freedom


being


threatened


or the


threat


itself.


Characteristics


the


freedom.


Reactance


theory


has


subjective


orientation.


That


the


freedoms


referred


and


their


importance,


operate


from


within


the


individual


point


of view.


Therefore,


a persuasion


attempt


can


only


arouse


possesses


reactance


the


the


threatened


individual


freedom.


aware


For


that


instance,


asses


sing


a prosecutor'


arguments,


those


subjects


explicitly


informed


of their


ability


to judge


the


defendant


innocent


disagreed


more


strongly


with


the


prosecutor


than


those


not


explicitly


informed


[Jones


and


Brehm,


1970;


Hass


Linder,


1972].


Awareness


alone,


however,


may


not











the


over


individual


a potential


believes


outcome"


or she


[Brehm


has


and


a freedom


Brehm,


or control


1981,


Likewise,


the


individual


must


feel


competent


exercise


the


freedom.


It has


been


shown


that


reactance


exhibited


the


individual


feels


inadequate


[Grabitz-


Gniech,


1971],


incompetent


[Wicklund


and


Brehm,


1968;1976],


or overly


controlled


external


forces


[Biondo


and


MacDonald,


1971].


It has


been


suggested


that


frequent


and/or


successful


opportunities


to exercise


an alternative


can


increase


the


actor'


perceived


competence,


and


therefore


increase


potential


reactance


[Regan


and


Brehm,


1972].


Goldman


and


Wallis


[1979],


example,


showed


that


art


maj ors


were


less


likely


persuaded


outside


influences


when


choosing


paintings


than


were


non-art


majors.


Thirdly,


the


alternatives


involved


must


be important.


The


greater


the


importance


of a threatened


freedom,


the


greater


the


amount


of reactance


aroused


[Brehm,


1966:


Mazis,


1975]


Finally,


the


be restricted.


availability


If the


freedom


similar


may


alternatives


exercised


must


means


other


than


the


threatened


alternative,


the


attractiveness


threatened


alternative


should


be unaffected


[Brehm


and


Weinraub,


1977;


Wicklund,


1974].











1981].


The


greater


the


perceived


difficulty,


the


greater


perceived


so small


they


threat.

do not


may


constitute


be possible


real


threats,


forces


and


to be


reactance


will


not


be aroused.


On the


other


hand,


the


forces


may


so great


that


a freedom


seen


as being


practically


eliminated.


If elimination


not


permanent,


reactance


may


still


aroused.


elimination


perceived


as permanent,


individual


no longer


perceives


himself


as having


control


over


outcomes,


there


no longer


a perceived


freedom.


Reactance


will


therefore


cease.


The


more


firmly


the


freedom


originally


individual


held,


to be


the


convinced


greater


the


the


threat


freedom


has


necessary


been


the


eliminated


[Wortman


and


Brehm,


1975].


Threats


are


often


categorized


as personal


impersonal.


Personal


threats


are


those


perceived


intentional


attempts


to persuade.


Impersonal


threats


are


those


which


individual


does


not


see


as directed


towards


himself


so that


no motive


imputed.


As originally


proposed,


reactance


theory


makes


no claims


about


the


motives


of actors,


and


making


causal


attributions


about


the


threat


should


have


no bearing


except


possibly


on the


seriousness


threat.


Personal


threats


are


often


seen


as having


implications


future


freedoms


due


to expected


continued











Increases


the


magnitude


the


threat,


which


expected


arouse


greater


reactance.


However,


intent


to persuade


has


been


found


arouse


reactance,


aside


from


possible


effect


on future


freedoms.


The


perceived


persuasive


intent


may


increase


the


magnitude


the


single


threat,


as the


communicator


longer


seen


as merely


providing


information


but


attempting


to pressure

Grady, 1975]


the


actor


Resistance


Wicklund


to the


et al


demanded


1970;


behavior


Hass

has b


and


een


shown


to be positively


related


to the


power


and


authority


the


communicator


the


threat


[Brehm


and


Brehm,


reported


Brehm


, 1966]


Finally,


reactance


is aroused


the


threat


seen


as illegitimate


or unjustified


[Grabitz-Gniech,


1971].


Consequences


reactance


Reactance

reestablishing


a motivational


or reasserting


state


directed


a threatened


freedom.


However,

direct b


as discussed


behavioral


above,


responses


certain

These


factors

factors


may


include


prohibit


the


strength


of the


threat


and


the


importance


the


freedom.


possible


then


that


reactance


may


be aroused


but


there


will


no behavioral


response.


Even


behavioral


responses


are


appropriate,


the


type











actually in

an increase


crease


the


as a result

threatened


an influence


behavior


attempt.


referred


Such

as a


"boomerang


effect"


Otherwise,


the


result


may


merely


reduced


compliance


as compared


a no-reactance


setting.


