The effect of tax refunds on taxpayers’ willingness to pay higher tax return preparation fees

This study examines the historical profile of tax refunds and reports the results of an experiment which helps to explain an economic consequence that tax refunds may engender. Analysis of historical tax refund data reveals that the incidence and magnitude of tax refunds have increased significantly over the past half-century, which suggests that legislative efforts aimed at reducing tax refunds have been largely ineffective. The results of the experiment reveal that taxpayers who receive tax refunds from the IRS tend to frame tax return preparation fees as a cost, while taxpayers who owe the IRS additional taxes tend to frame tax return preparation fees as a loss. In turn, the manner in which taxpayers frame tax return preparation fees influences the perceived benefits that taxpayers ascribe to the tax return preparation service, which, in turn, influences taxpayers’ willingness to pay higher tax return preparation fees. Importantly, when the results of this study are considered in conjunction with the results of extant research, which reveals that tax professionals bill taxpayers for larger fractions of billable fees when taxpayers receive tax refunds than when taxpayers owe additional taxes (Hatfield et al., 2007), it seems reasonable to conclude that higher equilibrium tax return preparation fees are likely to evolve when taxpayers receive tax refunds than when they owe additional taxes.