Implications of tax audit risk, consequences, aggressive behavior and ethics for compliance

Abstract

Purpose This study investigates whether consideration of future consequences (CFC), Machiavellianism (MACH) and the perceived role of ethics and social responsibility (PRESOR) enhance understanding of the impact of tax audit risk on compliance. Design/methodology/approach A between-subjects experiment is conducted to test the hypotheses. A hypothetical tax audit case (or lack thereof) is used to create a high (low) perceived tax audit risk. The usable responses of 144 participants representing the general taxpayer population are analyzed. Findings The results suggest that taxpayers with lower CFC, MACH or PRESOR scores are more compliant when tax audit risk is high than low. In contrast, taxpayers with higher CFC, MACH or PRESOR scores are indifferent toward high or low tax audit risk. Research limitations/implications Research can elicit consideration of future consequences of being detected for taxpayers with lower CFC scores to increase compliance. Additionally, increased saliency of tax audit risk and detection of noncompliance in a tax audit can enhance the compliance of taxpayers with lower MACH scores. Dissemination of information via social media on the value of ethical and social responsibility of compliance can also increase the compliance of taxpayers with higher PRESOR scores. Practical implications This study helps researchers and the tax authority better understand the complexities of compliance and the ethical dilemmas that taxpayers face, especially when a considerable amount of cash income is involved. To deter underreporting of cash income, the tax authority can use social media to explain how data analytics tools can facilitate the analysis and integration of multiple sources of a taxpayer’s income and expenses. Originality/value Prior studies present participants with objective tax audit rates, such as 5, 25 and 30 (Cullis et al., 2006; Maciejovsky et al., 2007; Trivedi et al., 2003) or 50% (Maciejovsky et al., 2012) to investigate tax compliance. However, the actual tax audit rate is very low (about 1%) due to the limited resources of the tax authority (Alm and Torgler, 2011). To attenuate perceptions of unrealistic tax audit rates, this study operationalizes high (low) tax audit risk via a hypothetical tax audit case (or lack thereof) to examine the impact of tax audit risk on compliance.

Cash and the Hidden Economy: Experimental Evidence on Fighting Tax Evasion in Small Business Transactions

“…That is, the higher the probability of audit, the less likely a taxpayer will evade taxes (Alm & Malézieux, 2021). Evidence from lab experiments indicates that a higher audit rate leads to more compliance (Alm, 1999;Blackwell, 2010;Torgler, 2002), with one study indicating that audit rates are successful in improving compliance in cash transactions (Chan & Song, 2021). Additional evidence has suggested that higher auditing rates induce probability neglect, where the individual receives the information, overweighs the probability of an audit occurring, and is subsequently more compliant (Bérgolo et al, 2017).…”

The Effect of Tax Penalty, Probability of Audit and Fair Treatment on Permanent Voluntary Disclosure: Tax Professionals’ Perspective

“…Khasanah et al (2019) also supported that taxpayers' decisions to voluntarily comply are significantly affected by the probability of being audited, although Oestreich (2017) found no evidence of such a relationship. Chan and Song (2021) asserted that the fear of possible consequences or anxiety among taxpayers may explain the improved compliance amongst those with high tax audit risk. In other words, taxpayers are less likely to evade tax when the probability of an audit is higher (Alm & Malézieux, 2021).…”

Determining Factors that Affect Tax Professional’s Ethics Intention

“…These factors can be interpreted by the presence of social pressure or expectations that individuals have from their social group to do or not perform certain behaviors (Ajzen, 1985). When tax professionals believe in their attitude or view that ethical leadership in themselves has an impact on the public interest, that belief embodies the intention to behave ethically (Al-Zaqeba & Al-Rashdan, 2020;Chan & Song, 2021;Low et al, 2017;Malmström & Öqvist, 2018;Payne et al, 2019). Simply examining how subjective norms affect intention is not enough for this study.…”