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

Abstract

ABSTRACTThe 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.