Exploring the potential impacts of compliance communications on taxpayer perceptions about tax cheating

Prepared for the:
Public Affairs Branch
Canada Revenue Agency
FINAL REPORT
November 2007
POR# 131-07
Contract #46558-082165

Prepared by:
Sage Research Associates

Le rapport complet en français sera fourni sur demande.

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EXECUTIVE SUMMARY

Based on analysis of a variety of information sources, the Canada Revenue Agency (CRA) has developed the following hypothesis about one factor that may be relevant to trends or differences across subgroups in tax compliance:

Perceptions of tax cheating are influenced by public awareness of the CRA’s approach to addressing non-compliance and the results of its programs.

The purpose of the present research was to explore through qualitative research whether and how the public’s perceptions about tax cheating are influenced by their awareness of (a) what the CRA does to combat non-compliance, and (b) the results of its programs. The research will contribute to a more in-depth understanding of the impact of compliance communications on attitudes and perceptions pertaining to tax cheating.

Twenty focus groups were conducted September 17-27, 2007, spread across different regions of Canada, and between larger cities and smaller cities. Ten focus groups were conducted with wage earners, and ten were conducted with self-employed business people running small businesses. The discussion agenda included discussion of tax compliance attitudes and how these are shaped by compliance-related communication, aided awareness and discussion of types of compliance-related communication, and discussion of examples of some types of compliance-communication the CRA might produce.

Factors Shaping Perceptions of Tax Cheating

The research explored factors shaping attitudes and perceptions pertaining to two aspects of tax compliance -- likelihood of tax cheating, and likelihood that tax cheaters are caught. The following summary focuses on major factors that can be based on what people see and hear.

Likelihood of tax cheating

Some factors widely mentioned as increasing the predisposition to cheat included:

• Whether a person feels the public pays too much in tax: The important point here is that what people see and hear about the operation and action of government, and how they feel about what the government is doing, is perceived to be connected to how people feel about tax compliance. To the extent a person feels their tax dollars are not being appropriately used by government, they may feel that it is OK to cheat at least a little on their taxes, and that it is not a truly "bad" thing to do (at least, up to a point).
• Perceived prevalence of the underground economy: The perceived prevalence of cash transactions to avoid tax can lead to a sense that if a lot of other people are cheating on their taxes, then it is not so bad to cheat on one’s own taxes. Notably, in all focus groups a substantial number of participants believed there were quite a few such cash transactions occurring in their area.

With regard to factors that may decrease predisposition to cheat, one widely mentioned factor was fear -- i.e., fear of getting caught, and fear of the consequences of getting caught. Of particular interest in this research project was to what extent participants’ fears were based on things they had seen or heard -- i.e., on compliance-related communication. Notably:

• The majority of participants had not in the past year or so seen or heard of people getting caught for tax cheating, and almost none had seen information on the general likelihood of getting caught.
• The majority of participants had not in the past year or so seen or heard information on the consequences of tax cheating, and very few had seen any such information from the CRA itself.

The result is that for the majority of participants, the fears were based more on general worry than on specific data or information.

Likelihood that tax cheaters will get caught

With regard to some factors that can lead to a view that the majority of tax cheaters are not caught:

• As noted above, the majority of participants had not in the past year or so seen or heard of people getting caught for tax cheating, and almost none had seen information on the general likelihood of getting caught. Some participants said this lack of information implies to them that the CRA may not be catching most tax cheaters -- because if it was, it would probably say so.
• In the context where the majority of participants have seen little communication pertaining to people getting caught for tax cheating, some comment that they have seen people not getting caught. In particular, they cite the perceived prevalence of the underground economy, and their perception that few if any of those doing this sort of business get caught. This result highlights the potential importance of perceptions of the underground economy impacting compliance perceptions more broadly (i.e., outside the scope of the underground economy transactions themselves). The underground economy is the one area where people can, with a bit of inference, actually "see" tax non-compliance happening on a regular basis around them. To the extent they perceive the underground operators getting away with tax cheating, this "factual data" contributes to the view that the likelihood of tax cheaters getting caught is relatively low.
• Beliefs about how the CRA approaches enforcement can also contribute to a view that the majority of tax cheaters are not caught:
  • Perceived CRA resources: Some participants said it was their belief that the CRA does not have sufficient resources to try to catch every tax cheater. Associated with this, they believed the CRA prioritizes its limited resources to focus on large tax cheaters, and expends relatively few resources on small tax cheaters. Further, since some believe the majority of people cheat in small amounts, this led to the conclusion the CRA does not catch the majority of tax cheaters.
    The perception that the CRA has limited resources to catch tax cheaters does not seem to have been based on anything people specifically saw or heard, but rather appeared to be an assumption.
  • Perceived CRA priorities: Related to the preceding point, some participants believed the CRA will base its enforcement priorities on expected dollar return relative to the cost of recovery. Again, this was not based on seeing or hearing something specifically stating this, but rather was an assumption about what would be a "logical" way for the CRA to operate. This again led to the view that the CRA would focus enforcement on large tax cheaters where the dollar return is likely to exceed the cost of identification and collection.

