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The IRS Research Bulletin The IRS Research Bulletin Proceedings of the 2019 IRS / TPC Research Conference Research, Applied Analytics & Statistics Publication 1500 (Rev. 6-2020) Catalog Number 11546J Department of the Treasury Internal Revenue Service www.irs.gov IRS Research Bulletin Papers given at the 9th Annual Joint Research Conference on Tax Administration Cosponsored by the IRS and the Urban-Brookings Tax Policy Center Held at the Urban Institute Washington, DC June 20, 2019 Compiled and edited by Alan Plumley* Research, Applied Analytics, and Statistics, Internal Revenue Service *Prepared under the direction of Barry W. Johnson, Acting Chief Research and Analytics Officer IRS Research Bulletin iii Foreword This edition of the IRS Research Bulletin (Publication 1500) features selected papers from the IRS-Tax Policy Center (TPC) Research Conference held at the Urban Institute in Washington, DC, on June 20, 2019. Conference presenters and attendees included researchers from many areas of the IRS, officials from other Government agencies, and academic and private sector experts on tax policy, tax administration, and tax compliance. In addition to those who attended in person, many participated live online, as the TPC broadcast video of the proceedings over the Internet. The videos are archived on their Website to enable additional participation. Online viewers participated in the discussions by submitting questions via e-mail as the sessions proceeded. The conference began with welcoming remarks by Eric Toder, Co-Director of the Tax Policy Center, and by Barry Johnson, the Acting IRS Chief Research and Analytics Officer, who introduced a short video welcome from IRS Commissioner Charles Rettig. The remainder of the conference included sessions on estimating the effects of tax administration on compliance, the influence of external factors on compliance, improving the digital taxpayer experience, and understanding the drivers of taxpayer behavior. The keynote speaker was Richard Rubin, U.S. Tax Policy Reporter at the Wall Street Journal, who offered his insights on current tax issues. We trust that this volume will enable IRS executives, managers, employees, stakeholders, and tax adminis- trators elsewhere to stay abreast of the latest trends and research findings affecting tax administration. We -an ticipate that the research featured here will stimulate improved tax administration, additional helpful research, and even greater cooperation among tax administration researchers worldwide. iv IRS Research Bulletin Acknowledgments This IRS-TPC Research Conference was the result of preparation over a number of months by many people. The conference program was assembled by a committee representing research organizations throughout the IRS. Members of the program committee included: Alan Plumley, Ken Kaufman, José Colon De La Matta, and Michael Sebastiani (RAAS); Scott Rutz (Taxpayer Advocate); Derek Haynes (Human Capital Office Research); John Miller (Large Business & International Division); Diane Belanger (Wage & Investment Division); Debbie Schmidt (Small Business / Self-Employed Division); Andrew Kitchings (Tax Exempt, Government Entities Division); Stephanie Needham (Criminal Investigation Division); George Contos (Communications & Liaison); Alcora Walden (Online Services); and Rob McClelland (Tax Policy Center). In addition, Ann Cleven and Hailey Roemer from the Tax Policy Center and Jon Creem (RAAS) oversaw numerous details to ensure that the conference ran smoothly. This volume was prepared by Clay Moulton, Camille Swick, and Lisa Smith (layout and graphics) and Beth Kilss and Georgette Walsh (editors), all of the IRS Statistics of Income Division. The authors of the papers are responsible for their content, and views expressed in these papers do not necessarily represent the views of the Department of the Treasury or the Internal Revenue Service. We appreciate the contributions of everyone who helped make this conference a success. Barry Johnson Acting IRS Chief Research and Analytics Officer IRS Research Bulletin v 9th Annual IRS-TPC Joint Research Conference on Tax Administration Contents Foreword ........................................................................................................................................................................ iii 1. Estimating the Effects of Tax Administration on Compliance Estimating the Specific Indirect Effect for Multiple Types of Correspondence Audits Ben Howard, Lucia Lykke, and Leigh Nicholl (MITRE Corporation), and Alan Plumley (IRS, RAAS) ...................3 Enforcement vs. Outreach—Impacts on Tax Filing Compliance Anne Herlache, Ishani Roy, Alex Turk (IRS, RAAS), and Stacy Orlett (IRS, SB/SE) ............................................. 