Paid tax preparer determinants extended and reexamined.

In recent years significant inquiry has been made into identifying the determinants of paid tax preparer (PTP) use. Research in this area has assumed importance in light of the vital role played by tax preparers in the tax compliance process. Use of a paid tax preparer is influenced by numerous factors. These factors are both internal and external to the taxpayer. Studies reveal that PTP use is affected by a desire to minimize tax liability and to enhance the accuracy of returns (Slemrod 1989; Collins, Milliron, and Toy 1990). In addition, mode of tax preparation is influenced by various personal characteristics including the taxpayer's knowledge of the tax law, taste for tax work, time to be expended in preparing the return, level of reportable income, type of tax return to be filed, age, and level of education.

These factors have been incorporated into a reduced-form model of PTP use. Pursuant to the reduced-form model, a significant positive correlation has been found to exist between PTP use and self-employment, complexity (as measured by number of forms and schedules filed), and age (Long and Caudill 1987, 1993; Christian, Gupta, and Lin 1993). Certain studies have examined and found a significant positive relationship between PTP use and audit rate (Dubin et al. 1992; Long and Caudill 1993), penalties, and state marginal tax rates (Long and Caudill 1993). Conflicting results, however, have been reached concerning the significance of marginal tax rate and income measures (Long and Caudill 1987, 1993; Slemrod 1989; Blumenthal and Slemrod 1992; Christian, Gupta, and Lin 1993; Deere and Wolfe 1994), as well as the number of dependents (Long and Caudill 1993; Christian, Gupta, and Lin 1993).

This study seeks to contribute to the literature by extending paid tax preparer research in three major respects:

1. Introduction of a new measure known as absolute positive income (API). Prior studies have used only total positive income (TPI) as an income measure. TPI is defined as the sum of all positive incomes taxpayers are required to report on the return (Long and Caudill 1987). In contrast, API reflects the sum of all positive income and the absolute value of all expense or deduction amounts specific to attached schedules. API is therefore not a true measure of income; rather, it is a measure of all relevant dollars believed to influence a taxpayer's decision to use a PTP. Although not intended to replace TPI, API more fully takes into account those dollars influencing mode of tax preparation.

2. A cross-section analysis is made using 1988 data to replicate and extend prior research. Prior research has relied on pre-Tax Reform Act of 1986 data. Thus changes made to the tax law and forms and schedules by the act have not been incorporated into prior studies.

3. Examination into whether the income measure (TPI or API) exhibits nonlinearity in variable for its influence on PTP use. Prior research has assumed a linear relationship. Failure to consider whether the relationship exhibits a linear or nonlinear relationship may result in an estimation error.

THEORETICAL FRAMEWORK

The model of tax-filing behavior analyzes the choice process confronting taxpayers as they attempt to maximize their utility (Slemrod 1989). Within this tax-filing behavior is an incentive to minimize tax liability. An important part of this tax-filing activity is captured by the tax compliance technology process(1) (Slemrod 1989), which relates to how a given level of tax liability is generated based on various tax-related inputs. These tax-related inputs are hours of professional tax assistance; taxpayer's own time spent preparing the return; type of return filed; and a set of personal characteristics that include education, age, attitude toward taxes, taste for tax work, tax law knowledge, and so on. The tax compliance technology allows effort expended in finding deductions and reductions in taxable income to receive distinctive treatment in the process. This treatment acknowledges that deductions are only relevant when taxpayers itemize their returns.(2) With respect to the resulting tax liability, it depends on the choice outcome for allocating time, effort, and expenditures in the tax compliance process for maximizing taxpayer's utility. As a consequence, the process for discovering reductions and deductions in taxable income in the tax relation depends on the composition of the income, which can influence the search effort by taxpayers or the purchase of professional tax assistance.

This research concentrates on the latter area of how the composition of income affects the purchase of professional tax assistance. The concept of income is expanded to encompass all income-related dollars that contribute to producing a level of income for the taxpayer; and thus, income-related dollars are not a pure examination of income. Including income-related dollars in the tax liability process helps one to determine what dollar amounts are associated with tax schedules filed by taxpayers, and the level of gross income. The role of income-related dollars is influenced by two taxpayer concerns that affect the acquisition of professional tax assistance in the tax compliance process: (a) the desire to discover reductions and deductions in order to minimize tax liability and (b) the desire to file an accurate return in order to avoid subjection to audit and penalties.

Each of these concerns is expected to have a positive correlation to PTP use: The first because of the greater tax …