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Why it may not pay to be nice

When it comes to tax evasion, agent’s attitude makes a difference, says report
May 18, 2017
Business person checking statements

Photo: Study from Ryerson University’s Ted Rogers School of Management (TRSM) examines exchanges between tax agents and taxpayers.

Picture this scenario: you haven’t filed your taxes yet because you think you’re going to be audited. Will a call from a courteous tax agent sway you to report all your taxable income? Not likely, finds a new study by Ryerson University’s Ted Rogers School of Management (TRSM).

“We found this result to be very surprising,” said Professor Jonathan Farrar, a tax psychology expert with TRSM’s School of Accounting and Finance, co-lead of the study. “You would think that someone who felt that their taxes may be scrutinized would be more likely to comply if they spoke with a nice tax agent.”

While numbers are not publicly available in Canada, according to the study, the cost of tax evasion globally was estimated to be U.S $3.1 trillion in 2011. Given the substantial sum of tax revenue lost, the Organization for Economic Cooperation and Development in 2010 stated “there is considerable interest … for tax authorities worldwide to develop a better understanding of how to improve taxpayers’ compliance.”

Farrar, along with his co-authors Steven Kaplan of Arizona State University and Linda Thorne of York University, conducted an online survey of some 200 U.S. taxpayers, ranging from 18 to 80 years old, with a nearly 50 per cent male-female ratio. The participants were asked to consider different tax-compliant scenarios where a barber, whose profit was mostly cash, was speaking to either a respectful IRS agent who took the time to answer all if his questions, or a rude tax agent who was impatient with him. In addition, in one version of the story, the barber felt he was going to be audited, while in the other scenario the barber thought he would not be audited.

The researchers found that in the scenario where the barber felt he was going to be audited, most of the respondents said they were less likely to report all of their income properly, regardless of the experience with the tax agent. However, in the scenario where the barber felt he wasn’t going to be audited by the IRS and had a pleasant exchange with a tax agent, most of the respondents indicated they would comply and report all of their profits.

What does this mean for Canadian tax authorities who want to encourage people to be more tax compliant?

“Simply being nice to them is not the solution, unless they have no reason to expect an audit,” says Farrar.  “Being nice to taxpayers when they expect an audit does not increase their compliance.”

The study, published online in the Journal of Business Ethics, was funded by Schulich CPA Research Alliance and the Canadian Accounting Association.