30 Exchange of Information and Bank Deposits in International Financial Centres Pierce O’Reilly and Michael A. Stemmer (OECD Centre for Tax Policy and Administration) and Kevin Parra Ramirez (Banque de France) ........................................................................................................... 72 2. The Influence of External Factors on Compliance Recent Changes in the Paid Return Preparer Industry and EITC Compliance Emily Y. Lin (Office of Tax Analysis, U.S. Department of the Treasury) ............................................................107 Effect of Recent Reductions in the Internal Revenue Service’s Appropriations on Returns on Investment Janet Holtzblatt (Urban-Brookings Tax Policy Center) and Jamie McGuire (Joint Committee on Taxation) ........128 3. Improving the Digital Taxpayer Experience IRS Online Account User Testing: Improving the User Experience Through Iterative Design and Research Heather Gay (Mediabarn Inc.) ......................................................................................................................................147 Usability of Biometric Authentication Methods for Citizens with Disabilities Ronna ten Brink and Becca Scollan (The MITRE Corporation) ................................................................................154 Customer Experience Research Leads to Better Design and Increased Adoption Nikki Kerber, Kristen Papa, and Jacob Sauser (Booz Allen Hamilton) ................................................................... 178 vi IRS Research Bulletin 4. Understanding the Drivers of Taxpayer Behavior Underpayment of Estimated Tax: Understanding the Penalized Taxpayer Population Victoria Bryant, Brett Collins, Janet Li, Alicia Miller, Alex Turk, and Tomás Wind (IRS, Research, Applied Analytics, and Statistics), and Stacy Orlett (IRS, Small Business/Self-Employed Division) ................................. 193 The Positive and Negative Effects of Burdensome Audits Amy Hageman (Kansas State University), Ethan LaMothe (Oklahoma State University), and Mary Marshall (Louisiana Tech University) .................................................................................................................220 Using a Graph Database To Analyze the IRS Databank Ririko Horvath and Rahul Tikekar (IRS, Research, Applied Analytics, and Statistics) ............................................223 5. Appendix Conference Program ...................................................................................................................................... 233 1 ∇ Estimating the Effects of Tax Administration on Compliance Howard ◆ Lykke ◆ Nicholl ◆ Plumley Herlache ◆ Roy ◆ Turk ◆ Orlett O’Reilly ◆ Stemmer ◆ Ramirez Estimating the Specific Indirect Effect for Multiple Types of Correspondence Audit Ben Howard, Lucia Lykke, and Leigh Nicholl (The MITRE Corporation), and Alan Plumley (IRS, RAAS) Introduction Tax enforcement actions have a direct revenue effect: the tax collected from (or refunded to) the contacted taxpayer pertaining to the year that was the subject of the contact. These enforcement actions undoubtedly also have an indirect effect on revenues: a change in the current or future behavior of taxpayers who either have experienced an enforcement contact themselves (the “specific” indirect effect) or have some knowledge or perception about others’ tax enforcement experiences (the “general” indirect effect). This study seeks to estimate and compare the magnitudes of the specific effects on taxpayers following one of three types of cor- respondence audits, using longitudinal taxpayer data obtained by the United States Internal Revenue Service (IRS) through operational audits conducted on tax returns filed within the Tax Years (TYs) 2006 through 2012 period. We study the effects of correspondence audits that examine three different types of taxpayers: those who were audited based on business expenses, itemized deductions, and self-employment tax, respectively. In each case, we compare the subsequent-year reporting on total tax and audit-specific line items between the audited group and a not-audited taxpayer “control” group that was otherwise eligible for the audit according to all operational eligibility criteria. In this way, we advance prior literature by estimating the specific indirect effect for three categories of audit, examining taxpayers who are designated for audit eligibility by operational criteria that vary by the audit category. Comparing the subsequent reporting behavior of taxpayers who experienced different types of audits has both research and operational value. Much of the prior literature on the indirect effect of audit has focused on taxpayers who are self-employed (e.g., Beer et al. (2015); DeBacker et al. (2018a)), finding
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