Tax Compliance Theory and Fiduciary Taxes: A Qualitative Exploration

1. Introduction

Existing tax compliance theories fall into two categories: those emphasising rational economic behaviour (assuming tax decisions are taken to maximise outcomes for taxpayers), and those that recognise the moral, psychological, and social factors influencing compliance (Kornhauser, 2007; McKerchar & Evans, 2009). What links them is a focus on individual taxpayers and their relationship with the revenue authority (James, 2012). While undoubtedly enhancing our understanding of how compliance decisions are made, Doyle et al. (2020) suggest that this focus may obscure other important factors within the tax systems of modern economies, most notably the collection of fiduciary taxes, which constitute a significant majority of the tax take and frequently involve the most serious forms of tax default. Furthermore, since the two main taxes paid by individuals, income tax and value added tax (VAT), are typically incurred by taxpayers in their capacity as workers or consumers, they may not necessarily have any direct contact with the revenue authority. Despite this, extant taxpayer behaviour research has focussed almost exclusively on consideration of self-assessed income tax cases (Alm et al., 2019; Sapiei & Kasipillai, 2013), largely ignoring organisations and fiduciary taxes. As Alm (2011) suggests, this diminishes the capacity of the literature to explain, and predict, overall tax yields.

It is of increasing concern to scholars and public administrators that the tax compliance of organisations is not well understood. In a 2010 report, the Organisation for Economic Co-operation and Development (OECD) specifically articulated the need for further research in this area, noting:

The literature concerned with the drivers behind behaviour most often takes the point of departure in individuals or social groups. Only little [sic] of this body of literature has businesses as a focus. The literature still holds evidence of several relevant findings, also for businesses, but there might be a need to “translate” or adapt this literature to also fit the reality of businesses (OECD, 2010, p. 12)

Expected Utility Theory (Allingham & Sandmo, 1972; Yitzhaki, 1974), Prospect Theory (Guthrie, 2003; Kahneman & Tversky, 1979) and the theory of tax morale (Torgler, 2007), have seldom been examined to explain the links between the variables suggested by these theories as influencing tax compliance and tax compliance outcomes in corporate entities (Doyle et al., 2020). This paper extends the literature by exploring this previously unmapped domain using a qualitative survey to gain a holistic view of how tax professionals working in or on behalf of organisations view tax compliance in an organisational context, thus providing a more nuanced understanding of the practical experience of those responsible for tax compliance decisions within corporate entities. More specifically, the paper establishes whether existing tax compliance theories are appropriate in the context of organisations discharging fiduciary tax obligations.

2. Literature Review

2.1 Tax Compliance Theories

2.1.1 Expected Utility Theory

Expected Utility Theory (Allingham & Sandmo, 1972) advocates that individuals are economically rational and solely motivated by maximising personal gain. Opportunities and risks are assessed carefully on a cost–benefit basis and the result that optimises the taxpayer’s economic outcome is chosen (Alm & Kasper, 2023). In a tax context, this would involve examining the probability of detection for non-compliance and the extent of the penalties that would be levied if evasion was discovered, and comparing these with the monetary benefits gained from non-compliance; in other words, the personal utility of taxes not paid. There are four key influences on decision-making under Expected Utility Theory: (1) risk of detection, (2) penalty, (3) potential return, and (4) risk aversion.

While Expected Utility Theory forms the foundation for many approaches to understanding tax compliance (Alm & Jacobson, 2007; Hashimzade et al., 2013), as a predictive construct, it has several problems (Alm & Kasper, 2023; Frey, 2003; Horowitz & Horowitz, 2000; Kleven et al., 2011; Sandmo, 2005; Torgler, 2007). First, it is entirely predicated on a taxpayer being capable of deciding whether to comply as well as personally suffering the subsequent consequences – the taxpayer is seen as an independent agent (Alm et al., 2012). Second, the theory deviates from reality in that it fails to recognise that developed countries typically make extensive use of third-party information reporting, whereby employers, banks, investment funds and pension funds report the taxable income of individuals directly to the revenue authority (Alm & Kasper, 2023; Kleven et al., 2011). Third, it is questionable whether the theory sheds light on the tax compliance of organisations (Chen & Chu, 2005; Crocker & Slemrod, 2005). We know of no prior study that has empirically examined Expected Utility Theory in the context of the behaviour of organisations complying with fiduciary tax obligations.

2.1.2 Prospect Theory

While Prospect Theory extends Expected Utility Theory (Kahneman, 2011), several key factors differentiate them (Alm & Kasper, 2023). First, in terms of evaluating potential outcomes, under Prospect Theory gains or losses are assessed in relative, rather than absolute, terms. Second, Prospect Theory holds that individuals take decisions to guard against losses but are willing to wager in anticipation of a gain. Third, for Prospect Theory, individuals suffer losses more than they appreciate gains, even if monetary amounts are the same. Finally, Prospect Theory suggests biases in weighing the probability of an event.

