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Taxpayers' Prepayment Positions and Tax Return Preparation Fees

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  • SCOTT B. JACKSON
  • PAUL A. SHOEMAKER
  • JOHN A. BARRICK
  • F. GREG BURTON

Abstract

Individuals who have their tax returns professionally prepared often overpay estimated income taxes, effectively giving the government an interest†free loan. To understand why tax professionals may place their clients in positive prepayment positions, we draw on mental accounting theory. Mental accounting theory suggests that by placing taxpayers in positive prepayment positions, tax professionals induce a favorable mental representation of tax return preparation fees, perhaps allowing them to collect larger fractions of billable time and costs incurred on taxpayers' behalves. Thus, we hypothesize that tax return preparation fees are higher for taxpayers in positive prepayment positions than for taxpayers in negative prepayment positions. Regression results using tax return data for 68,736 taxpayers provide strong support for this hypothesis. To more fully understand the general nature of the relationship between taxpayers' prepayment positions and tax return preparation fees, we adapt the prospect theory value function to the tax domain and formulate three additional hypotheses. Consistent with theory, regression results indicate that the relation between taxpayers' prepayment positions and tax return preparation fees is (1) positive, (2) stronger for taxpayers who receive refunds that are less than fees than it is for taxpayers who receive refunds that are greater than fees, and (3) stronger for taxpayers in negative prepayment positions than for taxpayers in positive prepayment positions.

Suggested Citation

  • Scott B. Jackson & Paul A. Shoemaker & John A. Barrick & F. Greg Burton, 2005. "Taxpayers' Prepayment Positions and Tax Return Preparation Fees," Contemporary Accounting Research, John Wiley & Sons, vol. 22(2), pages 409-447, June.
    • Handle: RePEc:wly:coacre:v:22:y:2005:i:2:p:409-447
    DOI: 10.1506/UU3E-P3YF-PX9F-T9TF
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    Cited by:

    1. Fochmann, Martin & Wolf, Nadja, 2019. "Framing and salience effects in tax evasion decisions – An experiment on underreporting and overdeducting," Journal of Economic Psychology, Elsevier, vol. 72(C), pages 260-277.
    2. Felix Bransch & Paul Gurr, 2019. "Die Nachfrage nach Steuerberatungsleistungen: Evidenz für deutsche Steuerpflichtige [The Demand for Tax Preparation Services: Evidence from German Taxpayers]," Schmalenbach Journal of Business Research, Springer, vol. 71(3), pages 245-270, November.
    3. Jannis Bischof & Joachim Gassen & Anna Rohlfing-Bastian & Davud Rostam-Afschar & Caren Sureth-Sloane, 2024. "Accounting for Transparency: a Framework and Three Applications in Tax, Managerial, and Financial Accounting," Schmalenbach Journal of Business Research, Springer, vol. 76(4), pages 573-611, December.
    4. Sanjit Dhami & Narges Hajimoladarvish, 2020. "Mental Accounting, Loss Aversion, and Tax Evasion: Theory and Evidence," CESifo Working Paper Series 8606, CESifo.

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