While


boomerang


effects


present


the


strongest


case


the


presence


of reactance,


reduced


compliance


also


supports


the


theory.


been


Both


found


boomerang


repeatedly


effects


as support


and

for


reduced


the


compliance


theoretical


have


model.


summary,


Psychological


person


own
and


who


f


behavior
unique b


threatened.
to respond
behavior; (


reasons


(c) changing
alternatives,


favorably


the


alternative.


reactance,


eels
in


then,


competent
a situation


ehavio
This


r,


belief


reactance
performing


counterarguing,


and


benefits


attitudes


in


created


guiding


his


perceives a
or attitude


motivates


the


when


or her


n important
as


the


person


threatened


often


the


toward


particularly
threatened o


[Petty


and


covertly,


restriction;


the


the
and


various


reevaluating
r eliminated


Cacioppo,


1981,


more


159]


Alternate


view


reactance


Reactance


has


also


been


explained


impression


management


terms


[Baumeister


, 1982;


Baer


et al.,


1980;


Heilman


and


Toffler,


1976]


. A


person


may


be motivated


two


self-concept


attempt


please


motives:


to construct


audience


one's


may


to please


ideal


the


self.


be salient


audience


The


the


and


motivation


audience


controls


or disnensaa


nnp l


nrd-on- i a 1


ratrn i-A a nnA ,.r411 a~ A a..aAan4


raon r~ a


t.r ill


an~











appearing


weak


and/or


foolish


complying


and


the


effects


on the


relationship


with


the


threatener


or other


audience.


Construction


the


ideal


self


the


desire


make


one


s public


image


congruent


what


he wants


to be,


to what


sees


as appropriate.


It is


defined


one'


own


values


rather


than


others


and


will


pertain


to the


public


general


rather


than


a specific


audience.


The


Present


Research


Most


research


to date


involving


professional


preparers


can


be classified


as either


economic


or attitudinal


research.


The


former


has


been


primarily


concerned


with


the


effects


preparers


on taxpayer


compliance


and


has


only


recently


begun


to look


the


effects


of other


factors


preparers.


The


latter


has


been


primarily


state-descriptive


has


which


yet


would


to posit


allow


any


comprehensive


hypotheses


concerning


models


proposed


or theories


changes


the


existing


environment.


The


current


research


attempts


to build


a comprehensive


model

than


the


preparer


considering


them


considering


as competing


both


areas.


theories,


Rather


however,


they


will


be integrated


examining


how


psychological


factors


might


moderate


economic


stimuli


Agency


theory


will


be used










generalize.


Previously


identified


characteristics


of the


preparer


are


used


to predict


when


such


moderating


effects


might


be expected.


Finally,


the


model


used


to generate


and


test


hypotheses


concerning


recently


considered


changes


the


environment.















CHAPTER


THEORETICAL


MODEL


AND


HYPOTHESES


Introduction


As discussed


Chapter


, previous


research


has


viewed


preparer


from


two


different


perspectives.


First,


the


preparer


has


been


examined


analytically.


From


an analytical


perspective,


was


considered


to be a rational,


utility


maximizing


economic


agent


the


taxpayer


Secondly,


the


preparer


been


examined


behaviorally.


From


a behavioral


perspective,


was


believed


to be influenced


perceptions


and


the


attitudes


preparer'


towards


role


, the


their


government,


relationship


the


The


taxpayer,


present


research


attempts


build


a model


which


integrates


basic


economic


principles


with


the


more


person-specific


considerations


attitudinal


research.


Unlike


much


prior


research


regarding


preparers


the


proposed


model


also


allows


predictions


changes


regarding


the


reporting


effects of

environment


certain


exogenous


on preparers


' behavior.


A Purely


Economic


Model


the


Preparer


The


principal-agent


framework


as applied


w


tax


tax










principal


(the


taxpayer)


and


an agent


(the


preparer),


both


expected-utility


maximizers.


The


taxpayer'


goal


maximize


his


after-tax


income.


To help


him


thi


, he


may


choose


to contract


with


the


preparer


the


prov:


ision


tax


advi


sing


and


preparation


services


due


to hi


inability


to accurately


file


himself,


increase


after-tax


income,


or some


combination


of both


motives.


The


preparer'


goal


to maximize


his


utility


which


determined


the


net


wage


received


from


the


taxpayer


and


the


monetary


and


nonmonetary


costs


incurred


in providing


servi


ces.


These


costs


can


classified


into


two


types


: (1)


time


and


effort


expended


prepare


the


return


and


advi


the


client,


and


any


additional,


unreimbursed


costs


which


might


incurred


as the


result


an audit


taking


place


and/or


preparer


sanctions


being


assessed.


The


preparer


s utility


then


can


represented


as follows;


-- f(W,


where


W i


the


net


wage


earned


the


preparer


and


the


nonmonetary


costs


.e.


effort)


necessary


earn


the


net


wage.


Utility


assumed


to be increasing


the


wage


and


decreasing


effort.


As explained


below,


the


expected


wage


can


be further


represented











= probability of the
= unreimbursed audit
across returns
= the sanctions impo
is noncompliant.
returns and will d
liability. The sa
either a function
liability, as show
tax. 6


return
costs


sed
This
epen
ncti
of t
n he


being
which


given that
may vary
d on the r
on can be
he under-r
re, or the


audited
re constant

the return
across
reported
thought of
reported
under-paid


The


preparer's


task


can


be described


as consisting


three


main


functions.


The


first


to identify


those


items


which


may


affect


the


taxpayer's


liability.


The


second


settle


any


ambiguity


which


may


exist


as to


the


tax


consequences


any


items.


