Insights from the new study on tax fraud prevention

A recent study from the University of Waterloo provided key insights into how the severity of sanctions and social norms influence tax compliance, particularly in the context of COVID-19 exemption fraud. The work is published in Journal of Business Ethics.

The study was conducted by Professor Dr. Tisha King from the School of Accountancy and Finance at Waterloo and investigates the behavioral responses of taxpayers when faced with different levels of penalties and social norms, revealing significant findings that can help shape future policy and improving tax compliance.

“This paper extends my previous research by exploring a spectrum of just and unjust punishments. The research establishes that the severity of punishment can encourage compliance and uses a novel approach to measure social norms,” ​​explains King.

“One of the main findings of the study is that imposing appropriate sanctions can deter fraudulent behavior, but only to a certain extent.” says King. “Focusing on appropriate penalties even when taxpayers perceive that their peers are not complying with tax regulations can still inspire tax compliance.”

However, if people believe that their peers are not paying their fair share, they may become less likely to pay taxes themselves.

The study involved extensive data collection and analysis, using a combination of surveys, experiments and statistical modelling. A two-part survey (Study 1) and an experiment (Study 2) were conducted in which participants had to make decisions about reporting their income and applying for COVID-19 relief funds.

In the first study, participants were informed of the penalties for falsely reporting their taxes, ranging from mild to severe. Survey participants were then asked to share their perceptions of these penalties for engaging in tax fraud as a taxpayer.

In the second study, participants took part in an experiment in which they were exposed to different levels of penalties for tax fraud and received information about how well their peers obeyed tax rules. The results showed that appropriate sanctions work, even when social norms may not seem supportive.

However, there is a critical point: if too much emphasis is placed on people who do not pay their fair share, the positive effects of appropriate sanctions can be weakened.

“Basically, this research highlights that tax authorities should consider what information most positively influences compliance, as well as how and when they should publish this information to encourage compliance,” says King.

“Globally, as billions of dollars have been lost to fraudulent aid claims due to COVID-19, this study highlights the need for better monitoring and enforcement mechanisms to ensure that aid funds and other benefit funding crisis-related, such as unemployment or disaster recovery aid, reach those who really need it.”