Questions remain, however, as to the efficacy of Prospect Theory in explaining tax compliance (Choo et al., 2016; Kahneman, 2011). A feature of all Expected Utility Theory models is the underlying assumption that individuals pay tax only because of the economic consequences of not doing so (Alm, 2011). This approach fails to consider the possibility of the rational actor taking decisions on moral or ethical grounds. The importance of a sense of fairness and a moral imperative to comply underpins theories of taxpayer behaviour known collectively as ‘tax morale’ (Kornhauser, 2007) and are consistent with using behavioural economics concepts to understand tax compliance (Alm & Kasper, 2023).

2.1.3 Tax Morale

Tax morale is centred on the idea that tax compliance is its own reward (Kornhauser, 2007). Torgler (2008) has described it as the intrinsic motivation to pay taxes. Key aspects include the taxpayer’s belief that it is morally wrong to evade tax, how fair the taxpayer perceives the tax system to be, their perception of what constitutes normal tax compliance behaviour, their respect for the revenue authority, and their comprehension of the social contract, central to which is the recognition that taxes must be paid if social services are to be maintained (McKerchar et al., 2012). Trust in national institutions is considered important for tax morale (Matthaei et al., 2023). Drawing on behavioural economics, Alm and Kasper suggest that individuals are also motivated by fairness, altruism, reciprocity, empathy, sympathy, trust, guilt, shame, morality, alienation, patriotism, social customs and norms, and many other objectives (Alm & Kasper, 2023, p. 281).

The tax compliance theories described above are based on a simplified model with two primary actors: (1) a taxpayer, at personal financial risk, interacting with (2) a revenue authority, capable of detecting and penalising wrongdoing. The theories also include the impact of moral, psychological, and social factors that influence compliance decisions. Significant drawbacks associated with these approaches remain, however, not least of which is their failure to acknowledge that most taxes are collected by organisations using fiduciary methods.

2.2 Fiduciary Taxes

Most tax is paid at source, through the application of VAT on purchases, or income tax on salaries through the operation of ‘pay as you earn’ (PAYE). Therefore, compliance is largely outside taxpayers’ control. When withholding taxes from customers, employees or others, organisations act as ‘fiduciaries’. For context, between them, income tax collected via PAYE, VAT and customs duties, collected as fiduciary taxes, made up 55% of the tax take in Ireland in 2024, while income tax (including National Insurance Contributions (NIC)) and VAT, largely collected by fiduciary methods, made up 75% of the tax take in the United Kingdom (UK) for 2024/25 (HM Revenue & Customs, 2025; Revenue Commissioners, 2025). Significantly, the most serious forms of tax default frequently involve failures in observing fiduciary tax obligations (Doyle et al., 2020).

Therefore, not only is a more nuanced understanding of the different types of taxes and collection methodologies necessary when considering tax compliance, but the discussion must also recognise the role of fiduciary tax collection and the organisations accountable for it (Doyle et al., 2020). This form of organisational compliance behaviour is not well understood. Joulfaian (2009) highlights the relative absence of empirical research on business tax evasion in comparison to the “voluminous” literature on individual compliance behaviour. Others have lamented the scarcity of empirical research regarding large organisations’ tax behaviour (Siglé et al., 2018). This paper begins to address this imbalance.

2.3 Tax Compliance Theories and Organisations

Nur-tegin (2008) suggests that the approach to studying organisational tax compliance should be different to that taken for individuals. Cullis et al. (2006) stress that Expected Utility Theory is based on the concept of rational economic man, egoistic in terms of economic self-interest. Although studies examining the impact of economic factors on organisational tax compliance have found some similarities (Hoopes et al., 2012; Joulfaian, 2000; Kamdar, 1997), differences nonetheless arise, largely attributable to the separation of ownership and control (Chen & Chu, 2005; Crocker & Slemrod, 2005; Hanlon & Heitzman, 2010). In an organisational context, we need to consider the differences in how organisations measure value compared to individuals (Doyle et al., 2020). When assessing tax risk and measuring tax compliance utility, do organisations begin from a different position? Are organisations likely to take different types of tax compliance decisions? There is limited evidence available. Crocker and Slemrod (2005) theoretically examine the impact of imposing penalties on tax managers for tax evasion, finding that they are more effective in reducing evasion than those imposed on shareholders. Another theoretical study explores the link between internal control and the evasion decisions of businesses, concluding that tax evasion increases organisational profit, albeit at the risk of being detected and at the cost of loss of internal control efficiency (Chen & Chu, 2005). Despite adding to our understanding, both these papers build theoretical models, but fail to examine the ideas empirically. Empirical research suggests that revenue authority audits are an effective deterrent to corporate tax non-compliance but also find that an increase in penalties does not increase compliance (Kamdar, 1997).

Kahneman (2011) suggests that the impact of Prospect Theory heuristics may be less prominent in organisational decision-making. Describing them as factories manufacturing judgements and decisions, he argues that organisations are better at avoiding errors, partly because they impose orderly procedures upon themselves.