The


third


take


care


the


clerical


function


of preparing


the


actual


tax


forms.


The


first


two


functions


will


be examined


more


closely


here.


The


following


two


sections


discuss


the


expected


relationships


between


the


variables


the


preceding


equations


and


the


existing


institutional


and


environmental


constraints


which


lead


the


preliminary


hypotheses


which


follow.


See


Appendix


A for


the


formal


derivation


the


hypotheses


that


follow.


6
differ
liabil
intere
consid


Alternately,


the


ence between the
ity. However, s
st here, and sin
ered ambiguous.


sanction


"true"
ince ta
ce the
referen


t-


could


tax liabili
cheating i
ax treatment
e to a true


be a function


ty and
s not
t of m
liabi


the
of p
any
litv


the


reported
primary
items is
has












Acaui


sition


Staae


Recall


preparers


that


is to


the


primary


ensure


the


reason


filing


given


a correct


employing


return


[Yankelovich


et al


1984;


Collins


et al


l988]


Thi


suggests


insufficient


knowledge


or confidence


on the


part


the


taxpayer


to file


himself


the


client


relatively


unfamiliar


with


the


tax


reporting


environment


the


assess


laws


the


themselves,


client


the


s situation


preparer

n and se


must


archin


spend

g for


time

relevant


information


which


might


affect


the


taxpayer


s liability


more


search


However,


on the


sophisticated


preparer

level of


some


part


the


and


may


knowledgeable


be relatively


search


preparer


activity


ensure


taxpayers,


ess


this


important.


always


that


necessary


relevant


information


brought


the


preparer'


attention.


To varying


extent


then,


a certain


amount


of search


effort


is required


preparers.


Note


that


the


amount


effort


spent


preparer


searching


information


may


affect


utility


in two


ways.


First,


assumed


that


increased


effort


will


lead


the


discovery


more


available


deductions


and


credits


of which


the


taxpayer


unaware


. The


potential


reduction


liability,


however


, may


Information










This


would


lead


an increase


the


last


term


of equation


and


therefore


a reduction


the


net


wage


and


utility.


More


directly,


increased


effort


will


increase


preparation


costs,


both


monetary


and


nonmonetary,


again


reducing


preparer


utility.


Accordingly,


the


preparer


may


averse


to exerting


additional


effort


his


search.


Increased


effort


may


also


increase


the


preparer'


expected


utility


through


effect


on fees.


the


extent


fees

time


are

spen


conditioned

t on the re


on effort


turn),


(e.g.,


increased


based

effort


on the

will d


amount


directly


increase


fees.


If fees


are


based


on computed


tax


liabilities,


effort


will


increase


fees


indirectly


via


reduced


tax


liabilities.


course,


institutional


constraints


This


have


possibility


historically


included


prohibited


here


such


contracting


completeness


as well


as to


parallel


the


traditional


agency


solution


conditioning


the


agent'


on outcomes.


This


alternative


discussed


further


below.


To maintain


his


expected


utility,


a preparer


who


faced


with


an increase


either


audit


or sanction


costs


may


consider

reducing

prevents


reducing


the

any


his


chances

decrease


level o

of being


the


f search

subject


wage


effort, thereby

to audit. This

offsetting the










be costly


to the


preparer


However,


even


the


might


be conditioned


observable


on effort,


to the


taxpayer,


preparer


mitigating


s actions


any


are


negative


not

effect


- the


traditional


moral


hazard


problem


The


second


concern


the


preparer


would


the


indirect


effect


decreased


effort


might


have


on fees


through


increased


tax


liability


This


concern


also


should


be somewhat


mitigated.


The


traditional


conditioning


the


solution


agent


the


s fee


agency


directly


problem


on outcomes


prohibited


setting


. Additionally,


due


the


expertise


advantage


that


preparers


have


over


taxpayers,


taxpayer


limited


ability


use


the


computed


liability


even


as a signalling


device.


An increase


preparer


penalties


then


should


reduce


the


benefits


search


activity


and


therefore


lower


the


level


of effort


expended


the


preparer


The


moral


hazard


problem


and


institutional


constraints


on contracting


should


allow


such


a reduction


without


a corresponding


loss


fees.


The


preparer


s expected


wage


then


can


be restated


reflect


the


institutional


constraint


preventing


the


conditioning


E(W)


fees


= F(e)


on reported


- P(e)


liabilities.


+ S(r(e))]


The


first


hypothesis


suggested


the


economic


model


can


r(e) 3











effort


expended


professional


preparers


the


tax


filing


proc


ess.


An implicit


assumption


the


above


discussion


that


a higher


level


of search


effort


will


result


a reduced


tax


liability


and


therefore


an increased


chance


of audit.


This


will


only


true,


however,


the


increased


information


search


results


relatively


more


tax-reducing


items


opposed


to tax-increasing


items)


being


reported.


Such


assumption


justifiable


at least


two


reasons.


The


first


the


extent


third


party


reporting


taxable


income


payers


the


are


current


subject


system


to specific


An increasing


reporting


number


requirements


wages,


interest,


dividends,


commiss


ions,


capital


gains,


pensions,


etc


while


relatively


few


requirements


exist


informing

Therefore,


taxpayers

a taxpayer


of available


can


deductions


be expected


and


credits.


to be relatively


more


informed


of hi


income


sources


than


available


deduction


credits


when


definitions


engages


of income


a preparer.


and


deductions


Secondly,


reinforce


the


thi


very


point.


