The Influence Of Prospect Theory And Psychological Commitment On The Tax-Reporting Aggressiveness Of Professional Tax Return Preparers

Abstract

According to prospect theory (Kahneman and Tversky 1979), decision makers perceive outcomes as gains or losses from a reference point and behave differently depending on how the outcome is framed. Decision makers will be risk-averse if the perceived outcome is viewed as a gain and risk-seeking if it is perceived as a loss.  Research applying prospect theory to the decision-making of tax preparers by using their client’s year-end payment status as the reference point has not been successful (see e.g., Duncan et al. 1988; Sanders and Wyndelts 1989; LaRue and Reckers 1989).  One possible explanation for the lack of consistent results in this area is that tax preparers do not internalize the framing of their client’s payment status and thus do not have a psychological commitment to the decision outcome.  It is the client who is in a gain or loss position, not the tax preparer. 

This paper reports the results of an experiment applying prospect theory and psychological commitment to tax preparer decision-making.  We hypothesized that tax preparers’ personal involvement in placing their client in a particular year-end tax situation (payment due or refund) will cause them to use the client’s year-end payment status as the reference point and to behave in a manner consistent with the predictions of prospect theory.  In particular, we hypothesized that personal involvement in placing their client in a year-end payment due situation will cause tax preparers to frame the decision as a loss and thus behave in a risk-seeking manner.   We also hypothesized that personal involvement in placing their client in a year-end refund situation will cause tax preparers to frame the decision as a gain and engage in more risk-averse behavior than tax preparers not so involved.  

Using a sample of 104 professional tax return preparers, we found no evidence that psychological commitment to their client’s year-end payment status caused tax preparers to behave in a manner consistent with prospect theory.  We did, however, find evidence that more experienced tax preparers took more aggressive tax-reporting positions than those with less experience.  We also found that males took more aggressive tax-reporting positions than females.