An Investigation of the Impact of Preparer Penalty Provisions on Tax Preparer Aggressiveness

Abstract

The Small Business Work Opportunity Act of 2007 enacted significant changes in tax return preparer penalties. This study uses an experiment to examine the effectiveness of the revised preparer penalty provisions at reducing tax preparer aggressiveness. Specifically, we examine the impact of two significant components of the changes to the preparer penalty provisions—penalty amount and reporting standard required to avoid penalty imposition—on tax preparers' recommendation and signing decisions involving an aggressive tax position. We find that the increase in penalty amount has no effect on tax preparers' recommendation decisions, but does affect their signing decisions. A higher reporting standard significantly reduces both tax preparers' willingness to recommend an aggressive position and to sign a tax return containing an aggressive position. Data Availability: Data used in this study are available from the first author upon request.

The Influence of Domain Knowledge and Client’s Reporting Strategy on Tax Consultant’s Decision

“…Some researchers have previously suggested that tax recommendations and willingness to sign client tax returns as separate and distinct decisions [35]. A tax consultant can recommend an aggressive tax position without having to sign the client tax return, or sign a client tax return that contains an aggressive tax position that is not recommended by the consultant [1] This study examines the influence of domain knowledge on tax recommendations and the willingness to sign client tax returns in situations of different client reporting strategies (neutral vs. aggressive). The results show that when the client adopts a neutral reporting strategy, there is no significant difference in the recommendations given between consultants with less domain knowledge and consultants who possess more domain knowledge.…”

“…Providing recommendations for certain tax positions involves several tasks for consultants such as examining the facts and conditions of the client and related to tax laws to evaluate the benefits and costs associated with the tax position taken, and then recommending appropriate tax positions with the best interest of the client. On the other hand, a choice decision, an action to choose between signing or not the client's tax return [1]. identify several different things between judgment decision making and choice decisions, namely the use of different cognitive processes [11].…”

“…Found that penalties for tax consultants had different effects between recommendation decisions and willingness to sign client tax returns [1]. Both found that penalties were more effective in influencing the decision to sign the tax return.…”

“…Previous research (such as Stephenson, 2010 and Devos, 2012) shows that tax consultants participate in determining taxpayer compliance decisions. [1] state that, governments in many countries have begun to direct efforts to reduce fiscal gaps and increase tax compliance through monitoring tax consultants. The same conditions occur in Indonesia.…”

“…Some previous researchers suggested that tax consultants view tax recommendations and willingness to sign client tax returns as separate and distinct decisions [2]. A tax consultant can recommend an aggressive tax position without having to sign the client"s tax return, or sign a client"s tax return that contains an aggressive tax position that is not recommended by the consultant [1]. According to the taxation law, consultants can act as representatives of taxpayers or commonly refer to as tax authorities.…”