The Impact of Multiple Tax Returns on Tax Compliance Behavior: A Mental Accounting Framework

Abstract

Tax compliance research has used prospect theory to describe taxpayers’ behavior finding that taxpayers with pending payments due (loss frame) report more aggressively than taxpayers with pending refunds (gain frame). Since taxpayers often file multiple returns and prior research has only examined the impact of single outcomes on compliance behavior, we extend the research by incorporating the element of taxpayers filing multiple returns (e.g., state and federal returns). We compare taxpayers’ behavior in a single gain or loss frame (i.e., total payment due or refund position) versus mixed gain conditions (i.e., larger refund and a smaller payment due) or mixed loss conditions (i.e., larger payment due and a smaller refund). Using mental accounting, we find that, contrary to prior tax compliance research based on prospect theory, taxpayers are more aggressive in a refund position than a payment due position when the current cash position is presented as multiple outcomes (i.e., mixed gains and losses). These results hold whether the deduction impacts the smaller payment due or larger refund in the mixed gain condition or the deduction impacts the smaller refund or larger payment due in the mixed loss condition. By incorporating multiple returns into the tax context, our results provide additional insight into factors impacting taxpayers’ compliance decisions in a risky choice setting.

Keywords: tax compliance behavior, emotions, prospect theory, risky decision making