Deterrence theory and tax compliance: The impact of a reduction in IRS enforcement activities

There exists a large body of research that examines how various deterrence activities affect the government's goal of maximizing tax revenues. The most common approaches involve some combination of increasing the audit rate and/or the penalty rate. The results of these studies are not conclusive, although some are consistent with deterrence theory and suggest that increases in deterrence activities result in a decrease in noncompliance and an increase in reported income.;The IRS has traditionally behaved in a manner consistent with deterrence theory, and used audits and penalties in an effort to enforce compliance. However, aggressive IRS actions resulted in negative political fallout, with the result being an attempt by the IRS to become a “kinder and gentler” organization. One of the results of this was the elimination of TCMP audits and a reduction in overall audit rates. This action on the part of the IRS provides a unique opportunity to investigate a condition that has not received much attention in the literature—the effect of decreasing deterrence activities on taxpayer compliance.;There have been a number of variables identified in the literature that influence the compliance decision of taxpayers. This dissertation examines the impact of two different compliance regimes—one increasing and the other decreasing in its level of deterrence activities, as well as the visibility of income, and penalty level, on a taxpayer's compliance decision. Participants self-assessed level of detection risk, and their level of moral reasoning (as measured by the Defining Issues Test) are included as control variables.;Overall, compliance regime, income visibility, penalty level, and perceived detection risk significantly influence the taxpayer's compliance decision. However, the compliance decision is complex, and proper analysis requires an examination of the interaction of these factors.