| This study furthers our understanding of taxpayer behavior by introducing two alternative theories that might provide letter explanations of taxpayer behavior than prospect theory: the house money effect and the breakeven effect. Prospect theory posits that taxpayers in a refund situation act conservatively, while those in a tax due situation act aggressively. It is theorized in the house money effect that taxpayers in a refund situation act aggressively up to the point where the potential exists to eliminate the refund, at which point taxpayers become conservative. Conversely, it is theorized in the breakeven effect that taxpayers in a tax due situation act conservatively up to the point where the potential exists to eliminate the tax due amount, at which point taxpayers become aggressive. A secondary purpose of this study is to determine how a preliminarily determined current year tax position, also prior years' taxpaying experience, influence taxpayer behavior.; A total of 415 graduate students from four regional universities in the Middle-Atlantic states completed a case study where they were asked whether they would take an ambiguous deduction given a 40 percent IRS disallowance rate and a risk of incurring IRS penalties and interest of {dollar}600. The subjects responded conservatively when provided with either a refund position or a tax due position. Therefore, these initial results do not support the house money effect, the breakeven effect, or prospect theory, but do support the idea that taxpayers are inherently conservative. However, when allowed to choose their own IRS disallowance rate or IRS penalty and interest amount, subjects responded more aggressively. Subjects provided with a refund position responded in a manner consistent with the house money effect, while subjects provided with a tax due position behaved more aggressively with a larger tax due position than with a smaller tax due position. In addition, when testing the refund position, current year versus prior year, an initial current year refund position more significantly promotes conservative behavior than an initial prior year refund position. However, when testing the tax due position, current year versus prior year, neither position has more influence over compliance behavior. |
