EVIDENCE ON THE DETERMINANTS OF TAXPAYER COMPLIANCE: EXAMINATION OF THE EFFECT OF WITHHOLDING POSITIONS, AUDIT DETECTION RATES AND PENALTY AMOUNTS ON TAX COMPLIANCE DECISIONS

This study reviewed research on tax compliance undertaken in a number of academic disciplines such as accounting, economics, sociology, psychology, and political science. The nature and extent of the tax compliance problem was examined and the determinant factors underlying the tax compliance decision were discussed in light of theoretical and empirical research. The purpose of this study was to examine the effect of withholding positions, detection rates and penalty amounts on tax compliance decisions. This study developed hypotheses based on Kahneman and Tversky's prospect theory with respect to the reference point concept and loss aversion property.; The results of an empirical study demonstrated that prospect theory, applied in an experimental setting, could be used as a means of predicting the effect of withholding positions, audit detection rates, and penalty amounts on tax compliance decisions. The findings also indicated that taxpayers in a tax due situation were more risk seeking (noncompliant) than those taxpayers who experienced a tax refund situation. This research also concluded that an increase in both audit detection rate levels and penalty rate levels caused taxpayers to be more risk averse (compliant). Overall, noncompliance with federal income tax law was at its highest when taxpayers experienced a combination of a tax due situation, a low penalty rate level and a low audit detection rate level. Interestly, the low penalty rate of 20% and the low audit detection rate of 1% used in this study are the actual rates encountered in practice, thus, increasing the realism of this analysis.