While


income


is not


defined


the


Internal


Revenue


Code,


the


concept


income


considered


-inclusive.


Any


receipt


income


unl


from


ess


whatever


specifically


source


derived


excluded


the


considered

Code.


Conversely.


only


those


items


snecificallv


identi fi ds


n~r










aware


of specific


deductions


and


credits


available


them,


and


would


need


to rely


on a professional


tax


preparer


identify


the


available


deduction.


is possible,


however,


that


a taxpayer


may


unaware


of the


existence


an item


of income,


and


that


increased


search


effort


on the


part


the


preparer


may


help


identify


the


tax-increasing


item.


For


instance,


through


faulty


information


obtained


from


peers,


or by


an incorrect


assumption,


a taxpayer


may


believe


that


a prize


not


taxable.


The


preparer,


searching,


may


identify


the


prize


and


inform


the


taxpayer


taxable


nature,


thereby


increasing


the


reported


liability


If increased


search


effort


were


expected


to result


relatively


more


income


items


being


reported


than


deductions,


an increase


potential


sanctions


may


have


just


the


opposite


effect


that


predicted


above


More


preci


sely,


expectations


could


be captured


a priori,


the


model


would


have


different


predictions


regarding


the


information


search


tax-


increasing


and


tax-reducing


items.


H2,.


An increase


will


result


preparer
a decrease


sanctions


and


(increase)


penalties


the


level


of effort
increasei


the


tax


f


expended


ng) i
iling


teams


identifying
professional


tax-reducing


preparers


process


Finally,


should


be noted


that


the


information


search










subsequently


to be


taken,


of which


may


be classified


legal


tax


research


The


amount


of legal


research


conducted


the p

other


reparer


an interesting


researchers


Marcha


question,

nt et al.


and


addressed


S1989]


The


effect


that


increased


penalties


have


on thi


activity


may


the


same


as their


effect


on information


acquisition.


In fact,


may


be argued


that


the


time


spent


on legal


research


may


increase.


However,


thi


a different


issue


from


that


which


being


examined


here.


Thi


issue


has


potentially


different


consequences


the


taxpayer


and


preparer,


and


should


addressed


separately


Evaluation


Staae


Once


potentially


relevant


information


obtained


the


preparer,


an evaluation


must


made


as to


consequences.


As proposed


Klepper


and


Nagin


[1987],


there


is little


latitude


the


evaluation


unambiguous


items


income


and/or


deduction.


In these


cases,


the


relative


certainty


economic


penalties


for


the


preparer


and/or


taxpayer


consistent


with


compels


that


such


items


preferred


to be handled


the


IRS.


in a manner


However,


discussed


previously,


there


are


innumerable


items


in the


tax


laws


and


an infinite


set


situations


which


the


proper










affect


the


evaluations


of the


tax


status


of these


ambiguous


items.


Recall


the


preparer'


utility


model


described


above


Aggressiveness


could


be added


as an additional


argument


the


model


with


the


effects


on the


expected


net


wage


being


similar


to those


encountered


with


effort


except


that


there


no direct


increase


preparation


costs


resulting


from


the


preparer


being


aggressive.


The


revised


model


would


then


appear


as follows.


E(W)


= F(e,g)


- P(e)


r(e,g)][b


+ S(r(


e,g))]


where


described


= aggres


before.


siveness


Like


and


effort,


other


taxpayers


variable


are


are


assumed


demand


a certain


amount


of aggressiveness


from


preparers.


Following


the


above


arguments


related


to effort,


increased


aggressiveness


may


reduce


the


preparer


s wage


increasing


potential


sanction


costs.


Likewi


increasing


aggressiveness


may


increase


fees.


Since


aggressiveness


does


not


directly


increase


preparation


costs,


however,


increasing


aggressiveness


may


be 1


ess


costly


than


increasing


search


effort.


To maintain


his


utility


level,


a preparer


may


respond


to increased


sanctions


reducing


aggressiveness


the











same


manner


as effort,


with


the


same


consequences.


While


utility

moral


might


hazard


be reduced


problem


through


still


a lowering


present


of fees,


to mitigate


the


this


possibility


The


model


would


then


predict


that


increased


sanctions


would


result


less


aggressiveness


on the


part


preparers.


The


third


hypothesis


suggested


a purely


economic


model


can


be stated


as follows.


H3*.


Increase


aggressive p
professional


sanctions


positions


tax


being


will


result


recommended


fewer
by


preparers.


summary,


a purely


economic


model


would


predict


just


what


some


preparers


perceived


to be


the


result


the


proposed


Circular


es.


They


believe


that


stricter


sanctions


would


practitioner


"adversely


s duty


interfere


of loyalty


to the


with


a tax


client


encouraging


the


tax


practitioner


to act


his


own


interest,


not


the


clients


' interest"


[New


York


State


Bar


Association,


1987]


A Psvcholoaical/Behavioral


View


the


Preparer


The


above


model


assumes


that


the


preparer


rational,


utility-maximi


agent


motivated


solely


economic


factors.


