AN EXPERIMENTAL EXAMINATION OF TAXPAYERS' AND TAX PROFESSIONALS' AGGRESSIVE TAX PREFERENCES: A PROSPECT THEORY FOUNDATION

The purpose of this research is to explore the tenets of prospect theory (Kahneman & Tversky 1979) and its ability to explain the behavior of taxpayers and tax professionals in the United States. Will taxpayers be more likely to take the "IRS audit gamble" in certain situations? One of the main tenets of prospect theory predicts that individuals will be risk seeking in loss situations and risk averse in gain situations. If tax situations are framed as "tax gains" or "tax losses," how will taxpayers and tax professionals react? The answer to these questions could have significant tax policy ramifications in efforts to curb overly aggressive tax positions.; A second objective is to determine if tax professionals react differently than do taxpayers in similar tax situations. Is the tax preparer more likely to recommend aggressive tax positions due to the relationship between the taxpayer and the tax professional? The third objective of this dissertation is to determine what effect the tax professional's recommendation has on the behavior of the professional's recommendation has on the behavior of the taxpayer and, conversely, the effect of the taxpayer's attitude on the aggressiveness of the tax professional.; Taxpayer subjects were found to be significantly more aggressive in loss situations, thus, supporting the value function of prospect theory. Taxpayers were also found to strongly rely on the recommendation of tax professionals especially in high risk situations.; Tax professionals, on the other hand, failed to follow the value function predictions of prospect theory. However, when subjected to the preference of the client, the professional were found to strongly adjust their risk acceptance in agreement with the client especially in tax due situations.