The Impact of Multiple Tax Returns on Tax Compliance Behavior

Abstract

ABSTRACTTax compliance research has used prospect theory to describe taxpayers' behavior finding that taxpayers with pending payments due (loss frame) report more aggressively than taxpayers with pending refunds (gain frame). Since taxpayers often file multiple returns and prior research has only examined the impact of single returns on compliance behavior, we extend the research by incorporating the element of taxpayers filing multiple returns (state and federal returns). This study compares taxpayers' behavior in a single net refund or single net payment due condition versus a multiple refund (larger refund and smaller payment due) or multiple payments due condition (larger payment due and smaller refund). Using mental accounting theory, the results show that taxpayers' aggressiveness shifts up in a refund position when the refund is presented as multiple returns rather than a single net return. Taxpayers' aggressiveness shifts down when their payment due position is presented as multiple returns rather than a single net return. While the results in the single net return conditions were consistent with prior compliance research, the results in the multiple returns conditions show a shift in taxpayer aggressiveness from prior research where taxpayers were less aggressive in the multiple payment due condition than the multiple refund condition. A path analysis lends insight into these results by finding that taxpayers' compliance behavior in the single net return and multiple returns conditions is driven by their affective reactions to their tax position. These results suggest that prior tax compliance research that has not incorporated multiple returns may be missing an essential element of the decision environment. These results also extend the growing body of accounting research on mental accounting by providing some initial insight into the role of affect on behavior for single versus multiple outcomes.