Determinants of Tax Compliance: A Contingency

Approach
Collins, Julie H; Milliron, Valerie C; Toy, Daniel R . The Journal of the American Taxation Association ;
Sarasota  Vol. 14, Iss. 2,  (Fall 1992): 1.

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ABSTRACT
 
An approach for segmenting noncompliant taxpayers based on a contingency model framework is explored. The
effect of the contingency factors of taxpayer objective (correct return or minimize taxes) and tax preparation mode
(self-preparation versus use of a professional preparer) on the relation between taxpayer characteristics and
noncompliance behavior is examined. The scope of US taxpayer characteristics tested is expanded to include
personality variables, tax knowledge, and anticipated benefits of noncompliance. The relations between the
predictor variables and noncompliance behavior varied across the subgroups identified by the contingency
factors. The additional predictor variables of tax knowledge, anticipated benefits of noncompliance, and the
personality characteristics were especially helpful in distinguishing the profiles of the different groups of
noncompliant taxpayers.

FULL TEXT
 
Noncompliance by individuals with the U.S. federal income tax laws is an expensive and pervasive problem, with
revenue losses projected at $83 billion in 1992 (Internal Revenue Service (IRS) 1988a). It has been estimated that
52 percent of those filing a tax return have engaged in some form of noncompliance (IRS 1988a; American Bar
Association (ABA) 1987, 13). The Internal Revenue Service estimates that current enforcement strategies recover
only 10 to 15 percent of the compliance gap (IRS 1986). Thus, tax administrators and legislators who have
suggested improved compliance as a means of raising revenue (Louden 1990, 609) have a pragmatic interest in
learning why some people comply with reporting requirements, while others do not. In addition, academic scholars
and practitioners who prepare tax returns and advise clients concerning tax matters continue to expand the
framework for analyzing the federal income tax compliance problem (Roth et al. 1989, 1; Slemrod forthcoming).
Traditionally, research focused on tax noncompliance has explored the overall relation between taxpayer
characteristics and taxpayer compliance. The development of robust models, however, has been impeded by
measurement difficulties and the sheer complexity of the phenomenon. Diverse taxpayer objectives and methods
of coping, together with the limited scope of taxpayer information available with audited tax return measures and
the potential bias associated with self-reported noncompliance measures, make taxpayer compliance behavior
particularly difficult to evaluate.
This paper adds to the tax compliance literature in two ways. First, we introduce an approach for segmenting
noncompliant taxpayers based on a contingency model framework. This modeling approach is motivated by the
observation that different approaches to the taxpaying process likely lead to variation in the factors influencing
compliance behavior. Also, the importance of the tax preparer in the interaction between taxpayers and the IRS is
recognized.(1) Therefore, we examine how the contingencies of taxpayer objective (correct return and minimize
taxes) as well as tax preparation mode (self-preparation versus use of a professional preparer) affect the relation
between taxpayer characteristics and noncompliance behavior. Second, the scope of U.S. taxpayer characteristics

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tested is expanded to include personality variables.
Based on this framework, we use contingency modeling techniques to explore the relations between compliance
and predictors of compliance for each taxpayer subgroup. This process focuses on three related research issues:
(1) Do our contingency factors improve the prediction of the level of noncompliance? (2) Are the determinants of
noncompliance different between the subgroups? and if so, (3) Which variables are related to noncompliance for
each taxpayer subgroup?
PRIOR RESEARCH
This section focuses on three areas. First, we discuss contingency modeling and detail the manner in which the
taxpayer subgroups were derived. Second, we review the motivation for the predictor variables included in the
study. Third, we describe our measure of taxpayer noncompliance and compare it to previous measures.
THE CONTINGENCY APPROACH
The concept of contingent relationships and contingency modeling has been discussed in several disciplines (e.g.,
Hambrick and Lei 1985; Hayes 1977; Kim 1988: Lawrence and Lorsch 1967; Lilien and Weinstein 1984; Ruekert et
al. 1985; Tellis and Fornell 1988). Although no formal definition of contingency modeling exists. the general
premise of the technique is described by Hofer (1975) and others in their research on business strategy. Hofer
(1975, 785-86) states that "unless one is willing to admit the possibility that there exists some strategy or set of
strategies which are optimal for all businesses no matter what their resources and no matter what environmental
factors they face--an assumption that is inconsistent with all research studies on business strategy to date--any
theory of business strategy must be a contingency theory."
In essence, Hofer argues that universal models of complex phenomena are inadequate for explaining variability in
outcomes (e. g., business success). The key to greater understanding, then, lies in the ability to establish
contingency factors that allow for more precise relations between predictors and criteria. In the case of business
strategy, variables that have been identified as important contingency factors include product life cycle,
consumer/industrial sector, product differentiability, technological change, concentration rate, share instability,
demand instability, etc. By considering these contingency factors, more precise models of organizational strategy
have emerged (e.g., see Hambrick and Lei 1985).
Adoption of a contingency approach to investigate compliance behavior is consistent with the recommendations
of a report issued by a national Panel on Taxpayer Compliance Research (hereafter, Panel).(2) The Panel states
that it is important to investigate differences in compliance patterns across specific taxpayer subgroups, so that
significant relations between tax compliance and its antecedents are not masked by aggregate models (Roth et al.
1989, 145-6). Kidder and McEwen (1989, 47) offer additional motivation for a contingency model approach stating
in part that:
From the vantage point of loss to the federal treasury, all noncompliance with federal tax laws is alike....But from
the perspectives both of social scientific understanding of taxpaying behavior and of policy efforts to maximize
compliance, differences in kinds of noncompliance and in their causes and social locations are extremely
significant.... Compliance and noncompliance could not be understood as unitary phenomena, nor could they
effectively be influenced by a simple policy or enforcement strategy.
The two variables used in this exploratory study of the usefulness of the contingency approach in studying
compliance behavior are taxpayer objective and the use of a tax practitioner. The taxpayer objective descriptors
used in this study were formulated after considering responses from a similar question in two national surveys.
The first study asked an open-ended question "What was the primary reason you decided not to prepare your own
return?" (Yankelovich et al. 1984, 186). The key reasons cited were fear of making a mistake (63 percent), hope that
using a preparer would save money (13 percent) and insufficient time to self-prepare the return (11 percent). In a
later fixed answer format question (IRS 1988b, Appendix B), the majority of taxpayers cited the desire for a correct
return as their "main reason" for using a preparer (60 percent). This response was followed by tax savings as the
main objective (10 percent) and by saving time (seven percent).(3) Although these two surveys queried taxpayers
as to their primary reason for using preparers rather than their primary approach to tax preparation, the categories

