Tax compliance has national importance for governments worldwide as the difference between income taxes owed and collected – the “tax gap” – continues to widen. While governments use tax whistleblowing programs to improve compliance and deter future tax fraud, it still isn’t clear which features of tax whistleblowing programs are most effective in encouraging individuals to report suspected tax fraud.
A recent study published by Associate Professor Cass Hausserman experimentally examined potential impediments to would-be-whistleblowers, as well as aspects of whistleblowing programs that affect the likelihood of reporting. “When we were designing this study, we tried to put ourselves in the shoes of someone who had just discovered that a friend had committed severe tax fraud. We brainstormed all of the things that would influence us to report or not report their fraud,” said Hausserman. One of the potential influences the study focused on was the feeling of guilt. “Interestingly, guilt can cause an internal conflict for potential whistleblowers, making them feel as if they are stuck between a rock and a hard place. They may feel guilty for reporting someone who they have a relationship with (interpersonal guilt), but at the same time, feel guilty for not doing the right thing morally if they don’t report the fraud (intrapsychic guilt). This competing dynamic is what drew me into this research topic,” Hausserman stated.
The research also examined two aspects of the whistleblowing program itself. The researchers presented actual taxpayers with a hypothetical scenario in which they were asked to imagine that they discovered a colleague’s tax fraud and were told that they would or would not be eligible for a large cash award. Additionally, half the respondents saw a moral suasion message when deciding whether to report the fraud, which stated, “The IRS uses the information you provide to make sure the tax system is fair for all Americans. Reporting tax fraud is the right thing to do.” Hausserman explained that the moral message was taken almost verbatim from Canada’s Revenue Agency Whistleblowing website, while the IRS’s Whistleblowing site didn’t have any messages trying to appeal to morals.
Study results provide evidence that both the moral suasion message and the cash award implemented alone increased fraud reporting, but that individuals were most likely to report fraud when they were offered a cash reward in combination with seeing a message encouraging them to report.
The study makes a lot of theoretical contributions and advances the research in the tax whistleblowing area, but Hausserman is most excited about the potential practical implications. “Adding a short message to an IRS website is practically free, but can impact the amount of taxes that are collected!”
The research team included Cass Hausserman, Associate Professor of Accounting at Portland State University (cass.hausserman@pdx.edu), Jonathan Farrar, Professor at Wilfrid Laurier University, Thomas Farrar at Cape Peninsula University of Technology and Morina Rennie, Professor at University of Regina. The study was published in Advances in Taxation in 2023.