Doyle et al. (2020) question whether organisations, or the compliance decision-makers working within them, are influenced by moral, psychological, and social considerations. There is evidence that tax professionals who believe strongly in the importance of ethical and socially responsible behaviour are more committed to ensuring their clients are tax compliant (Shafer & Simmons, 2008). Moreover, tax professionals who believe strongly in the importance of corporate ethics and social responsibility are less likely to express intentions to facilitate a client’s tax fraud (Shafer et al., 2016). While significant, both studies examine tax practitioners working in private practice, shedding limited light on the issue of tax morale in organisations. Doyle et al. (2020) suggest that employees acting on behalf of organisations experience different incentives than individual taxpayers, who bear the tax burden personally. Such employees can hire professional advisers to manage tax planning and compliance activities, placing them in a stronger position to contest tax laws (Siglé et al., 2018). Alm and McClellan (2012) blame the absence of organisational-level information (which would allow tax morale to be measured) for organisational-level tax morale being largely ignored. Despite finding that enforcement efforts have little impact on tax reporting at corporate level, they find that reducing obstacles to compliance, especially corruption and complexity, have a positive impact.

Corporate tax risk management has been described as “a bit of black art, not necessarily understood even by those in the tax function” (PricewaterhouseCoopers, 2004, p. 2; cited by Wunder, 2009, p. 15). Hanlon and Heitzman describe the literature on corporate tax compliance as “relatively young”, and call for more focussed research on the role of executives in corporate tax compliance (2010, p. 139). Siglé et al. (2018, p. 5) contend that a more nuanced understanding of the factors that determine organisational tax compliance will not only contribute to improved regulatory strategies but ultimately benefit revenue authorities in their fight against corporate tax evasion. As Doyle et al. (2020) suggest, the dominant tax compliance theories have seldom been used to explain the linkage between tax compliance variables and organisational tax compliance outcomes. The studies that have been conducted at an organisational level have focused on a limited number of variables to examine corporate tax compliance quantitatively, yielding mixed results (Alm & McClellan, 2012; Joulfaian, 2000; Kamdar, 1997; Siglé et al., 2018). Rather than theoretically adding variables to existing tax compliance models to adapt them to organisational contexts or quantitatively testing for the impact of one additional variable on organisational tax compliance, we aim to take a step back and explore the area more broadly in a qualitative manner. To move the theoretical models forward, Doyle et al. (2020) posit that we first need to understand their applicability in an organisational context, contending that this will provide a stronger base from which to subsequently empirically test the relevant variables and models in future studies. This paper contributes by exploring this previously unmapped domain to achieve a holistic view of how tax professionals working in, or on behalf of, organisations view organisational tax compliance. Specifically, it examines whether existing tax compliance theories are appropriate in the context of the tax compliance behaviour of organisations paying fiduciary taxes.

3. Methods

Unlike individuals, organisations do not think, feel, make decisions, or have observable behaviour. It is the individuals employed by organisations who make decisions. Taking this agency perspective to its logical conclusion, it is the behaviour of the individuals working on corporations’ tax affairs that will shed light on the tax compliance behaviour of corporates (Killian, 2006). As such, it is necessary to understand the practical experience of those responsible for organisational tax compliance. This research was carried out in Ireland and the UK, where the researchers had access to a relevant network. The regulatory frameworks governing the tax professions in the UK and Ireland are comparable and the issues that emerged are relevant in both countries. Both are common law jurisdictions and there is no reason to believe that tax practitioners working in Ireland and the UK would not be similar to practitioners working in other common law jurisdictions.

3.1 Research Instrument

As noted in the literature review section, there is almost no extant research on the tax compliance decision-making behaviours of decision-makers – company officers – within organisations. As such it was necessary to devise a survey which would delineate the environment, pressures and expertise of company officers in tax decision-making roles. A qualitative survey method was chosen on the basis that the domain is unmapped. To ensure the research objective was achieved, it was necessary to garner responses from a large sample of professionals working in tax. Following Shafer et al. (2016), this represents a move away from many tax compliance studies that are purely theoretical, use experimental methods conducted in laboratory settings, or use students as proxies. Survey questions were drafted to investigate the influences on tax compliance within organisations, such as legal obligations, commercial considerations, and the resources available for tax compliance and the key variables identified as impacting on compliance by the existing tax compliance theories. Some of the survey questions addressed issues such as perceptions of normal behaviour within the business sector, the degree of willingness to expose (‘blow the whistle on’) on the evasion of others, the degree of respect for the revenue authority and the degree of willingness to commit tax default to secure competitive commercial advantage. Table 1 outlines the variables from the tax compliance theories included in the survey, while Appendix A outlines how the specific questions included in the survey link back to each theory.

Qualtrics software was used to design, distribute, and collate survey responses. Using web-based distribution methods made it possible to disseminate the survey widely and cost effectively. Qualtrics is an online survey development tool, with some capacity for response analysis. Some of the analysis was completed using MS Excel with data downloaded from Qualtrics. All the Qualtrics coding was carried out by one of the authors. Question branching techniques were used in the survey design such that if the respondent identified themselves to be a company officer, as distinct from a tax adviser, slightly different questions more appropriate to their business environment were asked. The survey was distributed in two jurisdictions (Ireland and the UK). While two versions were generated (an Irish and a UK version), they differed in no material respect other than terminology changes in the phrasing of questions as appropriate to the respective jurisdiction. The survey was piloted on a small number of tax professionals and was amended based on their feedback before being disseminated.