Deci


sions


regarding


effort


levels


and


aggressiveness


are


determined


evaluating


their


effect


profits.


However,


just


as taxpayers


may


be motivated











factors


will


now


be discussed


leading


to a proposed


economic/psychological


framework


of the


preparer


Psvcholoaical


Reactance


The


theory


of psychological


reactance


was


discussed


Chapter


Applying


those


concepts


to increased


preparer


penalties,


the


penalties


can


be described


as a threat


which


being


made


restrict


the


behavior


of professional


preparers.


Specifically


the


increased


preparer


penalties


limit


can


the


range


suggest


recommendation


clients.


While


positions


a purely


which


economic


preparers


model


suggests


that


such


a threat


should


be effective,


psychological


reactance


would


suggest


that,


certain


conditions


apply,


preparers


may


actually


attempt


increase


the


threatened


aggressive


behavior


positions


and


than


possibly


they


would


recommend


the


even


absence


more


the


penalties


The


next


section


will


review


clients


expectations


of professional


preparers


and


the


preparers


own


role


prescriptions


that


were


originally


discussed


Chapter


to determine


the


conditions


necessary


arouse


reactance


are


present.


Reactance


and


Prof


ional


PreDarers


ess










the


threat


itself.


Some


these


conditions


will


examined


more


specifically


within


the


present


context.


Importance


the


threatened


behavior


Client


attitudes


and


expectations


regarding


the


preparer


were


discussed


above.


Recall


that


many


taxpayers


have


expressed


that


accuracy


and


safety


were


their


primary


concerns


when


filing


their


returns


[Yankelovich


et al


1984;


IRS,


1988;


Collins


et al.,


1988].


However,


view


not


shared


taxpayers.


has


been


shown


that


preparers


individual


situations


employed


with


large


more


[Jackson


CPA


complicated


and


Million,


firms


serve


financial

1987]. T


wealthier


and


these


tax

preparers


indicate


that


they


believe


their


clients


are


accustomed


taking


risks.


They


believe


that


clients


who


are


accustomed


to taking


risks


demand


a certain


amount


aggressiveness


and


tax


savings


from


them,


and


are


more


likely


to judge


CPA


the


amount


of perceived


tax


savings


[Coyne,


1987]


They


may


also


see


aggressiveness


as being


consistent


with


other


values


norms


observed


throughout


society


[Bernsley,


1989]


Preparers


employed


commercial


tax


preparation


services


however


see


their


clients


as much


more


conservative.

legitimate, s


Some


straightt


are


perceived


forward


as willing


deduction


to which


to give


they


even


were










CPAs


than


to clients


of commercial


tax


preparation


servi


ces


who


are


CPAs.


Many


preparers


see


themselves


as client


advocates


[Westat,


1980;


Kinsey,


1987a;


Coyne,


1987]


They


represent


their


clients


what


might


seen


as an adversarial


confrontation


with


the


government


[Kinsey,


1987b]


and


believe


appropriate


to settle


any


questionable


items


favor


their


client


[Westat,


1987]


Those


serving


lower-income


taxpayers,


however,


express


greater


government


loyalty


and


do not


see


themselves


as strong


client


advocates,


which


is consistent


with


their


clients


' attitudes


towards


them


[Westat,


1980;


Coyne,


1987;


IRS,


1987]


Again,


when


considering


only


client


expectations


but


preparers


views


of themselves,


appears


that


the


threatened


behavior


may


more


important


to CPAs


than


to commercial


preparers.


Recall


that


concerns


regarding


others


' opinions


(pleasing


the


audience)


those


concerning


one'


view


oneself


(constructing


the


ideal


self),


are


two


self-


presentational


motives


behind


reactance.


seems


that


client


expectations


and


preparer


self-perceptions


are


both


consistent


with


the


self-presentational


view


of reactance,


least


CPAs.


Perceptions


the


threat


illegitimate


or uniustified










perceived


legitimacy


the


sanctions


imposed


to reinforce


the


role


as seen


the


administration.


The


belief


the


that


the


preparer


has


begun


to overstep


his


bounds


and


may


be a contributing


factor


the


compliance


problem


was


previously


discussed.


While


the


contends


that


aggressive


preparers


exploit


ambiguity


the


law


and


may


refer


to this


as "noncompliance"


preparers


generally


contend


that


a certain


amount


of aggressiveness


should


considered


legal


tax


planning


and


represent


the


tax


avoidance


which


they


are


hired.


They


see


nothing


wrong


with


this


form


aggres


siveness.


Many


preparers


see


sanctions


as an attempt


to prohibit


them


from


functioning


their


perceived


role


the


tax


system.


They


believe


they


are


being


encouraged


through


increased sanction

a government agent


threats

[Coyne,


serve


1987]


more


Most


in

of


the

the


capacity

tax


practitioners


interviewed


Coyne


"strongly


felt


that


this


not


their


appropriate


role


the


tax


system


preparer


with


a commercial


tax


preparation


service


expressed


this


viewpoint


however


Commercial


preparers


may


see


their


loyalties


as more


with


the


government


[Westat,


1980;


Coyne,


1987;


IRS,


1987]


Similarly,


CPAs


may


see


themselves


as overly











the


circumstances.


