The Effects of Prefilled Tax Returns on Taxpayer Compliance

Abstract

This study uses two online experiments to examine the potential consequences of a recent U.S. Senate proposal to prefill federal income tax returns on behalf of individuals. Consistent with omission theory, we find that prefilled returns lower compliance compared to selfcompleted returns when the prefilled returns do not estimate undocumented income (e.g., cash tips). However, the results show that including estimates of undocumented income increases taxpayer compliance relative to self-completed returns. We also find evidence suggesting that prefilled returns eliminate the often-replicated differences in reporting behavior between taxpayers in refund versus tax due settlement positions, suggesting that prefilled returns change individuals' reference points. These findings suggest the implementation of a prefilled return policy could have economically important effects on taxpayer decisions.

Cash and the Hidden Economy: Experimental Evidence on Fighting Tax Evasion in Small Business Transactions

“…Nevertheless, student compliance greatly improved by introducing the option to pre-populate tax returns (infrequent pre-filled reporting) with a relatively small economic cost. This finding aligns with the recent literature on the effectiveness of pre-populated tax returns on compliance (Doxey et al, 2021;Fochmann et al, 2021;van Dijk et al, 2020); that is, pre-filled tax returns can increase compliance, particularly if they are pre-populated correctly and accurately.…”

“…The use of pre-populated tax returns is expected to increase the compliance of taxpayers, through the removal of self-reporting-based errors. Several studies show that the average level of compliance is higher for pre-filled returns (Doxey et al, 2021;Fochmann et al, 2021;van Dijk et al, 2020). The caveat, however, is that compliance for pre-filled is only higher when the undocumented income is included, or when the estimated income level is correct or greater than the actual income (Doxey et al, 2021;Fochmann et al, 2021;van Dijk et al, 2020).…”

“…Several studies show that the average level of compliance is higher for pre-filled returns (Doxey et al, 2021;Fochmann et al, 2021;van Dijk et al, 2020). The caveat, however, is that compliance for pre-filled is only higher when the undocumented income is included, or when the estimated income level is correct or greater than the actual income (Doxey et al, 2021;Fochmann et al, 2021;van Dijk et al, 2020). In the experimental context, pre-filled tax returns may appear as a welcome service that reduces mental effort and possibly even alleviates uncertainty around the decision to report the correct or incorrect amount for tax payments, both of which may induce psychological costs.…”

Digitalizing Public Services: Opportunities for Latin America and the Caribbean

“…A pre-filled tax return is a tax declaration that a tax administration prepares for a taxpayer using information provided by the taxpayer and information from third-party sources, such as banks and employers. The pre-filling of tax returns was first implemented in Denmark in the late 1980s (Doxey, Lawson, and Stinson 2021). Later the policy was adopted in several countries, including some tax jurisdictions in Latin America and the Caribbean.…”

“…Another study in Denmark found that pre-filling deductions in tax returns is associated with an increase in the number of tax deductions claimed by 100 percent, and in the value of tax deductions claimed by 15 percent (Gillitzer and Skov 2018). The pre-filling of tax returns was also evaluated in several laboratory experiments, yielding inconclusive evidence of their impact (Bruner et al 2015;Fonseca and Grimshaw 2017;van Dijk et al 2020;Doxey, Lawson, and Stinson 2021;Fochmann, Müller, and Overesch 2021). In the context of Latin America and the Caribbean, a report by the Economic Commission for Latin America and the Caribbean notes that pre-filling value-added tax returns in Ecuador reduced compliance time from 30 to 6 minutes per taxpayer for each value-added-tax return (Gonzalez, Romero, and Padilla 2019).…”