3.2 Participants

The research instrument aimed to capture the practical experience of those who make organisational tax compliance decisions. This necessitated canvassing the views of a wide number of experts, following Flyvbjerg’s observation that a common feature of all experts is that they “operate on the basis of intimate knowledge of several thousand concrete cases in their areas of expertise” (Flyvbjerg, 2006, p. 222). It seemed essential that the survey be completed by individuals within organisations who are responsible, at least in part, for the tax compliance decisions taken by those organisations. This gave rise to considering whether the views of tax advisers to organisations should be included. Tax advisers have a portfolio of organisations as clients, and therefore possess an in-depth understanding of how organisations approach tax compliance decisions. Indeed, the OECD suggests that over 90% of corporate returns are prepared with the assistance of tax intermediaries in Ireland and the UK (OECD, 2015).

In terms of evaluating the variables impacting on compliance in organisations, it was deemed necessary to canvass the views of such tax advisers. Many professionally qualified accountants train in advisory firms and then move subsequently to roles in industry. If attitudes towards tax compliance were broadly similar from the perspectives of both the tax adviser and of the company officer, that data could itself be useful. The survey asked respondents to indicate whether they were reporting as tax advisers (working in tax practice), or as officers working within an organisation (hereafter, ‘company officers’). Respondents, therefore, included individuals responsible in any way for decision-making, operating or implementing direct or fiduciary taxes within organisations, along with professionals advising organisations on the operation of direct or fiduciary taxes. Using the question-branching technique mentioned earlier, some survey questions were presented to company officers only (indicated in the tables below), and we use the term ‘tax professional’ hereafter to refer to both tax advisers and company officers. The survey was publicised by direct approaches to:

• the Association of Chartered Certified Accountants (Ireland)

• the Institute of Certified Public Accountants in Ireland

• the Irish Tax Institute

• the Institute of Chartered Accountants in England and Wales

• the Institute of Chartered Accountants in Scotland

• Chartered Accountants Ireland Ulster Society

• the Tax Committee of the Consultative Committee of Accountancy Bodies – Ireland (CCAB–I)

• FPM Chartered Accountants (Ireland and UK).

These organisations and groups included a link to the survey in some of their contact material with members, clients, and employees. This was another reason not to omit tax advisers from participating in the study, as members of the various professional institutes might work in either an adviser or a company officer capacity. There were 568 responses to the survey:

• 176 commenced but failed to complete it; and

• 392 surveys were completed and analysed.

Fieldwork on taxpayer behaviour using surveys is rare. Where it has been done, it is frequently based on relatively few responses (Ariel, 2012). McKerchar et al. (2005) describe a survey carried out by the Australian Taxation Office in 2004 of 20,000 tax agents with a 1% response rate. While noting this shortcoming in representativeness, the authors stress that participants were tax practitioners, not students (commonly used in this kind of research) and were therefore able to provide “invaluable insights” based on practical experience. Our response rate is approximately 4% of those to whom the survey was distributed. The Qualtrics reporting function was used to export the raw data from the complete responses to a CSV file for analysis. The analysis was carried out using MS Excel to sort and filter the data.

4. Findings and Discussion

As outlined below, there was a higher response from males (69%). Two hundred and seven (52%) were completed by professionals working in Ireland, with the remaining 185 completed by UK professionals. One hundred and fourteen responses (29%) came from company officers, while the remainder work as professional advisers. Almost all hold either a third-level or professional qualification in accounting, finance or tax and most hold a managerial position. Responses from professionals based in the two jurisdictions did not differ substantially. As such, tables are not segregated along jurisdictional lines, except where notably different. The bulk of the analysis was carried out on the responses from company officers only.

The experience level and seniority of respondents was high, with 81% indicating they had over 11 years’ experience. Responses came from a wide cross-section of business types. (Findings are discussed with reference to existing tax compliance theories, the elements of which prompted the survey questions in Appendix A.)

4.1 Expected Utility Theory

Heinemann and Kocher (2010) see the risk of tax default increasing as risk of detection (determined by the audit system and audit probability) decreases, potential loss (determined by fines for evasion) decreases, potential return (determined by tax rate) increases and individual risk aversion (usually negatively correlated to income) decreases. Our findings indicate that this may not hold sway in organisational tax compliance decisions. Participants indicated that their organisations are rigorous in maintaining computerised accounts and payroll systems. There was significant evidence of institutional supports for positive compliance outcomes from both tax advisory practices and commercial entities (Tables 3 and 4).

Levels of organisational investment in systems and controls indicate a concern for ensuring compliance. Regularly updating computerised compliance systems largely removes decisions from company officers. They follow the rules embedded in software, reducing substantive tax-compliance decisions in areas such as payroll and sales to micro decisions concerning data input.

Computerised compliance also removes tax-compliance complexity risk to a significant extent. Tax non-compliance may arise due to a misunderstanding or misapplication of the rules rather than an unwillingness to be compliant. Significant systems investment suggests high levels of commitment to tax compliance at the organisational level. There must be commercial justification for this investment, otherwise it would not be as widespread as the findings suggest. The emphasis on computerised systems shifts compliance decision-making from the organisation to the commercial software supplier. This has implications for the revenue authority in policing tax compliance. For fiduciary taxes, it is imperative for the revenue authority to ensure software providers are adequately briefed on regulation changes. It may also be a policy consideration for the revenue authority to insist on tax filing by digital means to facilitate the analysis of data, and to ensure taxpayers are obliged to use sophisticated software, with compliance rules embedded, when filing returns.

