Persuasive Communications: Tax Compliance Enforcement Strategies for Sole Proprietors*

CAR Vol.24 No. 1 (Spring 2007) Revenue (IR), which is the equivalent of the Internal Revenue Service (IRS) in the United States.Taxpayers frequently engage the services of paid preparers, who play a key role in the tax environment with responsibilities to both their clients and to the state (Erard 1993;Nichols and Ellis Price 2004).Indeed, there now is a substantial literature on the role of paid preparers in the United States (Roberts 1998).One key aspect of this literature has been to examine compliance levels associated with the use of a paid preparer by analyzing data from IRS tax audits.The direction of the results, however, has been inconclusive (Hite and Hasseldine 2003;Christian, Gupta, Webber, and Willis 1994).Nonetheless, most agree that the paid preparer does affect the process, one way or the other.The current study is the first to distinguish between the effects of normative and sanction-based appeals on actual self-prepared and paid-preparer returns.In order to analyze the role of paid preparers and the effect of persuasive communications, we examine three research questions: (a) whether targeted written communications are effective strategies for a tax agency, (b) which of five strategies tend to be more effective, and (c) whether the effectiveness of these strategies varies by type of preparer.This paper makes its contribution through an innovative, controlled field experiment that analyzes how actual tax-reporting behavior is affected by exposure to one of five treatments: simple offer of assistance, citizenship appeal, threat of audit, threat of audit with possible penalties, and virtual guarantee of forthcoming audit once the return is filed.Sales and net profit data are analyzed for a nationwide sample of over 7,300 UK sole proprietors who, for two consecutive tax years, reported a turnover (sales) level just below a fixed threshold of £15,000.Taxpayers with turnover below the threshold qualify for a simplified format for tax reporting, allowing them to reduce their costs of compliance.Thus, temptation to reduce tax liability, as well as costs of compliance, makes the sole proprietors an intriguing and appropriate population to target for this research.Consequently, we focus on two dependent variables: (a) whether turnover exceeded the reporting threshold and (b) the monetary increase in net profit reported on the tax returns filed after the treatment letters were received.Our results show evidence of a significant overall treatment effect for both normative and sanction groups.Specifically, when we measure whether taxpayers reported increases in turnover (over the £15,000 threshold for simplified reporting) after receipt of the letter, there are significant differences for each treatment group on one or both of the dependent variables.We use ordinary least squares (OLS) and probit regressions to examine the impact of the treatment letters contingent on preparation mode, and we find that the communications are particularly effective for self-preparers when reporting turnover.We also find that the sanction letters are generally more effective than the normative citizenship letter for reported turnover.In addition, the sanction letters are more effective than the normative letter for change in net profit but only for the self-prepared returns, not for the paid-preparer returns.This study contributes to the literature by providing evidence that written communication strategies can be effective tools for improving actual taxpayer compliance.Prior research reported mixed results and did not demonstrate specific 19113846, 2007, 1,

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