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of responses to these two questions are likely to be similar. Thus, based on these survey results, three categories
were established as descriptors of the tax objective contingency factor. Taxpayers were asked to indicate their
primary approach to the taxpaying process: having the most correct return, minimizing taxes, or minimizing effort.
Prior research suggests that it is especially appropriate to examine preparer use in conjunction with taxpayer
objectives as contingency factors. Tax practitioners may have both the ability to affect tax outcomes and the
incentives to act strategically to satisfy their clients' tax objectives (see Coyne (1987); Milliron (1988); and Jackson
et al. (1988) regarding tax preparers considerations of client expectations). Consistent with this prior research, the
Panel notes that...
...practitioners directly affect the compliance status of at least half of all returns filed each year. They also
potentially affect nearly all the institutional complexities...the cost of compliance, the detection probability for
noncompliance, the severity of penalties, and taxpayers' error rates. By advising clients how to structure their
financial affairs to maximize after-tax income, tax practitioners can affect the allocation of some taxpayers true
income across sources. Because practitioners' compliance incentives may differ from those faced by taxpayers
(e.g., they face severe penalties for negligence and fraud but may substantially increase their incomes by creating
a reputation for establishing and successfully defending novel interpretations of law that benefit their clients), they
can he expected to alter reported income from the levels reported by a strategic taxpayer working on his or her
own behalf. Yet even though practitioners should theoretically influence nearly all aspects of taxpayer compliance,
they have been incorporated in only a few microeconomic models to date...(Roth et al. 1989, 88).
PREDICTOR VARIABLES
As many as 64 different predictor variables have been suggested in the non-empirical, tax compliance literature
(IRS 1978). We approached the selection of predictor variables by categorizing the variables that had appeared
most often in prior empirical studies into three groups: demographic factors, situational influences, and tax beliefs
and perceptions. Within these three groups, we selccted those variables that have been commonly and repeatedly
included in prior empirical studies (gender, age, income, education, return complexity, unfairness perceptions,
deterrence system perceptions, and perceptions of peers' noncompliance). In addition, we included some
promising variables that have received less attention to date: tax knowledge, the anticipated benefits of
noncompliance, and the personality traits of conformity, responsibility, value orthodoxy and risk propensity. Table
1 lists the predictors of noncompliance incorporated in this study and indicates the direction of association found
in prior research for those variables previously studied. (Table 1 omitted)
The "standard" variables investigated in prior empirical studies have been extensively discussed in the literature
(e.g., see the Panel report, chapter 2 (Roth et al. 1989); Kinsey (1986); Jackson and Milliron (1986); Long and
Swingen (1991)). These predictors are not reviewed further here except to make note that the significance (and
even directionality) of the association of the "standard" predictors with noncompliance varies across the prior
studies and offer a clarification with regard to the complexity predictor variable (which serves as a surrogate for
taxpayer opportunity).
Although the direction is clear (positive) for situational predictor variables representing opportunity, researchers
have differed considerably in their approach to measuring this variable. Tax complexity and self-employment
status have both been suggested as measures of taxpayer opportunity (Witte and Woodbury 1985; Madeo et al.
1987). We chose to focus on tax complexity. A closer look at the selfemployment attribute suggests that two
distinguishing features of self-employed taxpayers are the greater complexity of their tax situation and less risk
averse behavior (Harris 1988, 6). Thus, we try to partially disentangle the self-employment attribute by separately
measuring tax complexity (or opportunity). A measure of risk propensity was also used and is elaborated on below.

In an attempt to gain further insight into taxpayer behavior, we added six variables to the list of predictors
previously studied extensively (see Table 1). Past literature suggests that the first variable, tax knowledge, is
negatively related to deliberate noncompliance (e.g., see Jackson and Milliron (1986)). Those individuals with less
tax knowledge are less able to minimize taxes through legal tax avoidance and are thus more inclined to misreport

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as a means of tax minimization (Cross and Shaw 1981). In addition, those individuals with a primary objective of
most correct return but little tax knowledge may not have the ability" to comply. The second variable we added
(consistent with Lewis (1982)), was a measure of the perceived financial benefit of noncompliance. As Smith and
Kinsey (1987, 658) note, previous research "has focused on the costs of noncompliance without considering in
similar detail...the gains of noncompliance." Particularly, those individuals with a primary objective of minimizing
taxes would be expected to consider the gains of tax evasion.
Although personality characteristics have not been extensively examined in the context of U.S. taxpayer behavior,
it appears that these variables may also contribute to an understanding of compliance. For instance, the ABA
Commission on Taxpayer Compliance (ABA 1987, 21) observes that many taxpayers choose to comply with the
law, even in the face of a high opportunity to cheat without detection. Further, they note that personal moral
commitments to obey tax laws are strongly related to compliance. In the United States, Arrington and Reckers
(1985) and Spicer (1986) have stressed the importance of studying psychological attributes. Arrington and
Reckers (1985) investigate the link between social psychological traits and perceptions of tax evasion, while
Spicer (1986) argues that previous economic models of evasion fail to account for empirical findings that suggest
the importance of non-maximizing behavior and social norms of compliance. Thus, Spicer presents and discusses
a simple model of tax evasion that incorporates psychic costs into the evasion decision. Abroad, Groenland and
van Veldhoven (1983), Geeroms and Wilmots (1985), and Hessing et al. (1988) have pioneered the investigation of
noneconomic variables by using socio-psychological measures.
We extend existing compliance research by using portions of a validated psychological test instrument (the
Jackson Personality Inventory (Jackson 1978)) to measure key personality variables. The major personality
variables suggested by a review of the tax compliance literature (e. g., see Jackson and Milliron (1986)) are
conformity, responsibility, value orthodoxy, and risk propensity. Each personality trait is defined as follows:
conformity--strong desire for approval from others, sensitive to public image, seeks to be popular.
responsibility--trustworthy, reputable, civic-minded, feels a strong obligation to he honest and upright; experiences
a sense of duty to other people; has a strong and inflexible conscience.
value orthodoxy--traditional, moralistic, conventional; values traditional customs and belief; values may
occasionally be seen by others as old fashioned; takes a rather conservative view regarding contemporary
standards of behavior.
risk propersity--venturesome, daring, rash; enjoys gambling and taking a chance; willingly exposes self to
situations with uncertain outcomes; enjoys adventures having an element of peril. (Adapted from Jackson (1976,
18-19))
We expect negative relations between conformity, responsibility, and value orthodoxy and noncompliance and
expect a positive relation between risk propensity and noncompliance. However, as the ABA Commission
observes, social norms against tax cheating are relatively weak" (ABA 1987, 21). Consequently, the expected
positive relation involving conformity may be correspondingly weak. Also, the posited negative relation between
value orthodoxy and noncompliance may be minimized to the extent that tax cheating is embedded in U.S. culture.
In addition, the existing literature does not provide a basis to form clear a priori conjectures of how the relative
importance of these four personality traits differs across the four contingency groups. Thus, our empirical
investigation must be considered exploratory.
NONCOMPLIANCE VARIABLE
Two approaches have been widely used to measure tax noncompliance: the IRS's TCMP audit results and taxpayer
surveys. Both of these measures have a unique set of advantages and weaknesses for taxpayer compliance
research. The Panel notes that strength of taxpayer surveys is that they capture a broad range of explanatory
variables known only to respondents; among the most important are understandings of compliance requirements,
relevant values and attitudes, expectations of risks and benefits of compliance and noncompliance, and details of
events and circumstances that affect taxpayers' willingness to comply and ability to conceal noncompliance. In
contrast, TCMP is limited to explanatory variables that can be inferred from the tax return..." (Roth et al. 1989, 211).

