Woman frets over tax return

During the COVID-19 pandemic, American taxpayers have grappled with no shortage of bad news, including unemployment, isolation and illness. In response, Uncle Sam has attempted to lend a helping hand with direct stimulus payments, increases in unemployment benefits and other employment incentives.

But will the disruption of COVID-19 prompt taxpayers to do their part? Or will the once-in-a-century pandemic result in an epidemic of tax cheating?  

Cal State Fullerton accounting professors Ed Lynch and Jon Durrant examined these questions in their study published in The CPA Journal in February 2021: “Tax Compliance and Taxpayer Mood: Will COVID-19 Lead to an Epidemic of Tax Cheating?”  

Ed Lynch

Taxpayers Are in a Bad Mood. That Might Be Good News For the IRS. 

Recognizing that the nation’s tax system depends largely on taxpayer willingness to pay, the study looks at the impact of the moods that taxpayers are in, seeking to determine if moods are correlated with tax behavior.

COVID-19 translates to a bad mood. Perhaps surprisingly, that could be good news for the taxman and IRS – and bad news for our bank accounts – since Lynch and Durrant discovered that negative moods may lead to more compliant tax behavior. In other words, more willingness for taxpayers to pay their full share. 

That’s because people are more likely to take an analytical, detail-oriented approach in order to avoid a negative consequence when they are in a bad mood.

“It is not difficult to understand that people will behave differently if they are in a good or bad mood. But, it may be surprising to see different behaviors in a tax setting,” says Lynch.

For the study, Lynch and Durrant wanted to trigger both positive and negative emotional reactions from their participants prior to asking them the survey questions. To do this, they asked respondents to think about a politician they dislike and then describe why they dislike them, attempting to put the respondent in a bad mood.

“The literature on pessimism has shown that pessimistic people are less likely to take risks, which fits well in a tax setting. Taking risks benefits you today with a larger refund, but may hurt you in the future, through IRS interest and penalties.” 

Jon Durrant

To do the study, the researchers sent questionnaires to 160 intermediate accounting students at Cal State Fullerton. A total of 92 Titans participated, and these had an average age of 23, an average of three years of work experience and an even gender split.

Nearly a year later, the first pandemic-era tax season is in the books and a second looms. Will reality match the study? In other words, will more people pay their full share of taxes since COVID-19 is generating negative moods? 

“It’s hard to say. For us to really show if this worked, we’d need to compare pre-pandemic to pandemic period tax returns,” explains Lynch. “However, so much has changed that it would be difficult to isolate the effect of mood. For example, many people lost their jobs, so incomes are down. Additionally, there were large changes in the tax law, especially related to stimulus checks. The tax law changes created a lot of work for the IRS, it’s possible that this might affect the quality or number of audits that they are able to do. There are just so many things happening that it is difficult to say. Plus, most tax return outcomes are confidential.”  

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