Behavioral Factors in Tax Preparer and Tax Compliance Choices

ABSTRACT What tax preparer characteristics are most important to taxpayers in their decision to use a tax preparer, and how does this choice of a tax preparer affect subsequent taxpayer compliance? We use laboratory experiments to examine these questions. We find that individuals in this environment simultaneously choose a preparer and their compliance based in part on factors predicted by the standard expected utility theory of individual behavior under uncertainty. However, we find that factors based on psychological considerations—which we refer to as “behavioral factors”—also play an important role in this setting: Participants prefer tax preparers who are “credentialed,” even when the cost is high or the credential has no impact on outcomes; participants fear an audit, regardless of its likelihood; participants often choose high‐cost preparers even when they are fully compliant; and many participants forego substantial expected earnings rather than underreport income.