Some


commercial


preparers,


on the


other


hand,


feel


that


penalties


are


necessary


to curtail


the


actions


of unscrupulous


practitioners


who


are


seen


overreaching


seems


that


some


CPAs


may


see


the


sanctions


as less


legitimate


ess


justified


than


commercial


preparers.


Feeling


(in adeauacv


and


control


CPAs


generally


feel


more


negatively


toward


the


than


other


preparers


who


have


less


exposure.


They


see


themselves


the


awkward


position


of possessing


greater


social


status


than


representatives


yet


having


ess


power


[Kinsey,


1987a]


They


represent


their


clients


what


may


seen


an adversarial


confrontation.


That


forum


peculiar,


Kinsey


points


out,


that


one


of the


adversari


the


admini


strative


proceeding


also


has


the


legal


authority


make


deci


sons


and


dole


penalti


es.


Yielding


authority


that


situation


may


be interpreted


acknowledging


a status


that


inferior


to the


threatener


[Heilman


and


Garner,


1975;


Heilman


and


Toffler,


1976]


Reactance


than


may


seen


CPAs


as a refusal


accept


thi


inferior


status.


An Inteqrrated


Model


of the


Preparer











economic


theory.


As a professional,


the


ability


to maintain


control


over


one


s own


activities


and


exercise


one


expert

without


can


j udgement

outside


and


to successfully


influence,


incorporated


the


may


apply


be important


economic


model


that


expertise


These


described


factors

above b


adding


an additional


argument


the


preparer


s utility


function


as follows.


= f(W,


where


P represents


those


non-monetary


factors


which,


threatened,


might


produce


reactance.


Hvyotheses


appears,


conditions


based


necessary


on the


arouse


preceding


reactance


discussion,


might


that


be stronger


some


preparers


than


others.


Those


who


serve


higher


income


taxpayers


may


generally


see


increased


threats


unjustified


and


have


clients


to whom


the


threatened


behavior


important.


They


may


view


the


threatened


behavior


important


to their


self-perceived


role,


and


see


compliance


with


the


threat


as a loss


of autonomy


and


self-esteem.


For


group


preparers,


a purely


economic


model


may


not


descriptive.


While


the


hypotheses


previously


offered


may











These


hypotheses


may


be viewed


as enhancements


refinements


those


suggested


the


economic


model


discussed


above


that


each


hypothesis


includes


the


different


effects


that


penalties


are


expected


to have


on the


different


types


preparers.


For


commercial


preparers


the


predictions


economic


are


model.


the


same


CPAs,


as those


however,


suggested


are


predicted


a purely

to react


oppositely


It i


these


hypotheses,


stated


the


alternate


form,


that


will


be the


focus


the


tests


that


follow.


HIa.


An increase


will


result


of search


(CPAs)


effor


the


t


preparer pe
a decrease
t expended
ax filing p


nalties


and


(increase) i
v commercial


sanctions


the


level


preparers


process.


H2a.


An increase


will


result


of effort


items
filing


preparer
a decrease


expended
commercial


sanctions


and


(increase)


identifying


preparers


penalties


the


level


tax-reducing


(CPAs)


the


tax


process.


H2b .


An increase


will
of e


result


effort


items
filing


preparer sa
an increase


expended i
commercial


nations


and


(decrease)


identifying


preparers


penalty
in the


tax-increa


(CPAs)


the


process.


ies
level
sing
tax


H3a*


An increase


will
being


result


preparer


fewer


recommended


sanctions


(more)


aggre


commercial


(CPAs)


and
ssive


tax


penalties
positions


preparers


It i


role


also


prescription


hypothe

ns are


sized

learned


that c

d over


lient


expectations


a preparer'


and


career


and


should


be stronger


the


longer


has


practiced.


If client










preparers.


Consistent


with


model,


Helleloid


[1989]


found


CPAs


with


more


experience


to be


relatively


more


aggressive


when


presented


with


ambiguous


client


documentation


expenses


Similarly,


Kaplan


et al


. [1988]


McGill


[1990]


found


that


experienced


Big


Six


preparers


were


less


affected


economic


variables


and


tended


to be


more


aggressive


than


their


less


experienced


counterparts.


An increase


will
level


cause


in preparer
differential


sanctions
effects a


and


cross


penalties
experience


Summary


A predictive


model


the


professional


preparer


presented


here


which


integrates


both


economic


principles


and


attitudinal


factors


concerning


the


relationships


among


preparer


, the


taxpayer


and


the


taxing


authorities.


First,


preparer'


role


as an economic


agent


described


and


effects


of sanction


threats


on that


role


are


examined.


When


faced


with


the


threat


of economic


sanctions,


the


preparer


would


be expected


to alter


his


behavior


to comply


with


the


threat


to the


extent


net


wage


will


be affected.


If the


other


activities


might


also


trigger


the


sanctions,


these


activity


too


will


be affected.


A










The


preparer


also


influenced


non-economic


factors.