One difficulty in understanding these findings through an Expected Utility Theory lens is that organisational tax compliance does not appear to constitute a series of individual tax compliance decisions. The tax compliance decision is taken when installing and committing to maintain software systems to support compliance, rather than at the individual decision point of deciding whether to accurately pay and file tax. Once a payroll system is installed, for example, payroll tax compliance is automatic, provided the system is kept up to date at an operational level (by maintaining the software) and an organisational data level (by ensuring up-to-date information concerning wages is maintained).

Organisations not committed to tax compliance are unlikely to expend cost and effort on systems they are not prepared to operate properly. If a system has been installed, organisations would have to work around their own internal systems should they choose not to be tax compliant. The expected utility is difficult to express in individual tax saving terms; it is rather an amalgam of the consequences of compliance decisions taken throughout the business life cycle.

Findings suggest that for most organisations, computer systems are just one element of the tax-compliance infrastructure. A comprehensive approach to supporting tax compliance was reported by respondents (Table 4). An organisation decides to employ people who know how to be tax compliant. There would be little point in organisations investing in trained staff to operate the compliance process, and sustaining that investment in training and accreditation, if the overall intention was to be non-compliant. The importance placed on adequate staffing levels is suggestive of both risk aversion (Expected Utility Theory) and pronounced loss aversion (Prospect Theory). While most company officer participants do not work full-time on tax issues, almost half noted a time commitment of more than three days monthly. This is not a trivial investment and is supported by the finding that attendance on continuing professional development (CPD) courses is the most effective way for company officers to keep up to date with changing tax rules. Along with investing in systems, this suggests a compliance decision when hiring and training staff rather than when dealing with an individual tax compliance requirement.

Risk aversion is linked to the amount of tax at issue and the complexity of the tax and helps justify the installation of systems to ‘automate out’ complexity and the difficulties associated with keeping up to date. Complexity is a different risk to the risk of detection, which Expected Utility Theory relies upon. It may even run counter to it – arguably the more complex a tax, the lower the risk that wrongdoing will be detected. The utility of positive organisational tax compliance seems less likely to be found in the context of any single compliance decision than in the commercial benefit of running a tax-compliant organisation. The likelihood of risk detection on a taxable transaction may need to be revised to estimating the likelihood of the organisation being systematically non-compliant. It follows that any risk-aversion measurement should include organisational risk aversion to being labelled non-compliant, rather than a specific risk aversion to getting a particular tax return or payment wrong.

This understanding of organisational risk detection helps explain why there is a greater belief in an organisation that detection of default will be through internal controls, rather than by the revenue authority. Findings indicate that external advisers are more likely to detect mistakes than the revenue authority, with the latter ranking as only the third-most effective reviewer, after more senior internal personnel and external advisers (Table 5).

Findings indicate that organisations take care with both fiduciary and direct taxes, even though the utility benefits of failure to comply with direct taxes would be higher for the organisation, as fiduciary taxes are collected from employees or suppliers on behalf of the revenue authority. This may be partly explained by Prospect Theory concepts, which emphasise the importance of the amount of tax at issue. Fiduciary taxes often involve greater monetary amounts than direct taxes. The anticipated measure of utility in considering the penalty for poor tax-compliance decisions is of less relevance in organisations than the theory would suggest. It seems the concept of utility is more closely linked to reputation than financial loss for organisations when making tax-compliance decisions (Table 13).

Respondents were asked about the linkage between organisational loss (financial, reputational, or otherwise) due to tax default and the personal consequences for them. While the findings indicate that there are no direct consequences for tax professionals, there can be indirect career consequences (Tables 6 and 7).

Non-compliance with tax law may dilute business value by leaving outstanding tax liabilities, which must be satisfied later. A fear of unresolved tax issues, which could emerge when the organisation changes hands, discourages potential buyers. These residual costs present another route to understanding organisational tax-compliance patterns. While the existing theories focus on point-in-time compliance decisions, they do not explain behaviours linked to longer-term business value. Due-diligence processes are conducted when a business is being sold, the objective being to identify any potential issues that have a bearing on sale price, and to quantify any liabilities that may crystallise in the future. Examining tax issues is a critical element of due diligence, as a record of past default may emerge during the sale. Tax professionals with experience of due diligence have a greater awareness of business valuation issues and may be more sensitised to the consequences of tax default or non-compliance on the future value of the business.

Most respondents had due diligence experience (74% UK, 66% Ireland), substantiating the recognition of issues concerning future business value. Evidence of an awareness of the importance of tax planning among tax professionals could reflect an awareness of the need to preserve the underlying value of the business through maximising retained earnings, making tax-efficient capital investments, etc. (Table 8).

Findings suggest that while Expected Utility Theory may shed some light on organisational tax compliance, the theory variables (risk aversion, risk of detection, potential loss and the potential return) must be framed in different terms when applied to organisational tax compliance.