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Taxpayer surveys can also provide better information than audits on unreported income not subject to withholding
or information reporting and taxpayer intent.
Alternatively, survey measures can be contaminated by nonresponse bias and by deliberate, inaccurate reports by
respondents wishing to conceal their illegal behavior from interviewers. In addition, these measures capture only
misstatements that are recognized and remembered. Finally, survey measures have traditionally been much less
specific than audit-based measures as to the nature, extent, and timing of noncompliance. This could result in
underrepresentation of the true noncompliance rate. For example, by manipulating survey data, Kinsey (1988, 25)
estimated the true U.S. noncompliance rate to be about 48 percent of taxpaying units. However, a review of 18
survey studies shows cumulative noncompliance estimates in the 22-25 percent range for a lifetime reference
period and 12-20 percent for a five-year reference period (Roth et al. 1989, 47; Weigel et al. 1987, 217; Kinsey 1984,
Table 2). (Table 2 omitted)
In conclusion, all previous methods of constructing data bases to measure tax compliance are deficient in
important (but different) ways. Thus, no single research approach or single study is likely to produce definitive
findings. More accurate insights will only be possible as future analyses of all types of data begin to produce
consistent or reconcilable results.(4)
We use a detailed line item (TCMP style) approach to surveying noncompliance. Although past survey studies have
used only one or two general compliance questions as measures (Kinsey 1984; Roth et al. 1989, Table 5,55-7),
common income and deduction items are listed separately in this study, and a noncompliance rating on each item
is solicited.
In the next section we further describe the methods used to address our research questions. To reiterate, these
questions involve determining the relevancy of our contingency factors, exploring whether different taxpayer
subgroups display dissimilar patterns of predictor/criterion relationships, and assessing which determinants are
significant for each of the four taxpayer subgroups.
METHODS
DATA
The data employed in this study were collected from a random mail survey of 700 households from telephone
directories in a southwestern and northeastern state. Respondents were offered $5 for completing the
questionnaire. They were assured anonymity by being allowed to mail their completed questionnaire back
separately from their request for payments.(5) Of the 700 surveys mailed, 48 were returned as undeliverable, and
240 responses were received. Twenty of the responses contained missing data and were unusable. As a
percentage of the surveys delivered, this translates to a 37 percent total response rate and a 34 percent usable
response rate. Given that the instrument was quite long, addressed sensitive issues, and was administered by mail,
we considered the response rate to be satisfactory for this exploratory investigation.
We use our survey data to establish complex multivariate relations between research constructs rather than to
describe certain populations. Consequently, specification of the model's functional form (rather than sample
coverage or nonresponse error) is the central concern (see Groves (1987) for details).(6) Although we do not
attempt to describe the national taxpaying population, for comparative purposes, a breakdown of the
demographics of study respondents is provided in Table 2.
DEPENDENT MEASURE
For the dependent measure we asked taxpayers to indicate whether they had misstated" each of the tax return
items in their favor. Misstatement in the taxpayer's favor is commonly termed noncompliance and was defined as
the number of self-reported items on the tax return that the taxpayer under or overstated in the past five years (see
Appendix, Part III, Questions 1(A) and 1(B) Column 2). Although our measure is primarily designed to capture
deliberate noncompliance, unintentional noncompliance brought to the taxpayer's attention by others (such as the
IRS) may also be included.(7)
INDEPENDENT MEASURES
The independent variable measures used in our analyses appear in the Appendix. Table 3 reconciles the empirical