Over


time


and


through


exposure


to other


professionals


and


to clients,


role


prescriptions


and


client


expectations


are


inconsistently


internalized.


with


the


The


intent


preparer


the


may


threat


react


a sanction


threat

role p


results


prescriptions


serious


and


potential


client


conflicts


expectations.


with

First,


those


other


means


pursue


exist


these


to achieve


means.


his


goals,


Secondly


, he


then


may


the


resist


preparer


the


will


influence


attempt


and


possibly


increase


the


threatened


behavior.


The


model


illustrated


Figure


3-1.


The


purpose


of the


model


not


to view


economic


and


attitudinal


perspectives


as competing


hypotheses.


Rather,


the


purpose


to identify


reasons


why


and


conditions


when


economic


stimuli


may


produce


the


intended


results.


Certain


role


prescriptions


client


expectations


are


seen


as moderating


variables


which,


present,


will


prevent


the


economic


stimuli


from


being


effective.


In Chapter


a research


design


and


methodology


will


presented


to test


the


predictions


the


model


developed


here.


The


operationalization


the


constructs


believed


influence


preparers


will


be considered


and


an experimental


task


into


which


those


constructs


can


be introduced

































Can some other
action trigger
sanction?

Yes


Take steps to
reduce expos-
ure.




Comply with
sanction -
reduce aggres-
siveness.


influence
. economic
made?


attempt
sanction)


Yes

r


Yes


No


Decision


Is there other
way to reduce
liability?

Yes


Use other means
to reduce
liability.


React
tion
aggre


to sanc-
- increase
ssiveness.


FIGURE


Preparer's


Aggressive Recommendation
A Comprehensive Model


Decision


Made


Does influence attempt
arouse reactance?


Preparer Type
Client Factors
Role Perceptions


Experience


1~















CHAPTER


RESEARCH


DESIGN


AND


METHODOLOGY


Introduction


In Chapter


a descriptive


model


the


preparer


was


developed


which


integrated


both


economic


and


psychological


variable


es.


In this


chapter


a method


described


examining


a sample


interest


to determine


there


basi


the


hypotheses


offered


Chapter


An empirical


test


then


designed


to test


the


predictive


ability


of that


model


which


First,


describes


the


the


general


research


constructs


design


interest


presented


and


the


hypothesized


results.


Next,


the


measurement


the


constructs


within


an experimental


context


discussed


and


simulation


task


designed


into


which


the


factors


believed


to influence


preparer'


behavior


can


be introduced


and


resultant


behavior


captured


and


measured.


The


subjects'


ratings


of task


realism


are


also


presented


thi


section.


Preliminary


Analvsi


The


hypotheses


developed


Chapter


depend


heavily


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The


first


step


the


present


research


to determine


professional


preparers


possess


the


attitudes


which


have


been


previously


described


as necessary


arousing


reactance.


While


these


attitudes


have


been


suggested


interviews


with


preparers,


there


has


been


no attempt


see


they


are


attitudes


consistently


can


held


be identified


larger


as being


held


groups.


these


consistently,


then


a test


will


performed


to determine


they


differ


significantly


across


different


types


preparers.


If the


attributes


are


present


and


differ


across


preparer


types


in a


manner


consistent


with


model


described


Chapter


, and


the


subsequent


empirical


tests


support


the


model,


there


further


evidence


that


the


results


of the


subsequent


tests


are


attributable


to the


variables


suggested


the


model


and


competing


Factor


hypotheses.


Analysis


Factor


analysis


an exploratory


technique


designed


give


an impression


of the


interrelationships


which


may


exist


data


and


to identify


characteristic


which


may


be helpful


summarizing


them


[Afifi


and


Clark,


1984]


The


primary


goal


factor


analyst


to obtain


easily


interpretable


factors


which


convey


information


about


the


original










examined


empirically.


In the


present


case,


hypotheses


have


already


been


developed


based


on factors


suggested


previous

if the a


research.


attitudes


Factor


identified


analysis


will


surveys


be performed


and


interviews


see


exist


the


sample


used.


Subjects


were


given


a series


of debriefing


questions


designed


to capture


their


attitudes


concerning


the


tax


laws,


administration


the


laws,


their


clients,


and


their


role


the


tax


compliance


process.


The


responses


these


questions


were


variance


used


present


to extract

in those


common


factors


responses.


Each


which


explain


response


can


represented


as a linear


combination


of a set


common


factors


and


a residual


which


considered


to be a factor


unique


that


response.


Breaking


each


response


into


these


two


parts


also


breaks


the


variance


of the


response


into


two


parts:


that


which


attributable


the


common


factors,


the


communality,


unique


factor.


and


Each


that


factor


which


can


attributable


then


the


interpreted


examining


response


partial


variable,


correlation


or the


between


coefficient


itself


the


and


factor


the


the


following


factor


model


= d~iFi


where:


pth


response


variable,


F2,


* *Fm


are


the


+ dp2F2











variables


which


load


highly


on that


factor


or that


correlate


highly


with


The fa

extraction,


because

factors


Lctors


identified


however,


a response

or because


may


variable

a factor


the


be difficult


loads

has a


initial


factor


to interpret


highly


number


either


on a number


response


variables


that


load


highly


on it.


In such


a case,


these


factors


can


be rotated


so that


some


loadings


are


very


high


and


rest


are


very


low.