4.2 Findings and Discussion Under Prospect Theory

Prospect Theory challenges Expected Utility Theory by modifying the assumptions of how the variables are quantified. The survey included questions designed to examine tax professionals’ perceptions of the likelihood of revenue-authority intervention. There were strong indications that an intervention is a concern for tax professionals some or most of the time and that they are aware of the broader consequences of their compliance decisions (Table 9).

This concern indicates that there may be personal sanctions for tax professionals arising from a revenue-authority intervention, though it is unlikely to come from within the organisation. Tax professionals may be reluctant to draw more work and pressure on themselves in dealing with revenue-authority enquiries or may have concerns about their personal reputations or careers. As noted, the measurement of risk aversion is a recurring issue within Expected Utility Theory approaches. Respondents are professionals who are likely to have a high level of tax expertise compared with other taxpayers. They are therefore less daunted by the intricacy of tax rules and compliance requirements (Table 10). Nevertheless, concern about the number of tax rules and the frequency of change suggests strong risk aversion and awareness of the cost of mistakes.

Further evidence of the accuracy of perceptions of risk and risk aversion came from questions involving the prospect of revenue-authority intervention over different time spans. Respondents understand the risk factors associated with revenue-authority methodologies when selecting cases for investigation. Most professionals with a coherent understanding of selection methodology would be unable to say that an audit is due in the short term (unless they had reason to anticipate it). However, a competent professional would expect their organisation to be audited within five years. This was evidenced as follows: while more than 75% of respondents did not know, or thought an audit was unlikely, within a 12-month timeframe (Table 11), more than two thirds believed a revenue audit was likely or very likely within five years (Table 12). This indicates a realistic awareness of the occurrence of a revenue-authority intervention.

Risk of detection is fundamental to Expected Utility Theory and Prospect Theory. Both suggest compliance decisions rely heavily on the evaluation of the risk of detection. Prospect Theory suggests that heuristic decision-making results in a miscalculation of the degree of risk. If respondents took decisions by reference to their reported capacity to risk assess detection, these heuristic biases would not be considered. Expected Utility Theory more accurately predicts compliance behaviour where the risk of detection is high, as is the case where there is full and verifiable reporting of transactions to the revenue authority. Company officer respondents are aware of organisational disclosure to the revenue authority and are likely to assess the probability of a revenue intervention informed by this knowledge. The characteristic overweighting of factors and overestimation of probabilities, key extensions of Prospect Theory to Expected Utility Theory, are not present in the findings.

The framing hypothesis of Prospect Theory suggests that the value of an outcome is dependent on the initial position. Prospective gains and losses are not assessed in absolute terms but are measured by reference to what is already possessed. The implication for tax compliance is that the amount of tax at issue has a bearing on the decision. Under Expected Utility Theory, the amount of tax is not a factor. The amount of tax only becomes relevant in the context of the tax rate and where penalties are calculated by reference to the tax liability. Findings indicate that monetary amounts are not always key determinants of risk aversion and there are greater concerns in the minds of tax professionals over reputation and publicity (Table 13).

The findings suggest that the consequences of tax evasion, which bring the organisation’s tax default into the public domain, are of concern. Publishing the organisation’s name as a tax defaulter is normally an alternative sanction to prosecution. While collection enforcement proceedings are not always publishable, they frequently come to the attention of customers, suppliers and bankers. Criminal prosecution for tax default usually involves a monetary fine (and possible custodial sentence) which will inevitably lead to publicity. The common link between publication, collection enforcement and criminal prosecution is that all three place information in connection with a tax default outside the purview of taxpayer/revenue authority confidentiality. Tax default becoming public does significant reputational damage. It can also hamper commercial capacity: lack of capacity to pay taxes discourages suppliers. Moreover, financial institutions extending lines of credit may be prompted to change credit terms or demand immediate repayment of outstanding loans fearing they may be left with bad debts after taxes and fines have been paid. While the desire to avoid reputational damage lends credence to Prospect Theory framing as bearing on the decision-making of tax professionals, it also suggests that utility must be measured in terms beyond monetary consequences.

Prospect Theory predicts that decision-makers will show greater aversion to a loss than preference for gain. When asked for their views on the costliest taxes to rectify, respondents considered VAT and PAYE/PRSI/NIC^[1] the costliest (Table 14).

VAT and payroll taxes are fiduciary taxes. They are often greater in monetary terms than direct taxes because they are computed by reference to turnover and payroll cost, whereas direct taxes are computed on profits. Nevertheless, loss aversion does not hold true in every situation. Respondents were asked if they might consider defaulting on fiduciary taxes if their organisation was in cash-flow difficulties (Table 15).

Fiduciary tax default is associated with a high risk of detection, largely because of the information available to revenue authorities from third parties. Furthermore, the detection of default on fiduciary taxes can be almost immediate because some fiduciary taxes fall due for remittance to the revenue authority every month. Direct taxes are remitted less frequently. Moreover, interest charges associated with the failure to remit fiduciary taxes are higher than for direct taxes. Nevertheless, 25% of company officers expressed a willingness to consider non-compliance with fiduciary tax legislation. The findings provide evidence of how risk might be assessed – not only in terms of tax default and the possibility of default being discovered, but also in terms of the commercial risk to the business of non-compliance.