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variables with their measurements derived from the questionnaire. (Table 3 omitted)
The measures of conformity, responsibility, value orthodoxy, and risk propensity were taken from the Jackson
Personality Inventory (Jackson 1987). Ten questions were selected from the inventory subscale for each trait.(8)
Although the forty questions appear in the Appendix grouped and labeled by trait and "correct" answer, the forty
items were randomly ordered and unlabeled in the survey. A person achieving the maximum score of ten on each
trait would answer five questions true and five questions false.
Other empirical measures that are not self-evident from the survey questions included in the Appendix are
knowledge of the tax law, tax return complexity, unfairness and deterrence system perceptions. The knowledge
measure equals the number of the ten tax scenarios in Part II of the questionnaire answered correctly. Complexity
equals the number of income and deduction items checked in Part III, Question 1 of the survey, that applied to the
respondent in the last five years.(9) As noted in Table 3, unfairness and deterrence perceptions are index variables
based on multiple questions. Unfairness perceptions were measured as the sum of the responses to three
questions eliciting the subject's perceptions of the fairness of their own tax burden, the distribution of the tax
burden among individuals, and the return received from taxes in terms of government services.(10) Deterrence
system perceptions were measured by multiplying the problem the penalty would present in the respondent's life
by the chances of it being imposed. This was done for both small and large understatements of tax, and the results
were summed.
CONTINGENCY MEASURES
The contingency variables for this analysis (Tax Preparation Mode and Taxpayer Objective(11) were both
measured by single questions in a fixed answer format. These questions are referenced in Table 3 and included in
Part III of the Appendix.
RESEARCH DESIGN
As shown in Table 4, approximately 70 percent of the households in our sample approach the taxpaying process
with the primary objective of filing the most correct return, while 25 percent are principally concerned with
minimizing taxes. Few strive for effort minimization. Consistent with the national average, the percentage of
taxpayers using professional preparers and those preparing their returns themselves was approximately equal
(45.5 percent and 55.5 percent respectively).
A chi-square test on the two contingency factors demonstrated there was no significant relation between tax
objective and preparer use, This implies the distribution of tax objectives was approximately the same for
households who self-prepare as for those who engage a professional preparer.
Due to their small number, households whose tax objective was effort minimization were excluded from the
subsequent analyses. Thus, the contingency relations examined in this research can be represented by a 2 X 2
matrix with two levels of taxpayer objective (Taxpayer Objective: Most Correct Return vs. Minimize Taxes) and two
levels of tax preparation (Preparation Mode: Taxpayer-Prepared vs. Professionally-Prepared).
Based on this design, our research objectives were to determine if the contingency framework was empirically
justified, and if so, to establish what differences exist between noncompliance and its determinants for the four
taxpaying segments.
CONTINGENCY MODEL ANALYSIS AND RESULTS
Our procedure for testing the 2 X 2 contingency model described above is based on an extension of the approach
first specified by Gujarati (1970a, 1970b). The steps involved in this approach include: (1) establishment of the
relations between noncompliance and the independent variables in our model without considering the contingency
factors (referred to as the noncontingency model); (2) determination of whether the inclusion of the contingency
factors in the model significantly increases the predictive power of the model; (3) assessment of whether the
linear relations between noncompliance and determinants of noncompliance were similar or different for the four
taxpayer segments; and (4) determination of the regression relations between the dependent and independent
variables for each taxpayer subgroup based on our 2 X 2 framework. The analyses and results for each step are
discussed below.

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NONCONTINGENCY MODEL
The first step in the analysis process involved estimating the noncontingency model. Fifty percent of the
respondents to our survey admitted some form of noncompliance. The mean number of income and deduction
items reported misstated by all subjects was 1.65.
The misstatements were widely distributed across all income and deduction items. The five items most commonly
reported as misstated were charitable contributions, cash payments from side jobs, profit from sale of goods,
interest income, and miscellaneous deductions. The results of regressing noncompliance on the independent
variables are presented in Table 5.(12) (Table 5 omitted) Of the fourteen predictors included in the model, four
proved significant (adjusted R sup 2 = .389; p <.001).(13) Education was negatively correlated with noncompliance,
while anticipated benefits of noncompliance, perceptions of peers' noncompliance, and return complexity were
positively correlated with-noncompliance.
EFFECTS OF INCLUDING CONTINGENCY VARIABLES
The analysis procedures were based on the premise that including the contingencies of differences in objectives
among taxpayers and tax preparation mode would enhance the prediction of noncompliance. This implies that our
contingency model should outperform the noncontingency model in terms of predictive accuracy (R sup 2 ).
Analysis of the differences in the two models involved setting up dummy variables for each of the four
contingency situations (most correct return objective--taxpayer preparation of return; most correct return
objective--professional preparation of return; minimize tax objective taxpayer preparation of return; minimize tax
objective--professional preparation of return). Each contingency situation was coded as a 0,1 dummy variable (D
sub i ) such that D sub i 1 if the situation is present, and D sub i = 0 otherwise. After the four dummy variables (D
sub i , D sub 2 , D sub 3 and D sub 4 ) were created, each of the fourteen independent variables were multiplied by
each dummy variable. This procedure resulted in the generation of 4 X 14 or 56 contingency interaction variables
(D sub 1 X sub 1 , D sub 1 X sub 2 ,...D sub 4 X sub 14 ) to be included in the contingency model.
The determination of the added explanatory value of the contingency model over the noncontingency model is
accomplished by comparing the two models using a partial F-test.(14) In terms of hypothesis testing, the partial F-
statistic tests the following:
H sub O :The contingency factors have no effect(15)
H sub A :The contingency factors do have an effect
The results of the partial F-test indicated that the contingency factors added significantly to the explanatory power
of the noncontingency model presented in Table 4 (F = 5.681; df 45/146; p <.0001). The adjusted R sub 2 rose from
.39 in the noncontingency model to .59 in the contingency model to. In addition to this test of the combined effect
of the contingency factors, we also evaluated the impact of each contingency factor by itself over the
noncontingency model. The results for Motivation (adjusted R sup 2 = .512) and Preparation Mode (adjusted R sup
2 = .439) were both significant (p <.0001 and p <.01 respectively). Two final tests evaluated the potential of the
combined contingency model over the explained variance of each of the single factor contingency models. Again,
the partial F's indicated that adding the second contingency factor significantly improved the predictive power of
the single factor contingency model (p <.001 when compared to the Motivation Contingency model and p <.001
when compared to the Preparation Mode model).
These statistical tests established the relevance of the contingency factors in terms of creating a more precise
model of the relations between determinants of tax compliance behavior and compliance behavior itself. Based on
these partial F-tests, a further examination of the contingency effects was warranted.
ESTABLISHING TAXPAYER SEGMENT DIFFERENCES
The third step in our analyses involved testing for differences in the linear equations for each of the four taxpayer
segments based on our 2 X 2 contingency framework. This test requires that one of the four contingency
situations be designated as a base condition. From a statistical perspective, the specification of which condition
represents the base in the contingency model is arbitrary. However, from a conceptual standpoint base
specification is relevant. The base condition represents the benchmark for establishing changes in coefficients in

