Persuasive communications: Tax compliance enforcement strategies for sole proprietors

Abstract

Knowing how to encourage honest tax reporting by small business proprietors is a nontrivial issue. Sole proprietors represent an important group of taxpayers to examine, because they have both a high cost of compliance and a high opportunity for noncompliance. At the same time, tax agencies need to balance the high costs of noncompliance with the high costs of traditional enforcement strategies. Consequently, researchers have suggested using persuasive communications with either normative or sanction appeals. However, prior research on persuasive communications has had mixed results. We examine the effect of normative and sanction appeals in a controlled field experiment in the United Kingdom using actual data reported by over 7,300 sole proprietors. Each participant in a treatment group received one of five different letters ranging from a simple offer of assistance to a letter advising that his or her tax return had already been preselected for audit. Using a concise instrument targeted toward high opportunity behavior, sales, and net profit, we find that tax compliance appeals resulted in greater compliance, particularly among recipients who do not use a paid preparer. We also find that sanction appeals tend to be significantly more effective than normative appeals for self-preparers on turnover and on net profit. For paid-preparer returns, the sanction appeals were also more effective than the normative appeal, but only on reported turnover. In contrast, the normative and sanction appeals were statistically equivalent for change in net profit on the paid-preparer returns. © CAAA.