Overall, the results suggest that organisational tax compliance decisions are not just tax payment related. Tax compliance decisions are complex because they consider monetary risks, the organisation’s commercial viability and reputation. Attempts to explain organisational tax compliance cannot be reduced to detection, risk and tax reward. Tax compliance is an element of overall commercial sustainability rather than a cost disassociated from broader commercial considerations.

4.3 Findings and Discussion in the Context of Tax Morale

Ninety percent of respondents noted that tax issues were an agenda item for senior management at least annually (Table 16). This indicates that compliance is routinely regarded in organisations as a corporate governance issue, possibly because taxation and the exposures flowing from non-compliance can be major business costs. The high incidence of internal support for compliance is consistent with this finding. Both Irish and UK tax law permits the revenue authority to take direct action against officers for corporate tax default. Respondents would be fully aware of the consequences of tax default discovered by the revenue authority for the organisation and for themselves. As discussed above, tax professionals demonstrate a sound awareness of revenue-authority detection risk.

Asked about the attitude of senior management to tax compliance mistakes, over 95% said management would regard them as requiring resolution and over 60% said mistakes would be resolved as a matter of priority (Table 17). Separate questions established that over 40% of respondents knew of regular attention being devoted to tax at board level. Fewer than 20% suggested there was no involvement by members of the board or senior management in organisational tax affairs. Overall, the findings suggest that tax compliance, both as a policy and operational issue, is significant for most businesses.

Seventy-five percent of respondents indicated that tax-saving opportunities are important (see Table 8), suggesting that the organisational imperative is to pay tax accurately, rather than as a societal contribution. The findings also indicate that tax is regarded as a business cost to be managed. There is also a sense that the tax professional might be at a disadvantage if they fail to secure tax saving opportunities. This response may be a contra-indicator of tax morale.

Sixty-two percent of tax advisers see the greatest risk as the overpayment of taxes, while 56% of company officers see underpayment as the greatest risk. This may suggest a preoccupation among tax advisers for accuracy as a commercial objective. Tax professionals in advisory roles may be more sensitive to their clients paying more tax than mandated because that may imply poor advice or carelessness. Alternatively, company officers may prefer to avoid the disruption of revenue-authority interventions arising from underpayments, and therefore be more comfortable with making overpayments, perceiving them as a necessary trade-off, and not made at their personal expense.

One-in-three respondents was indifferent in terms of their attitude to the revenue authority; a similar proportion considered the revenue authority to be good; while the outliers at opposite extremes made up the final third (Table 18). This positive result suggests an environment conducive to tax morale. Nevertheless, there were some divergences of views, specifically along jurisdictional lines, with respondents in Ireland having a less jaundiced view of their revenue authority than their UK counterparts. Respondents were asked how they would rate the revenue authority in policing the tax system and enforcing rules. While most respondents felt they were doing a reasonable job, Irish professionals were more positive. This may cast doubt on any general tax morale conclusions being drawn and instead reflect a measure of the respective efficacy of the revenue authorities concerned. This possibility is further amplified by responses regarding the fairness, or perceived fairness, of the tax system, with respondents in Ireland having a more positive reaction than their UK counterparts (Table 19).

Participants’ reluctance to evade fiduciary taxes like VAT or PAYE when experiencing organisational cash-flow difficulties, indicates a moral sense that it is wrong not to fulfil tax obligations. This has been examined above through the lens of Prospect Theory as indicative of how losses are framed. However, for tax morale purposes it is also worth noting that almost 20% of respondents are likely or very likely consider not fulfilling fiduciary tax responsibilities when in a difficult cash-flow position (Table 15). Considering that this is a potentially self-incriminatory response, such a high level of willingness to consider default suggests that the underlying reasons may also contain an element of pragmatism: perhaps the survival of the business comes first, rather than the desire to be tax compliant. This is challenged by views concerning the conduct of commercial rivals (Table 20). More than two thirds of respondents believe that some competitors compete unfairly by not charging tax properly. While few consider this practice to be widespread, this does not reconcile with individual unwillingness to contemplate tax default.

4.4 The Typical Company Officer Profile

Based on responses from company officers only, it is now possible to create a profile of the typical company officer engaged in tax-compliance work. This company officer may be like the rational economic man; an artificial concept, but nevertheless a useful construct when attempting to understand organisational tax-compliance decisions. The picture that emerges of the typical company officer is of a qualified professional who finds tax work challenging but manageable. Such individuals benefit from the significant support and training provided by their organisations, including on computerised systems, which is appropriate because many spend quite some time in their day-to-day work attending to organisational tax issues. This professionalism and ongoing training pay off because company officers appear to have a good awareness of tax risk, realise that they must be careful to check their work and engage outside help if necessary, and be on the lookout for organisational tax-saving ideas. While senior management within organisations consider tax issues regularly and regard tax mistakes as matters to be rectified without delay, company officers feel sheltered by their organisation and do not believe that action would be taken against them personally should something go wrong. While external consultants such as auditors are more likely to find tax-compliance problems within organisations than the revenue authority, company officers realise that the relationship their organisations have with the revenue authority is important for their careers. They appear to quantify organisational tax default by reference to the amounts at issue and the difficulty of making restitution, rather than by the rights and wrongs of the situation. Furthermore, the reputational outcome for their organisation is more important than any monetary sanctions for non-compliance.