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the model. In this research, the condition Most Correct Return/Taxpayer-Prepared was designated as the base,
since it was the most common taxpayer objective and processing mode. Thus, the interaction coefficients for the
other three conditions were compared to this base to establish significant differences.
The results of the contingency analysis are presented in Table 6. (Table 6 omitted) There are two different "types"
of coefficients in this table, The first are the parameters in the base condition column (column 1: Most Correct
Return/Taxpayer-Prepared). These coefficients are interpreted in a traditional linear model fashion, except that
they represent the correlation between the predictor and the criterion of admitted noncompliance for the base
condition group only.
The coefficients in the other three columns are the changes in slope (or intercept) between the base condition and
the other three contingency conditions. For example, the results show that for the Gender variable, there is a
significant difference in the relation between Gender and Noncompliance for those in the base condition versus
those in the Minimize Taxes/Taxpayer-Prepared condition. This is not a test of whether or not the subjects in the
Minimize Taxes/Taxpayer-Prepared condition demonstrate a significant relation between Gender and
Noncompliance. Rather, it examines whether the Gender coefficient for this condition is significantly different from
the Gender coefficient in the base condition.(16) Of the 14 independent variables (and one intercept term), eight
were different from the base condition for at least one of the contingency conditions. In sum, this test revealed
that the relations between predictors of noncompliance and noncompliance behavior for the base condition group
were significantly different from the relations in other taxpayer segments.
Table 7 shows a different set of coefficients for the contingency model.(17) (Table 7 omitted) The values in this
equation are created by combining the base condition coefficients with the change in base coefficients presented
in Table 6. Therefore the coefficient for the Gender variable in the condition Minimized Taxes/Taxpayer-Prepared
(2.650) = coefficient for Most Correct Return/Taxpayer-Prepared (.506) + change coefficient for Minimize
Taxes/Taxpayer-Prepared (2.144). In general, any coefficient and standard error of the coefficient in Table 7 can be
found by:
regression coefficient = B sub bj + B sub cbj
standard error of B sub bj + B sub cbj = var(B sub bj + var (B sub cbj) + 2cov (B sub bj ,B sub cbj)!
where:
B sub bj = j sup th regression coefficient for base condition
B sub cbj = j sup th regression coefficient for change in base condition
The coefficients in Table 7 are interpreted as the relation between the predictor and criterion (noncompliance) for
the i sup th contingency group (taxpayer segment). Therefore, the coefficient for Gender for the four contingency
conditions shows that this predictor is only significant in terms of predicting noncompliance behavior for the
Minimize Taxes/Taxpayer-Prepared group and the Minimize Taxes/Professionally-Prepared group. Other
coefficients in this table can be interpreted in a similar manner.
DISCUSSION OF RESULTS
NONCONTINGENCY MODEL RESULTS
The results of our noncontingency model (shown in Table 5) generally agree with recent tax compliance studies.
The failure of the majority of the posited predictor variables to relate significantly to the dependent variable has
been the norm rather than the exception (Jackson and Milliron 1986, 127-129). The strong showing of return
complexity and peer influence is consistent with recent stuaies stressing the importance of taxpayer opportunity
(Madeo et al. 1987; Smith and Kinsey 1987) and peer communication (Mason and Mason 1988). A somewhat
perplexing result, however, is the negative direction and the statistical strength of the education variable. Although
the seminal experimental study by Schwartz and Orleans (1967) found a similar educational association, survey
studies have tended to find either no association or a significant positive association between education and
noncompliance. Positive associations between education and noncompliance found in prior survey studies may
have been partially driven by the potential increased willingness of more educated respondents to admit
noncompliance. Perhaps the skewness of our sample towards the highly educated population (i.e., 91 percent of

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our sample graduated from high school and 68 percent had at least some college education) creates more
homogeneity across the education levels present in the sample as to the likelihood of admitting noncompliance
when it has occurred. Also, the number of response categories above the high school graduation level may have
contributed to the finding in this study.
The paucity of significant associations for the noncontingency model suggests that the Panel may be correct in
their belief that disaggregating taxpayers will lead to a better understanding of the noncompliance problem. In the
next section we discuss the results of the contingency model.
CONTINGENCY MODEL RESULTS
Model specification is improved with the contingency model. The adjusted R sup 2 increases from .39 in the
noncontingency model (Table 5) to .59 in the contingency model (Table 7). Only four of the fourteen independent
variables were significant in the noncontingency model (Table 5). In contrast, we found twelve of the fourteen
predictors to be significant for at least one of the four taxpayer subgroups based on our contingency framework
(Table 7).(18) The only variables that did not significantly correlate with noncompliance for any of the subgroups
were age and deterrence system perceptions. Moreover, return complexity was the sole predictor that was
statistically related to noncompliance across all groups.
Taxpayers responding that their primary approach to the tax process is most correct return are more likely to be
noncompliant (regardless of preparation mode) when their sense of responsibility is relatively low and their return
is more complex (or opportunity is higher). This is consistent with the notion that while these taxpayers express a
primary objective of most correct return, they may be willing to misstate a limited number of items if they feel that
the effort required to determine the correct amount is too great or they perceive a perception of greater opportunity
to misstate these items.
In addition, when taxpayers with a stated primary objective of most correct return seek professional assistance,
noncompliance is significantly associated with lower education, income, and tax knowledge and stronger
perceptions regarding the unfairness of the tax system and the noncompliance of their peers. Both Kinsey (1987,
11- 8) and Coyne (1987, 18-23) describe two distinct groups of potentially noncompliant taxpayers who use
preparers (screeners and entrepreneurs). Based on their discussions, noncompliant taxpayers who state their tax
objective as a correct return and use preparers could be referred to as screeners. By correct return, these
noncompliant taxpayers could mean one that will not be challenged by the IRS. They may rely on a preparer for
advance warning that an item appears unusual or suspicious.
Taxpayers responding that their primary approach to the tax process is tax minimization are more noncompliant
(regardless of preparation mode) when they are males, anticipate greater financial benefit from noncompliance,
and their return is more complex (or opportunity is higher). Neither gender or anticipated benefits of
noncompliance were significant for those taxpayers indicating most correct return as their objective. Thus, the
previous finding in the tax compliance literature that males are more noncompliant is corroborated only for,
taxpayers that seek to minimize taxes. Taxpayers with this objective are also most cognizant of the potential gains
from noncompliance.
In addition, when taxpayers with a stated primary objective of tax minimization seek professional assistance,
noncompliance is significantly associated with less income, a lower score on the personality trait labeled value
orthodoxy, and higher scores on the personality trait measures of conformity and risk propensity. This profile is
similar to the sketch of the entrepreneur group described by Kinsey (1987, 11-18) and Coyne (1987, 18-23) who
enlist preparers to help achieve tax minimization. By whatever means they can use, these noncompliant taxpayers
are determined to keep their taxes as low as possible. Thus, it is not surprising that individuals who are likely
engaging in avoidance, as well as evasion, score relatively lower on the value orthodoxy trait and higher on the risk
propensity trait. The positive association between the conformity personality trait and noncompliance for this
subgroup was not expected. However, two considerations lend some credence to the results. First, noncompliance
is a private act unlikely to become public unless voluntarily disclosed. Second, the acquisition of more material
goods through the payment of less taxes may be a way of seeking the admiration and approval conformists desire.

