Research Proposal – The effect of the interaction between tax professionals and taxpayers on tax compliance behaviour

Break

Historically, it has been documented that when making judgment on potential legal challenges and when making recommendations in terms of giving aggressive or non-aggressive tax advice, tax professional are affected by some special attributes of their clients (taxpayers). These attributes include taxpayers’ aggressiveness (e.g. Duncan et al. 1989, Cloyd 1995, and Cuccia et al. 1995), their importance to the tax professionals (Bobek et al. 2010), and their riskiness (e.g. Bobek et al. 2010 and Fiore 1998) and so forth.

On the other hand, the impact of tax professionals’ advice on taxpayers’ compliance behaviour, although not intensively or directly examined, has been suggested in the tax compliance literature. For instance, Murphy (2003) reports that taxpayers indeed respond to campaigns advertised by their tax professionals and place trust in their tax professionals. Devos (2010) finds that compared to tax non-evaders, evaders are more likely to retain their relationship with their tax professionals who proffer aggressive advice.

Based on the above discussion, one may conclude that taxpayers can affect their tax professionals’ decision-making processes and outcomes which in turn, exert influence on taxpayers’ compliance behaviour. However, prior studies tend to ignore the fact that tax professionals do not directly affect the compliance behaviour as the ultimate decision-maker is the taxpayer himself. Tax professionals’ advice is only one of the concerns of taxpayers when deciding their own tax positions. Thus, one may expect no, or a weak relationship between tax professionals’ advice and taxpayers’ compliance behaviour.

Restructure

In the proposed research project, I argue that it is the interaction between tax professionals and taxpayers, which is dynamic and bidirectional, that helps to shape taxpayers’ compliance behaviour.

The following simple example serves to illustrate the dynamic and bidirectional interaction between tax professionals and taxpayers. Suppose there is an aggressive taxpayer who approaches a tax professional in order to more effectively minimise his tax payment. He has heard some other tax professionals promoting a particular investment scheme to save tax. However, to his surprise, his tax professional does not recommend him to do so. Therefore, it would be interesting to know first, on what basis the tax professional formed such recommendation, and second, will the taxpayer change his intention upon receiving the advice?

More specifically, for tax professionals, albeit it has been well-documented that their decision-making processes and outcomes are affected by the specific client (taxpayer), it is unclear how they weigh their clients’ intention or preference against their ethics and judgment about the probability of being caught and the subsequent penalties when making decisions. For taxpayers, it is unclear what the role of tax professionals is in their views? Are tax professionals more like a reliable information source or a tax-reducing enabler? How important are tax professionals’ advice in the mind of taxpayers, compared to their own ethics and intentions? On the one hand, taxpayers’ own ethics and tax morality may play the central role in their tax compliance decisions, hence the aggressive advice from tax professionals, even if more or less influential in the decision-making process, does  not change the ultimate outcome; and vice versa when an aggressive taxpayer encounters a  non-aggressive tax professional. On the other hand, it is also possible that tax professionals’ opinions are so essential that taxpayers may be willing to follow their suggestions, although this means giving up their original intention.

Method

Since the proposed research project is an exploratory one, semi-structured interviews will be conducted to collect information from both tax professionals and individual taxpayers who approach tax professionals for tax reporting.

Interviewees will be asked to describe their interaction or experience with their tax professionals or their clients, and how such experience affects their decision-makings. In cases where interviewees do not respond properly to the general questions, some specific questions and scenarios will be given. A list of examples of specific questions is presented in the appendix.

Appendix

For taxpayers:

About themselves

What do you think yourself as an individual taxpayer? Will you take advantage of ambiguities in tax laws to save your tax?

About tax professionals

What is the primary reason for you to engage in tax professionals? Is it because they are experts in tax and perhaps, accounting, and you think they are able to reduce your tax payment as far as the law allows? Or, you think the tax system is too complex and you want to ensure that your tax report is correctly done?

For taxpayers who self-report they are aggressive

Have you ever expressed your tax-minimising goal to your tax professional? Any example of how and when (before the tax professional make recommendations or afterwards) do you do so?

In cases where your tax professional does not recommend aggressive actions, did you try to persuade him? If so, did he follow your suggestion (i.e. he did some aggressive tax planning for you even though this was not his original thinking)?

If your tax professional does not take your suggestion even if you explicitly show your desire to reduce tax, will you terminate your client/advisor relationship and find another one who is willing to help you, or you accept your tax professional’s suggestion? If you accept his suggestion, are you still going to approach him the next time or try to find another one? What are your concerns in making this retention or termination decision?

For tax professionals:

About themselves

What do you think yourself as a tax professional? Are you more inclined to play a tax enforcer role or a tax exploiter role?

About their clients

What are the concerns you take into account when making judgment on the probability of being caught and the associated penalties?

When you make decisions regarding what type of advice you are going to proffer to your client, what is the most influential factor? Is it you weighing of the probability of being caught and penalties against potential tax savings? Or is it your clients’ desire? Or something else, such as the ethical environment of your working place?

Will you make recommendation based on how aggressive/conservative your client is? In other words, will you make aggressive advice if you see your client is keen to reduce his tax payment? Or rather, will you be more conservative in such a case?

If your professional judgment tells you that it is better to be conservative in terms of reporting tax for a particular client, but your client persuades you to be more aggressive, what will you do?

Suppose that your client terminates his relationship with you simply because you are not aggressive or conservative as he desires. Will this experience change your thinking? Will you act differently the next time when a similar client approaches you? Why?

References

Bobek D. D., Hageman A. M. & Hatfield R. C. 2010, ‘The Role of Client Advocacy in the Development of Tax Professionals’Advice’, Journal of the American Taxation Association, vol. 32, no. 1, pp.25-51.

Bobek D. D. Hageman A. M. & Radtke R. R. 2010, ‘The Ethical Environment of Tax Professionals: Partner and Non-Partner Perceptions and Experiences’, Journal of Business Ethics, vol. 92, pp. 637-654.

Cloyd C. B. 1995, ‘The effects of financial accounting conformity on recommendations of tax preparers’, The Journal of the American Taxation Association, vol. 17, issue 2, pp. 50-70.

Cuccia A. D., Hackenbrack K. & Nelson M. W. 1995, ‘The ability of professional standards to mitigate aggressive’, The Accounting Review, vol. 72, no. 2, pp. 227-248.

Devos K. 2012, ‘The impact of tax professionals upon the compliance behaviour of Australian individual taxpayers’, Revenue Law Journal, vol. 22, issue. 1, pp. 1-26.

Duncan W. A., LaRue D. W. & Reckers P. M. J 1989, ‘An empirical examination of the influence of selected economic and noneconomic variables in decision making by tax professionals’, Advances in Taxation, vol. 2, pp. 91-106.

Fiore N. 1998, ‘From the tax adviser: Minimising risks in taking on new clients’, Journal of Accountancy, vol. 185, no.2, p. 36.

Murphy K.2003, ‘Procedural justice and tax compliance’, Australian Journal of Social Issues, vol. 38, issue. 3, pp. 379-407.