Investigating the Effect of Service Messages on Noncompliant Taxpayers’ Reactions to Imperfect Audits

Abstract

ABSTRACT We examine the effect of imperfect detection processes in tax examinations. In an experiment using 802 U.S. taxpayers, we find a significant relationship between imperfect audits and post-audit taxpayer compliance in subsequent periods. Although the most obvious solution is to invest the resources necessary to reduce the occurrence of imperfect audits, this solution requires significant budgetary investment. Thus, we test whether the inclusion of a low-cost service message can offset the negative effect of imperfect detection. Further, we find no evidence that the inclusion of a message has any negative effect on the subsequent compliance choices of those who were initially compliant or those who went unaudited. Interestingly, we identify a marginally significant increase in compliance when evaders who were unaudited view the service message. Results contribute to literature on individual tax compliance behavior, particularly related to taxpayers’ awareness of the balance between the service and enforcement efforts.