nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2015‒05‒09
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Mental accounting in tax evasion decisions: An experiment on underreporting and overdeducting By Fochmann, Martin; Wolf, Nadja
  2. Tax compliance and information provision: A field experiment with small firms By Doerrenberg, Philipp; Schmitz, Jan
  3. Boon or bane of advance tax rulings as a measure to mitigate tax uncertainty and foster investment By Diller, Markus; Kortebusch, Pia; Schneider, Georg; Sureth, Caren
  4. The effect of audit regimes on applications for long-term care By Lindeboom, Maarten; van der Klaauw, Bas; Vriend, Sandra
  5. The Maximum Punishment Principle and Precision of Audits under Limited Commitment - Preliminary and Incomplete Version - By Martin Pollrich

  1. By: Fochmann, Martin; Wolf, Nadja
    Abstract: Although there is already a variety of papers analyzing tax evasion decisions, only little focus is put on tax evasion of gains and losses. As taxpayers can evade taxes by either underreporting their income or by overdeducting expenses, we study whether there is a significant difference if subject are confronted with a gain or a loss scenario. We find that individuals evade more in the first than in the latter case. As a consequence, subjects are more willing to evade taxes by underreporting income than by overdeducting expenses. We show that this finding can be explained by mental accounting and an asymmetric evaluation of tax payments and tax refunds. Our result is robust to treatment variation. However, if individuals have to complete only one tax declaration (but still decide on gains and losses) and we therefore expect subjects to use only one mental account, the effect vanishes. This provides strong evidence that mental accounting plays an important role in tax evasion decisions. Further results are presented and discussed.
    Keywords: tax evasion,tax compliance,prospect theory,mental accounting,behavioral taxation,experimental economics
    JEL: C91 D14 H24
    Date: 2015
  2. By: Doerrenberg, Philipp; Schmitz, Jan
    Abstract: We study tax compliance in Slovenia using data generated in a field experiment. Small accounting companies were randomly assigned to an untreated control group and two treatment groups. Companies in the first treatment group received a letter that highlighted the importance of paying taxes and informed about the likelihood of becoming subject to an audit. In the second treatment group, tax officers from the tax authorities handed out in person the same letter that companies in the first treatment group received by post. The results indicate that such letters can increase compliance, and trigger even more compliance if handed over in person. These findings are in line with the theoretical predictions that we derive to rationalize the experiment.
    Keywords: Tax Compliance,Audits,Randomized Field Experiment,Tax authority,Information provision
    JEL: H20 H32 H50 C93
    Date: 2015
  3. By: Diller, Markus; Kortebusch, Pia; Schneider, Georg; Sureth, Caren
    Abstract: Tax uncertainty often negatively affects investment. Advance tax rulings (ATRs) are commonly used as a measure to provide tax certainty. Rulings are currently controversially discussed in the context of tax planning activities of multinational firms (Luxembourg Leaks). We analyze ATRs as tax uncertainty shields from both the taxpayers' and the tax authorities' perspectives. In general, tax authorities charge ATR fees and investors request ATRs provided the fee does not exceed a certain threshold. We assume risk neutral investors and that tax authorities integrate investors' reasoning in their decision on whether and at what price to offer ATRs. We find for uniformly distributed cashflows that tax authorities offer ATRs at a prohibitively high fee. However, extending our model framework we find that ATRs are offered if the ATR enables tax authorities either to significantly reduce their tax audit costs, or to increase the probability of detecting ambiguous tax issues, or to increase their revenues by attracting more investment. ATRs may foster investment and are hence potentially beneficial for both tax authorities and taxpayers if the investment projects in question generate relatively small net returns but high tax uncertainty. This pattern is typical for aggressive tax planning strategies, e.g., in tax havens. Our findings are threefold. First, we find that even risk neutral investors will pay for tax certainty. Second, they enable us to explain the enormous demand for rulings for tax-aggressive strategies and illustrate the tax authorities' opportunity cost of offering ATRs free of charge to attract taxaggressive foreign MNGs. Third, our results provide new explanations for why ATRs, even if the fee is rather low, are not as frequently requested by taxpayers with substantial investments, as expected in settings with high tax uncertainty. Our paper elaborates the theoretical foundation that is essential when planning to use ATR fees as a new measure for tax uncertainty in future empirical tests.
    Keywords: Advance Tax Rulings,Fee Design,Investment Effects,Tax Aggressiveness,Tax Planning,Tax Risk,Tax Rulings,Tax Uncertainty
    JEL: H21 H25 M41 M42 M48
    Date: 2015
  4. By: Lindeboom, Maarten; van der Klaauw, Bas; Vriend, Sandra
    Abstract: This paper studies the effects of various audit regimes, differing in the degree of control and the presence of performance incentives, on behavior of care providers filing applications for providing long-term care services to patients. We present evidence from a large-scale field experiment in the Dutch market for long-term care. We find that increasing the degree of control reduces the number of applications and that introducing performance incentives reduces this even further. However, we find evidence for substitution with other types of long-term care services, which are often less extensive. Finally, we find detrimental effects on audit approval rates, but we provide some results showing that assessors are less strict when audits do not have direct implications.
    Keywords: auditing; field experiment; incentives; long-term care
    JEL: C93 H51 I18
    Date: 2015–05
  5. By: Martin Pollrich (Humboldt-Universitaet zu Berlin)
    Abstract: For optimal audit contracts the principle of maximum deterrence applies: penalties imposed by the contract are either zero or at their maximal level. Additionally, an imperfect audit technology which reveals the agent’s type only with an error makes the principal worse off. In this paper I show that both statements are no longer true when the principal cannot commit to an audit strategy. Both intermediate penalties and imperfect audits facilitate the creation of incentives for the principal to carry out an audit. Creation Date: 2015-03-18
    Keywords: Auditing, limited commitment, contract theory
    JEL: D82 D86 C72

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