As a description of a person making decisions under risk, there are such fundamental differences in approach between the rational economic man and the typical company officer that existing theories involving expected utility must be re-interpreted if they are to accurately describe or predict organisational tax compliance behaviour. While rational economic man stands to personally gain or lose because of compliance decisions, it does not appear that the typical company officer is impacted personally. While rational economic man has a variable perception of risk in the event of a default, the typical company officer has a clear understanding of the likelihood of the detection of non-compliance. While rational economic man fears tax penalties, the typical company officer fears adverse organisational publicity and career damage for themselves. Additionally, the typical company officer is not misled by the heuristic biases of Prospect Theory. This is partly due to professional training, and partly the embedded systems in organisations, which include continuous checking and review. Moving beyond economic deterrence models, the typical company officer is pragmatic while appearing suspicious of competitors who act outside tax compliance norms.

5. Conclusion

The dominant theories of tax compliance derive from Expected Utility Theory, Prospect Theory, and theories of tax morale (Frey, 2003). They are most often considered in the context of decisions made by individual taxpayers in a direct relationship with the revenue authority, which bears the consequences of their compliance decisions. In monetary terms, fiduciary tax compliance by organisations yields far more than direct tax compliance by individuals. The more serious forms of tax default often involve failure to operate fiduciary taxes. Despite their role in operating fiduciary taxes, however, the contribution of organisations to overall tax compliance appears neglected in the literature, leading to calls for more focussed research in this area (Doyle et al., 2020). Answering these calls, this paper explores this previously under-researched domain, specifically examining whether the primary tax compliance theories can explain tax compliance behaviour in organisations discharging their fiduciary tax obligations.

The findings establish that the key components of Expected Utility Theory, namely risk aversion, risk of detection, potential loss, and potential return, must be considered differently in the organisational context. Organisations embed procedures, supports and systems to achieve high levels of fiduciary tax compliance, and the role of the revenue authority is largely secondary in day-to-day compliance policing. For Prospect Theory, there is evidence that risk assessment techniques are refined so that heuristic biases do not colour compliance judgements. There is little evidence to indicate that tax morale principles inform fiduciary compliance decisions to any significant extent. Overall, it may be concluded that the theories attempting to explain tax compliance behaviour are not appropriate to organisations discharging fiduciary tax obligations. Rather, they point towards an application of theory that accounts for the commercial success of organisations and the career aspirations of their tax compliance officers.

This research has practical implications and thereby contributes to tax policy. Faced with limited policing resources, revenue authorities should prioritise organisations with fiduciary tax obligations. Rather than applying traditional enforcement techniques derived from models of economic deterrents (namely enhanced risk of detection with financial sanctions), they should instead employ a range of sanctions for poor compliance, which create adverse reputational consequences for the taxpaying organisation. This would reinforce the norm that tax compliance makes good business sense: it would be necessary for (or at least not run counter to) an organisation’s commercial interests to be tax compliant.

Revenue authorities should also focus attention on company officers within organisations. Findings establish that what influences company officers’ behaviour is not the same as what influences individual taxpayers. Considerations of career prospects and personal professional reputation can outweigh the consideration of their organisation’s tax compliance status, which could be leveraged to benefit overall compliance levels.

Those involved in either the formulation of tax policy, or in the compliance process, within revenue authorities or within private-sector organisations, should better understand where the weaknesses in the overall tax system might be from these findings. Tax compliance levels in Ireland and the UK are high, primarily because of the work of organisations in complying with fiduciary methods of tax administration and collection. This degree of compliance should, however, not be taken for granted and must be fostered carefully.

For tax policymaking, the evidence indicates that new fiduciary taxes or additional regulation of existing ones may not be successful without reference to the commercial concerns of organisations. New taxes at odds with existing commercial practice will require more rigorous enforcement levels. However, compliance obligations that run parallel to existing business practices and procedures are more likely to succeed.

It is clear that the risk of public exposure of tax default has an influence on the behaviour of company officers. The official publication of tax defaulter’s names is not the only way tax default may come to light publicly but may be the most significant. However, there is a risk that the regular publication of tax defaults may serve to normalise adverse behaviours and propagate a public perception that tax default is a routine occurrence. Nevertheless, the regular publication of tax defaulters’ names serves as a reminder of the policing and enforcement activity of the relevant revenue authority. The impact of such reminders may exceed the adverse normalisation effects of publication.

In terms of limitations, the survey may have suffered from self-selection bias in being voluntary. However, the anonymity aspect may mitigate that risk somewhat. The research was conducted across two common law jurisdictions. It is possible that jurisdictions operating a civil law system might yield different results. Furthermore, the typical profile of a company officer is based on the responses from company officers only rather than the full cohort of participants.

Alm (2011) comments that the puzzle of tax compliance behaviour may be why people pay taxes, not why they evade them. Decision-makers in organisations are key actors in modern tax systems, and their behaviour shapes the success or otherwise of the tax system as a whole. This research brings the role of the organisation in tax compliance and the contribution of fiduciary taxes to the overall tax yield into sharper focus and contributes to understanding how tax compliance operates in an organisational context.