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Finally, the income result is consistent with Cross and Shaw (1981), who initially suggested the joint relation
between tax avoidance and tax evasion. After controlling for complexity, perhaps those with less income quickly
exhaust their ability to save taxes through legal tax avoidance and thus are more inclined to evade.
In addition to noting the differences in the predictors of noncompliance based on the subgroups defined by our
contingency framework, we investigated the difference in mean noncompliance across the two contingency
factors (Table 8). (Table 8 omitted) The results of a two-way analysis of variance (ANOVA) with taxpayer objective
and preparation mode as the independent variables and the degree of noncompliance as the dependent variable
yielded a significant main effect for taxpayer objective (F = 12.15; df = 1/202; p <.0001). Those with a tax
minimization objective exhibited significantly more noncompliance. There was no significant difference in tax
compliance behavior by preparation mode, and there was no significant interaction effect between the two
independent variables. Thus, for this sample, the predictors of noncompliance were significantly different across
the four subgroups; however, only the contingency factor of taxpayer objective affected the mean level of
noncompliance.
In summary, the contingency framework added to the explanatory power of our model. The relations between the
predictor variables and noncompliance behavior varied across the subgroups identified by the contingency
factors--taxpayer objective and preparation mode. The additional predictor variables of tax knowledge, anticipated
benefits of noncompliance, and the personality characteristics (conformity, responsibility, value orthodoxy, and
risk propensity) were especially helpful in distinguishing the profiles of the different groups of noncompliant
taxpayers.
EXTENSIONS AND LIMITATIONS
This exploratory contingency study supports the notion that compliance and noncompliance are not best
understood as unitary phenomena. Aggregate modeling of heterogeneous samples may mask many of the
complex relations between noncompliance behavior and the predictor variables of interest. Future research is
needed to continue to refine and identify the relevant contingency factors that define the subgroups of taxpayers
for investigation. Rather than striving for representative samples of the general population, more specialized
studies are required that overrepresent taxpaying groups of special interest.(19)
Our results also provide support for the continued exploration of the effect of personality characteristics on tax
compliance behavior. Each of the four personality traits measured in this study was significantly associated with
noncompliance behavior for one or more of the four taxpayer groups examined. Additional personality traits, as
well as additional validated psychological measuring instruments, should be explored. Laboratory experiments are
likely to offer a fertile setting for extensively examining the interrelations between the effects of personality traits
and variables determining the economic gain from noncompliance on taxpayer reporting behavior.
While there will continue to be strengths and weaknesses associated with all noncompliance measures, survey-
based measures offer enough unique advantages that future research should seek to continue to improve the
specificity and validity of these measures (Roth et al. 1989, 222-27). The line item approach used in this study to
measure noncompliance begins to eliminate the vagueness of prior survey-based measures with regard to the
nature of noncompliance. Continued improvements in the specificity of survey-based measures could result from
querying taxpayers as to the amount and timing of their noncompliance.
Particular care must be taken in future studies that attempt to quantify noncompliance. It is not clear whether the
dollars of underreported taxable income or the dollars of taxes evaded is an appropriate measure. For example, a
$500 understatement of income to a person in the 15 percent bracket would result in $75 of avoided taxes.
However, a $300 understatement by a person in the 31 percent bracket would result in $91 of taxes evaded. The
relative magnitudes of these two noncompliant behaviors would be altered depending on the measure.
Regarding the specificity of the timing of noncompliance, the five-year reference period used in this study limits
our ability to distinguish between "habitual" and "one-time" noncompliers and to match variables such as preparer
use and noncompliance behavior by specific filing periods. Retrospective measures of taxpaying behavior and
perceptions by year may not be optimal either. Current perceptions can bias recollections. Longitudinal surveys of

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taxpayers using one-year reference periods offer tremendous potential payoff in terms of our knowledge of
taxpaying attitudes and behavior. Such surveys not only could provide an insight into the "frequency" of
noncompliance behavior, but they may also allow us to begin to unravel the direction of the causality between
attitudes and behavior that is not possible in single period cross-sectional studies. Obtaining longitudinal data
through multi-wave interview or survey activity affords less of a chance of contaminating the results with the
measurement process than audits.
Increasing the specificity of survey-based compliance measures raises additional validity concerns, however, if
one assumes that respondents are less threatened by vague questions. Thus, experimenting with randomized
response techniques may be particularly appropriate for future studies. Respondents may be more truthful if they
feel protected by the randomization offered by these response techniques. The Panel encourages further testing of
the potential value of the randomized response technique for surveying self-reported noncompliance behavior.
They indicate that these "tests should involve samples from a variety of taxpayer subpopulations, should test
alternative randomizing techniques in field conditions, should explore how response bias and precision are
affected by changing the selection probability and content of the nonsensitive alternative, and should compare the
results of randomized response surveys with surveys that directly seek reports of sensitive behavior" (Roth et al.
1989, 226).
In addition to acquiring more time specific data that allows the researcher to match preparer use with behavior by
filing period, a more detailed description of tax advisors than obtained in this study appears warranted in future
studies. We did not collect information on the professional status of the tax preparer used, the duration of the
relation between taxpayer and advisor, or the nature of the services purchased. Such information, together with
other background information of the tax preparer, could facilitate the development of detailed taxpayer/tax
preparer profiles that would further refine the analysis presented here.
In summary, the results of this study support further investigations of disaggregated subgroups of taxpayers and
further examination of the effects of personality characteristics on noncompliance behavior. In addition, more
refined measures of the amount and timing of noncompliance, as well as more detailed information concerning tax
advisors, offer potential for augmenting the findings of this research.
APPENDIX
QUESTIONNAIRE ITEMS USED TO ELICIT VARIABLE MEASURES
PART I
On the following pages you will find a series of statements which a person might use to describe himself. If you
agree with a statement or decide that it does describe you, circle the "T" to indicate TRUE. If you disagree with a
statement or feel that it is not descriptive of you, circle the "F" to indicate FALSE. Circle either T or F for every
statement, even if you are not completely sure of your answer.
1. CONFORMITY
A. TRUE
1. I try to act in a way that others will accept me.
2. It makes me feel uncomfortable to be dressed differently from those around me.
3. In most situations, I usually agree with the opinions of the group.
4. It causes me a great deal of worry if I think that someone doesn't approve of something I have done.
5. I am very sensitive to what other people think of me.
B. FALSE
1. What the general public thinks does not affect my standards or beliefs.
2. I am not concerned about how many friends I have.
3. I do not worry about what I say when out socially.
4. When I want to purchase something, I rarely consider other people's opinion of it.
5. I believe in speaking my mind, even if it offends others.
2. RESPONSIBILITY