With regard to factors that can lead to a view that the CRA does catch the majority of tax cheaters: Participants mentioned such factors as being personally audited, seeing or hearing about people caught for tax cheating, and the perceived power of CRA computer systems. However, given that the majority of participants had not in the past year or so seen information about people getting caught, the overall result was that there did not seem to be any strong, widely seen communication or information supporting an evidence-based opinion that the CRA is effective in catching tax cheaters. Indeed, some participants said as much, and said they therefore did not understand how anyone could believe the CRA catches the majority of tax cheaters.

Compliance-Related Communications

Incidence of seeing or hearing compliance-related information: The majority of participants said they had not seen or heard any compliance-related communication in the past year or so. Among those who said they had, the frequency of seeing or hearing things tended to be low. Overall, the results suggest a scarcity of compliance-related communication.

Word-of-mouth communication was the most commonly mentioned medium for seeing or hearing something related to tax compliance. Only a minority of participants said they had seen or heard anything in the media (e.g., TV, print, radio, Web) pertaining to compliance. Recall was very low of receiving any communication from the Government of Canada or the CRA in any of the following areas: the likelihood that tax cheaters will be caught, the consequences of tax cheating, or the importance of complying with tax laws.

Impact of compliance-related communication: Because of the perceived scarcity and infrequency of compliance-related communication, there is relatively little one can say, based on participants’ experiences, as to what impact communication might have if there was more of it. For the most part, there is not a critical mass of recalled communications on which conclusions can be based.

Nonetheless, there are some observations that can be made based on participants’ experiences. For example, with respect to stories about people getting caught for tax cheating, the following are some factors that affect the deterrent impact such stories can have:

• Degree of personal connection: Knowing somebody personally who has been caught for tax cheating is more likely to have an impact.
• Similarity of life/work circumstances: A story can be more impactful if it is about a person with a broadly similar lifestyle or line of work. This can be an issue with media-based stories, since these tend to be perceived as involving famous, prominent, or wealthy people, and may not be seen as relevant to an "ordinary" person considering cheating on taxes.
• Size of the tax evasion: If a case of tax cheating is seen to be extreme or "stupid" (because it is perceived to be so extreme), then it will have less perceived relevance to the average small-time tax cheater. That is, the fact the person got caught for such seemingly blatant cheating may not be seen as having any implications for the risk incurred by the "average", smaller-time tax cheater.
• Severity of consequences: Severe consequences, such as jail time or heavy fines/penalties, can get attention.

Participant Suggestions Pertaining to Compliance-Related Communications

Overall, the majority of Wage Earner participants said they would like to receive more compliance-related information, while the Self-Employed tended to be somewhat less interested, with somewhat fewer than half saying they would like to receive more information. That said, the Self-Employed became a bit more interested in receiving information once they saw examples of possible types of compliance-related communication in the last segment of the focus groups.

Among participants who expressed an interest in receiving more information, the two most frequently mentioned categories were the consequences of tax cheating and the likelihood of getting caught. Some participants wanted communication on the general importance of complying with tax laws in order to ensure adequate funding of programs and services.

Communication on the consequences of tax cheating: Among participants expressing an interest in more compliance-related information, many suggested the CRA should provide more information on the consequences of tax cheating. They believed it is likely many people have relatively little specific awareness of the consequences of tax cheating.

Participants believed that providing information on the consequences of tax cheating could have a deterrent impact -- providing the consequences are perceived to be sufficiently severe. The latter point is an important one, as some participants noted they would essentially do a risk assessment of the consequences relative to the potential gain of tax cheating.

