Implications of tax audit risk, consequences, aggressive behavior and ethics for compliance

• DOI: https://doi.org/10.1108/IJAIM-09-2021-0183
• Published date: 01 November 2021
• Date: 01 November 2021
• Pages: 823-847
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Siew H. Chan,Qian Song

Implications of tax audit risk,

consequences, aggressive behavior

and ethics for compliance

Siew H. Chan

University of North Georgia, Dahlonega, Georgia, USA, and

Qian Song

Rochester Institute of Technology, Rochester, New York, USA

Abstract

Purpose –This study investigateswhether consideration of future consequences (CFC), Machiavellianism

(MACH) and the perceived role of ethics and social responsibility (PRESOR) enhance understanding ofthe

impact of tax audit riskon compliance.

Design/methodology/approach –A between-subjects experimentis conducted to test the hypotheses.

A hypothetical tax audit case (or lack thereof) is used to create a high (low) perceived tax audit risk. The

usable responsesof 144 participants representing the general taxpayerpopulation are analyzed.

Findings –The results suggest that taxpayers with lower CFC, MACH or PRESOR scores are more

compliant when tax audit riskis high than low. In contrast, taxpayers with higher CFC, MACH or PRESOR

scores are indifferenttoward high or low tax audit risk.

Research limitations/implications –Research can elicitconsideration of future consequences of being

detected for taxpayers with lowerCFC scores to increase compliance. Additionally, increased saliencyof tax

audit risk and detectionof noncompliance in a tax audit can enhance the complianceof taxpayers with lower

MACH scores. Disseminationof information via social media on the value of ethical and social responsibility

of compliancecan also increase the compliance of taxpayers with higherPRESOR scores.

Practical implications –This study helps researchers and the tax authority better understand the

complexities of compliance and the ethical dilemmas that taxpayers face, especially when a considerable

amount of cash income is involved.To deter underreporting of cash income, the tax authority can use social

media to explain how data analyticstools can facilitate the analysis and integration of multiple sources of a

taxpayer’sincome and expenses.

Originality/value –Prior studies present participantswith objective tax audit rates, such as 5, 25 and 30

(Cullis et al.,2006; Maciejovsky et al., 2007; Trivedi et al., 2003) or 50% (Maciejovskyet al., 2012) to investigate

tax compliance. However,the actual tax audit rate is very low (about 1%) due to the limitedresources of the

tax authority (Alm and Torgler, 2011). To attenuate perceptions of unrealistic tax audit rates, this study

operationalizes high (low) tax audit risk via a hypothetical tax audit case (or lack thereof) to examine the

impact of tax audit riskon compliance.

Keywords Machiavellianism, Tax compliance, Consideration of future consequences,

Perceived role of ethics and social responsibility, Tax audit risk

Paper type Research paper

1. Introduction

Archival research uses the US tax authority’s Taxpayers Compliance Measurement

Program data and reports either a signif‌icantly large (Dubin et al.,1990;Witte and

Woodbury, 1985) or modest (Beron et al.,1992) positive effect of detection risk on

compliance. Experimentalstudies also f‌ind mixed evidence of the effectiveness of detection/

audit risk on compliance (Schauer and Bajor, 2007;Trivedi et al.,2003;Trivedi et al., 2005).

Implications of

tax audit risk

823

Received10 September 2021

Revised12 October 2021

Accepted12 October 2021

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 5, 2021

pp. 823-847

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-09-2021-0183

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

To address the mixed f‌indings, this researchinvestigates the moderating roles of individual

characteristics (i.e. consideration of future consequences [CFC], Machiavellianism [MACH]

and perceived role of ethicsand social responsibility [PRESOR]) in the effect of perceived tax

audit risk (hereafter tax auditrisk) on compliance.

Although high tax audit risk may elicit increased compliance (Kirchler et al.,2010;

Trivedi et al., 2003), tax audit risk alone is insuff‌icient for explaining the complexities of

compliance. In response to the call for additional research (Bobek et al., 2013;Kaplan et al.,

1997;Trivedi et al.,2003) for investigating noneconomicinf‌luences (e.g. psychological, moral

and social factors) on tax compliance (Andreoni et al.,1998), this study identif‌ies CFC,

MACH and PRESOR as important noneconomic individual characteristics that provide

insight into taxpayers’compliance in response to tax audit risk. This study uses trait

activation theory to examine whether CFC, MACH and PRESOR (traits) interact with tax

audit risk (situational factor) to affect compliance. These traits are selected because

taxpayers react to tax audit risk and their orientation toward immediate versus future

consequences, aggressive behavior and ethical values inf‌luence their reaction to tax audit

risk. CFC is examined as a moderator in thisstudy because taxpayers with higher or lower

CFC scores are predicted to place different weights on immediate versus future

consequences (Joireman et al.,2003;Joireman et al.,2006). Specif‌ically, individuals with

higher or lower CFC scores are predicted to react differently toward high or low tax audit

risk, which inf‌luencescompliance.

MACH is an individual characteristic that affects ethical decisions in various contexts,

such as whistleblowing intentions (Dalton and Radtke, 2013), acceptance of unethical

technological practice (Winter et al.,2004) and unethical workplace behavior (Dahling et al.,

2012;Sakalaki et al., 2007). MACH is also used as a measure of ethics (Dalton and Radtke,

2013;Ghosh and Crain, 1995). Ghosh and Crain (1995) use MACH to measure taxpayers’

ethical standards and f‌ind that individuals with higher MACH scores are less compliant

than those with lower MACH scores. MACH has ethical implications because it measures

the extent of a person’s manipulative and deceptive behavior. Examination of MACH as a

moderator can facilitate understanding of the effect of tax audit risk on compliance.

Individuals with higher or lower MACH scores may exhibit different manipulative and

deceptive behavior when they encounter high or low tax audit risk, which affects their

compliance.

Ethical value is another importantfactor that inf‌luences tax compliance, especially when

motivation exists for underreporting cash income (Richardson and Sawyer, 2001). In

addition to legal implications,tax noncompliance entails an ethical dilemma wherepersonal

gains conf‌lict with the interests of others (Kaplan et al.,1997). Tax compliance research

indicates increased theoretical,experimental and empirical evidence of the important role of

ethics in tax compliance (Alm and Torgler, 2011;Bobek and Hatf‌ield, 2003;Henderson and

Kaplan, 2005). Prior research also demonstrates the signif‌icance of moral factors, such as

ethical standards (Ghosh and Crain, 1995), responsibility (Collins et al., 1992) and social

norms (Bobek et al., 2013;Wenzel, 2005) in tax compliance. Weisbach and Plesko (2007)

indicate that additionalwork is still needed to enhance understanding of the impactof ethics

on compliance. Hence, PRESOR, an individual characteristic which measures taxpayers’

ethical and social responsibility, can provide insight into the impact of tax audit risk on

compliance. Specif‌ically, individuals with higher or lower PRESOR scores are posited to

react differentlyto high or low tax audit risk, which inf‌luences their compliance.

Participants representing the general taxpayer population are recruited from Amazon

Mechanical Turk (mTurk). The usable responses of 144 participants are analyzed. The

f‌indings reveal that taxpayerswith lower CFC scores are less compliant when tax audit risk

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