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A. TRUE
1. If I were called for jury duty, I would serve without hesitation no matter how inconvenient it might be for me.
2. I contribute to charity regularly.
3. If I accidentally scratched a parked car, I would try to find the owner to pay for the repairs.
4. Everyone should spend a part of his leisure time working on community projects.
5. I am very careful not to litter public places.
B. FALSE
1. If people choose to drink and drive, it is their own business.
2. I see nothing wrong with having a traffic ticket "fixed:"
3. I think it would be challenging to try to smuggle a small item into the country.
4. I see no need for belonging to service clubs or community organizations.
5. Sometimes it is too troublesome to do exactly what I promised I would do.
3. VALUE ORTHODOXY
A. TRUE
1. Cheating and lying are always wrong, no matter what the situation.
2. It is wrong to spend money on things you can't afford.
3. Many people are too hasty in trying to change our laws.
4. People today don't have enough respect for authority.
5. My values might seem a little old-fashioned by modern standards.
B. FALSE
1. A person should be allowed to take his own life if the circumstances justify it.
2. People respect tradition more than necessary.
3. The discoveries of science may someday show that many of our most cherished beliefs are wrong.
4. The legal drinking age should be lowered.
5. People should be able to refuse to fight for their country without the fear of punishment.
4. RISK
A. TRUE
1. When I want something, I'll sometimes go out on a limb to get it.
2. In games I usually "go for broke" rather than playing it safe.
3. Taking risks does not bother me if the gains involved are high.
4. I would enjoy bluffing my way into an exclusive club or private party.
5. I enjoy taking risks.
B. FALSE
1. I probably would not take the chance of borrowing money for a business deal even if it might be profitable.
2. I rarely make even small bets.
3. I would prefer a stable position with a moderate salary to one with a higher salary but less security.
4. I consider security an important element in every aspect of my life.
5. If I invested any money in stocks, it would probably only be in safe stocks from large, well-known companies.
(Part II omitted)
(Part III omitted)
1 Approximately 47 percent of the 100 million federal individual tax returns are prepared by tax practitioners (IRS
1988b).
2 The Panel on Taxpayer Compliance Research was convened in response to an IRS request to the National
Academy of Sciences. Their report (which was the culmination of a four year effort by 16 noted social scientists
and several commissioned researchers) synthesizes existing knowledge regarding taxpayer compliance influences
and recommends future research that offers the prospect of augmenting the knowledge base. The report
comprises volume one of Taxpayer Compliance which is edited by Roth, Scholz, and Witte (1989). Volume two of

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Taxpayer Compliance is edited by Roth and Scholz (1989) and consists of research papers commissioned by the
Panel.
3 The most frequent response in two earlier studies querying taxpayers on their motivation for preparer use was
the forms were too complicated" (Aitken and Bonneville 1980 and Citicorp 1977). However, the Panel notes that
some of those who worried about the complexity of the forms most likely were more concerned that they would
pay too much without the assistance of a preparer (Roth et al. 1989. 174). Hence this response may have been a
surrogate for the taxpayer objectives of minimizing taxes or having the most correct return.
4 For a more detailed discussion of the relative contributions of the types of data used in tax compliance research
see Chapter 5 of the Panel's report (Roth et al. 1989).
5 Assurances of anonymity are crucial in a survey such as this that seeks self-reports of sensitive information. As
there is no clearly established superior method of eliciting unbiased replies, we chose to give numerous
assurances that replies would remain anonymous and directly appeal to the potential respondents to answer
accurately and correctly. A carefully drafted cover letter began with bulleted statements covering the following
items:
1) the purpose of the study--to learn more about relationships between personality characteristics, knowledge of
the current tax law and taxpayer behavior,
2) our affiliation as university professors,
3) emphasis that this was not a government sponsored or funded study, and
4) a promise that anonymity was guaranteed and that we could not trace the answers back to the respondent.
Further, we stated in the text of the cover letter that no names are requested on any part of the questionnaire and
that the $5 cash would be mailed to whomever was indicated on the postcard. We reiterated two more times that
we were trusting their honesty and that we had no way of checking whether there was a completed questionnaire
for the postcards returned. We closed the letter by signing our names and detailing our university position. In
addition, only broad categories were used in soliciting demographic data to mitigate any respondent concern of a
potential tracing that would compromise their anonymity.
6 Overall, the sample appears adequate for a modeling study. Generally, there is a trade-off between nonresponse
error and measurement error in that reluctant respondents tend to provide lower quality responses. For example,
Groves (1987, 167-68) states that "improving response rates through heavy persuasion may lead only to a more
comprehensive data set with larger measurement error." Since the objective of this study was modeling, our focus
was on the quality of the responses rather than the coverage of the population.
7 By not including the words "intentional" or deliberately" in the prompt used to measure noncompliance, we may
have also included unintentional noncompliance that was committed by the taxpayer in the last five years and also
discovered during this time frame. This wording was a deliberated trade-off made in developing the test
instrument. The additional clarity of expressing the prompt as "Have deliberately or intentionally overstated this
item in the last five years" was weighed against the potential jeopardy to the candor of the respondents from this
specific incriminating wording. The exact amount of unintentional noncompliance subsequently discovered that is
actually present in our dependent measures is indeterminate. However, only 5.6 percent of our sample indicated
that the IRS had contacted them for a person to person audit in the last five years.
8 In order to shorten our survey instrument, we selected ten items from the twenty questions for each subscale
taken from the Jackson Personality Inventory. We received feedback from Professor Jackson and the research
company from which we obtained the instrument that this procedure had been used in other studies and was
unlikely to affect the validity of the subscales. The coefficient alphas on the constructs were: conformity, .78; risk,
.77; responsibility, .65; and value orthodoxy, .57.
9 Our complexity measure provides an equal weighting of each income, deduction, and credit item. To assign
objective complexity ratings to the line items requires extensive data gathering and analyses. Past research, Long
and Swingen (1987) and Klepper and Nagin (1989), generating complexity ratings was examined. However, these
ratings could not be employed in our analysis, as the categories of income and deductions used did not

