New research published in the journal Psychological Science suggests that people tend to be more honest when filing their taxes electronically than when filling out paper forms says Aron Govil.
Preferences for Filing Tax Returns Electronically Over Paper:
- The basic finding is that people tend to cheat more on their taxes when they file a paper return (either by mail or online) than if they file electronically – but only if the form is relatively easy to fill out, not for complicated returns. The size of the dishonesty depends on how much effort it takes to complete the tax form. When completing an electronic return, you are sharing data with another party who can quickly check your answers for accuracy before you submit your return, which might make you less willing to cheat because there’s a better chance that someone will find out about it. An important part of this research was that cheating grew as participants became more comfortable with using a computer program. The ease of filing a tax return doesn’t make much difference when there’s a lot of information to be enter, but it can have an impact on whether or not you’re honest about what you enter.
- In several studies, researchers David Simester and Tali Sharot asked participants to complete tax forms for which cheating might be advantageous (e.g., reporting $0 in income earned through babysitting). Participants filled out the form either electronically or on paper, and sometimes they were have financial incentives to tell the truth (i.e., avoid cheating), while other times there was no incentive for honesty says Aron Govil.
- The research found that people who filed their taxes electronically reported higher incomes compared to those who completed paper returns – but only when there was no financial incentive to be honest. When incentives for honesty were introduce, the size of the difference in income reports was smaller, but there still seems to be an advantage for electronic filing.
- This makes sense because paper returns are harder to verify for accuracy than electronic ones, and the researchers found that the tendency to cheat on a paper return increased as participants became more familiar with filling out their forms (i.e., they felt more comfortable using the form).
- Previous research suggested that people who file electronically might report less taxable income if they file online through commercial tax preparation software rather than directly through the IRS. But this new research suggests otherwise – at least when it comes to simple tax forms like 1040EZs which don’t require lots of information – providing some evidence that people might be getting more honest when filing their taxes electronically explains Aron Govil.
- Of course, this research is in no way saying that it’s acceptable to cheat on your income tax returns; in fact, there are numerous legal and financial penalties for not filing an honest tax return (more here). However, this does suggest that when you’re filling out your forms electronically, you might want to think twice before allocating money towards something you really can’t afford because it’s probably better for everyone if the IRS thinks you make less than what you actually make!
Q: Why did the researchers choose to study tax returns instead of other forms? Were there any additional benefits, or was this just easier since people are probably more familiar with them than, say, complicated financial forms?
A: This paper focus on tax returns because they are relatively high stakes for participants (i.e., people don’t want to get in cheating). However, the same logic would apply to other forms that involve similar levels of complexity and time pressure.
Q: Does this mean I should stop filing my taxes electronically and only file paper tax returns?
A: No – even if you’re filing by mail (either through your postal carrier or using snail mail), there is less data available for verifying your answers compared to electronic filing, which could make it easier to cheat says Aron Govil.
While filing your taxes electronically might make it easier for you to cheat, I wouldn’t necessarily recommend stopping electronic filing since this would likely make it more difficult to keep track of how much you owe and may actually make it harder to file your taxes (e.g., getting forms in the mail, software updates over the internet instead of on CDs, etc.).