Sorry Seems to Be the Smartest Word: PSU Study Shows an Apology Can Boost Tax Compliance

When taxpayers get audited, they face various costs and hassles - both financial and time-related - the researchers called this "audit burden" and studied how it affects future tax compliance behavior. Audit burden is imposed on taxpayers regardless of whether they actually misreported their income or expenses; that is, even compliant taxpayers can be – and often are – selected for tax audit.

A team of researchers, including Mary Marshall, Assistant Professor of Accounting at PSU’s School of Business, examined how audit burden influences taxpayers’ compliance in future years. Their findings were quite striking: People who had cheated on their taxes and went through a difficult audit were less likely to cheat again. This is great; however, the team also identified an unintended consequence because previously honest taxpayers who experienced a burdensome audit were more likely to underreport on future returns. They confirmed these patterns through four experiments with actual U.S. taxpayers. “This is an incredibly rewarding study to be part of,” said Marshall, “because the IRS faces budgetary constraints that require careful use of resources. If they are accidentally pushing honest taxpayers to become dishonest, we need to help them fix it.”

The researchers explored two options to “fix” the problem: a simple apology or a monetary bonus for compliance. Surprisingly, the monetary bonus did not offset the compliant taxpayers’ frustration with the burdensome audit; however, a simple apology from tax authorities to honest taxpayers helped prevent this negative reaction to difficult audits. “Practically speaking, this is the best outcome. By implementing apology mechanisms, tax agencies can maintain effective audit practices while taking steps to preserve positive relationships with compliant taxpayers,” said Mary Marshall.

This research was coauthored with Amy Hageman (Kansas State University) and Ethan LaMothe (University of Central Florida) is published in The Journal of The American Taxation Association.

If you would like a copy of this article, please contact Mary Marshall at memarshall@pdx.edu.