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correspond with our line items.
The range of the complexity scores using our measurement technique was 1 to 26 (26 items could be checked)
with the median score being 9. The range and variability of this measure provides some evidence that the notion of
complexity has been captured, and the measure seems to represent an improvement over previous studies which
have used number of schedules or forms.
Our measurement technique may (to a limited extent) artificially induce a positive relation between complexity and
noncompliance. Although at least moderate levels of complexity may be necessary for extreme levels of
noncompliance, any level of complexity can be associated with low levels of or no noncompliance. This latter
aspect of the relation between the complexity and noncompliance measures would lead to no or little relation
between the two variables. Since half of our sample exhibits no noncompliance, it is not clear a priori that our
measurement will lead to a positive relation between the two variables.
10 The coefficient alpha for this measure was .74.
11 Some degree of noncompliant behavior is not necessarily inconsistent with a primary objective of most correct
return. A taxpayer may state a primary objective of most correct return but still be willing to misstate a limited
number of specific items for reasons such as a perception of greater opportunity to misstate these items or a
feeling that the "proper" treatment of these items is inequitable. See Kidder and McEwen (1989) for a more
complete discussion of this seemingly inconsistent behavior.
12 In addition to measuring noncompliance in the manner described in the Methods section, we also evaluated
other measurement schemes for the criterion measure. The objective of this sensitivity analysis was to determine
the robustness of our model under different scoring methods. In the present model we weighted each act of
noncompliance as equal whether the respondent indicated it was a large or small amount (weights of 1:1). Our
alternative measures of noncompliance included weights of 1:3, 1:5 and 1:10. The regression results for these
models had lower adjusted R sub 2 values and similar relations between criterion and predictor as compared to the
1:1 model presented in Table 4. We also evaluated a model with the criterion coded as a binary (0 = compliant; 1 =
noncompliant) variable. Our logistic regression results could not be compared in terms of adjusted R sub 2 values,
but the general pattern of results was similar. Finally, we tested a model with the predictor weighted as 1:1, but
divided by complexity. Under this scoring scheme, taxpayers who indicated only one occurrence of noncompliance
but who had 20 opportunities would get a value of 1/20 as their dependent measure score. Other taxpayers would
have a different value for their dependent variable if they had more or less opportunity to be noncompliant (e.g.,
1/23 or 1/6) but still checked only one category of overstatement or understatement. This scaled scoring method
resulted in a substantially lower adjusted R sub 2 value (.21), and complexity and benefits of noncompliance were
not significant in the equation.
The overall pattern of results from our sensitivity analysis suggested that the present model was superior in terms
of predictive ability, and similar to others in establishing relations between noncompliance and determinants of
noncompliance. Given that there is no clearly established "correct" measurement scheme and the results of the
sensitivity analysis, we were satisfied with the general robustness of our findings.
13 A tolerance test was used to determine if problematic collinear relationships existed between predictors. The
tolerance values ranged from .92 to .73, indicating that multicollinearity was not a problem with this model. Similar
diagnostics were performed on the contingency model. No variable in this model failed the tolerance criteria.
14 The partial F test is of the form: (Equation omitted) with, (k sub cm - k sub m /(N - k sub cm - 1) degrees of
freedom where:
(Equation omitted) = squared multiple correlation coefficient for the contingency model (Equation omitted) =
squared multiple correlation coefficient for the noncontingency model k sub cm = parameters estimated in
contingency model k sub m = parameters estimated in noncontingency model N = total sample size
15 This test simultaneously examines two possible impacts of the contingency factors on the original equation. It
tests whether there are differences in the intercepts and the slopes of the two equations. It is possible to
differentially test the effects of changes in slopes or intercepts by examining models in which only the D sub i or

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the D sub i X sub j are included in the model.
16 This is equivalent to a Chow (1960) Test of the hypothesis that B sub i = B sub j ; where these coefficients come
from two different equations.
17 The models in Table 6 and Table 7 are the same. Therefore, the statistical infomation at the bottom of Table 7
also pertains to the model in Table 6. As explained below and on the tables themselves, the only difference in the
two models is in the calculation and interpretation of the regression coefficients.
18 The sample size (n = 206) for estimating the number of parameters in the contingency model does not provide
the maximum power for establishing significant regression coefficients. Although the model is somewhat
conservative in terms of power, it seems to legitimately capture the significant relations between criterion and
predictors, and the parameter estimates are stable. This statement is based on the following: (1) The model has
ample degrees of freedom to calculate the estimated regression coefficients. Hence, it does not suffer from
overfitting. (2) The parameter estimates were quite stable across the various models examined in our sensitivity
tests on the dependent variable measure. (See footnote 12.) (3) Cross-validated results using the jack-knife
technique (20 percent holdout sample) support the predictive power of the model. The decline in the R sup 2 value
did not exceed 8 percent in any of the five cross-validated models. (4) There were no coefficients that were close
to significance that would become significant (at the .05 level) with moderate increases in sample size.
19 See Roth et al. (1989, 222) for further elaboration of this recommendation.
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Julie H. Collins is Associate Professor of Accounting at the University of North Carolina, Chapel Hill, Valerie C.
Milliron is Professor of Accounting at California State University, Chico, and Daniel R. Toy is Professor of Marketing
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we are particularly indebted to the editor and two anonymous reviewers for numerous helpful suggestions with
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Young Foundation. Data are available on request.

DETAILS

Subject: Tax regulations; Tax preparation; Statistical data; Noncompliance; Models;

Mathematical analysis; Income taxes; Correlation analysis

Location: US

Publication title: The Journal of the American Taxation Association; Sarasota

Volume: 14

Issue: 2

Pages: 1

Number of pages: 0

Publication year: 1992

Publication date: Fall 1992

Publisher: American Accounting Association

Place of publication: Sarasota

Country of publication: United States, Sarasota

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 Publication subject: Business And Economics--Public Finance, Taxation

ISSN: 01989073

e-ISSN: 15588017

Source type: Scholarly Journals

Language of publication: English

Document type: PERIODICAL

Accession number: 00384090

ProQuest document ID: 211137092

Document URL: https://search.proquest.com/docview/211137092?accountid=145113

Copyright: Copyright American Accounting Association Fall 1992

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