Similarly,


the


factors


can


rotated


so that


each


response


variable


loads


highly


on only


one


factor.


The


rotation


achieved


finding


a new


axes


to represent


the


factors.


These


new


axes


through


the


The


clusters


most


of points


common


representing


rotation,


the


varimax


response


procedure,


variables.


further


restricts


the


axes


to being


orthogonal.


For


a discussion


this


approach,


see


Harmon


[1976]


or Afifi


and


Azen


[1979].


While


the


total


variance


explained


the


rotated


factors


the


same


as that


explained


the


initial


factors,


interpretability


of these


factors


may


enhanced.


Finally,


factor


scores


can


be assigned


to individuals.


This


accomplished


combining


each


individual


standardized


response


variables


and


the


factor


loadings.


These


factor


scores


can


then


be used


as independent












Discriminant


Analysis


The


factor


analysis


designed


to identify


and


interpret

interest.


attitude

However,


patterns


does


which

not d


exist


the


determine


sample


these


attitudes


differ


across


preparer


types.


Discriminant


analysis


techniques


are


used


to either


class


sify


individuals


into


one


of a set


of alternative


groups


or to


identify


which


variable


contribute


to making


the


classification


[Afifi


and


Clark,


1984]


The


groups


are


known


advance


and


are


distinct.


The


technique


can


be used


either


predictive


or descriptive


purpose


es.


In the


present


case,


discriminant


analysis


techniques


will


be used


to determine


the


factors


identified


the


factor


analysis


can


used


to classify


preparers


into


the


previously


identified


groups


.e.


CPAs


and


commercial


preparers)


The


factors


are


expected


to be consistent


within


groups


and


to differ


across


groups.


In making


the


classifications,


a discriminant


function


developed


which


makes


no distributional


assumptions


about


the


underlying


populations.


The


variables


themselves,


however,


are


assumed


to have


a multivariate


normal


distribution


and


covariance


matrix


assumed


to be


the


same


both











groups


and


differ


across


groups


and


therefore


contribute


ass


ifying


the


sample


into


preparer


types.


Experimental


Design


The


hypotheses


derived


Chapter


were


tested


two


separate


designed


phases


the


to address


the


same


experiment


effect


One


of penalty


phase


threats


on effort


level


of professional


preparers


while


the


other


addresses


the


effect


of penalty


threats


on the


preparers'


level


aggressiveness.


The


dependent


variables


the


two


pha


ses


are


the


amount


of search


effort


expended


professional


preparers


in a tax


preparation


task


and


the


aggressiveness


the


positions


recommended


ambiguous


situations,


respectively.


Penalties


are


manipulated


across


preparers


of each


subject


with


type


respect


(described


to each


below)


phase


A separate


of the


analysis


experiment


done


effort


and


aggressiveness),


with


each


one


being


(level


penalty)


(type


of preparer)


fully


crossed


analysis


variance


(ANOVA)


The


experimental


design


and


hypothesized


results


are


illustrated


Figure











MethodoloQv


Experimental


Task


Subjects


were


given


a brief


sketch


of a taxpayer


and


asked


to compute


the


related


tax


liability.


The


relevant


information


was


contained


three


parts


interactive


computer


program


developed


Brucks


[1988].


The


first


part


included


directions


on how


to interact


with


computer,


a description


the


facts


necessary


the


subjects


to conduct


the


experiment


including


the


penalty


manipulation


(described


below)


a description


of the


hypothetical


taxpayer.


The


effort


second


phase


part

the


the


experime:


instrument c

nt. In this


orresponded


part,


to the


taxpayer-


specific


information


was


provided


to subjects.


The


information


many


was


accounting


formatted


firms


similar


to their


to a tax


clients


organizer


the


sent


beginning


the


tax


season


to aid


them


gathering


relevant


data.


The


organizer


contained


suggestions


regarding


a number


possible


items


of income,


deductions


and


credits


that


may


have


applied


to the


hypothetical


taxpayer'


situation


but


did


not


necessarily


refer


to them


explicitly.


The


subject


was


able


to request


specific


additional


information


i










information


was


provided.


If not,


the


subject


was


informed


that


there


was


information


available.


All


the


information


contained


the


organic


zer


was


relatively


was


requested,


unambiguous


nature.


or otherwi


That


presented


s, if

to the


the


information


subject,


the


tax


treatment


the


item


or the


related


facts


were


not


open


to interpretation.


The


third


part


of the


instrument


described


five


matters


with


ambiguous


tax


consequences.


Thi


part


the


instrument


was


intended


to correspond


with


the


aggressiveness


phase


the


experiment.


In order


complete


the


return,


the


subject


needed


to make


a deci


sion


to how


each


matter


should


be reported.


Subjects


were


given


a brief


summary


of the


relevant


tax


laws


relating


items,


and


specifically


told


that


there


was


additional


relevant


legal


or factual


information


to be


obtained.


Determining


the


tax


liability


then


required


the


subj ect


to search


and


information


uncover


phase


one


the


as well


relevant,


as choosing


unambiguous


a settlement


the


ambiguous


issues


phase


two.


The


computer


program


used


designed


to capture


and


record


subjects


' search


strategies,


the


number


and


nature


of the


specific


inquiries