With regard to what sorts of information about the consequences of tax cheating might be provided, suggestions included

• Financial consequences -- fines and penalties
• Jail, and tax cheating is a "crime": Some participants were not clearly aware that jail is a possible consequence of tax cheating. Several participants also believed that some people do not think of tax cheating as a "crime", and suggested the word "crime" be used in order to emphasize the seriousness of the consequences of being caught cheating on taxes.
• Impact on review of future tax returns: Some participants said something they would fear if caught cheating on taxes is that the CRA would "red flag" their file and audit their returns for years to come.
• Publish names of tax cheats: Self-Employed participants were more likely than Wage Earner participants to perceive publishing the names of tax cheats as having strong deterrent value. The Self-Employed participants perceived this as adversely affecting their business reputation and therefore their future livelihood. In this context, the perceived deterrent value was stronger among Self-Employed participants in the smaller cities compared to those in the larger cities. Participants in the smaller cities felt business people in smaller cities tend to be better known in the community, whereas businesses in large cities may be more anonymous.

Communication on the likelihood that tax cheaters will be caught: Among participants expressing an interest in more compliance-related information, many suggested the CRA should provide more information on the likelihood of tax cheaters being caught. There were two reasons for wanting to see this type of information -- to deter people from cheating because of the fear of a high likelihood of being caught, and to make people who are honest feel good about being honest. Note that the latter message can have a deterrent impact as well, because one reason many participants mentioned for why some people would hide income/overstate deductions is because they perceive other people to be doing it and getting away with it. The following are additional results associated with these two suggested reasons for providing more information about the likelihood of being caught:

• To deter people from cheating: Many participants suggested that an impactful way to communicate the likelihood of being caught would be to provide statistics of some sort, although participants were vague on the precise sorts of statistics that might be published. Almost none of the participants said they had ever seen or heard such statistics.
  
  A perceived advantage of statistics on likelihood of being caught relative to the stories of individual tax evaders some participants had seen is that statistics are relevant to everybody, whereas any given story of an individual may be perceived as relevant to only a relatively small segment of the population.
• To make people who are honest feel good about being honest: In order to effectively convey a message about the likelihood of getting caught that will help make people feel good about being honest in paying their taxes, it is important to show that the segments most likely to be seen as getting away with not paying enough taxes are getting caught. This means, for example, showing effective action against "big"/wealthy people and businesses, and against large operators in the underground economy.

Communication on the general importance of complying with tax laws: Some participants wanted what they perceived as a more "positive" approach, which emphasizes the value of the programs and services funded by tax dollars. It was suggested this approach could either show the valuable programs and services funded by tax dollars, or show how tax cheating compromises valuable programs and services.

Participants suggesting this approach noted that one reason people may cheat on their taxes is if they do not feel they are getting good value for their tax dollars. Showing the good value that is there could motivate people, in a positive way, to want to pay their honest share of taxes.

There are two cautions with respect to the use of this more positive approach:

• Some other participants responded that they did not believe this sort of positive message would actually be powerful enough to change the behaviour of those inclined to cheat. They felt "threats" would be needed to impact behaviour.
• From a CRA communication perspective, the ways in which tax dollars are spent are outside the CRA’s control.

Reactions to Examples of Compliance-Related Communications

Participant reactions to seven examples of compliance-related communications were explored in the focus groups. Three were examples of individuals caught for tax cheating, and topics addressed in the other examples included the consequences of tax cheating, the likelihood of people operating in the underground economy getting caught, the Voluntary Disclosure Program, and the importance of keeping business records up to date and organized.

The following are some general results that emerged from the discussions of the examples:

• Participants were often interested in the contents of the examples, confirming the finding reported above that there is interest in seeing more compliance-related information.
• Participants typically assessed the communications from two perspectives: (1) direct personal impact or relevance in terms of their own attitudes or behaviour with respect to being compliant, and (2) the perceived effectiveness of the CRA in terms of ensuring tax compliance. The latter is to some extent about whether, as some participants put it, the CRA "is doing its job", but even more it is about whether it makes people feel good about being compliant on the grounds that those who do cheat are getting caught.
• Three of the examples were about individuals caught for tax evasion, and there were several common elements to how participants reacted to descriptions of individual cases:
  • The particular circumstances of any one case – e.g., the individual’s occupation, type of tax fraud, dollar amounts involved, etc. -- can limit its perceived direct target in terms of a deterrence message. This implies that with respect to a communication strategy of publicizing particular cases of tax fraud, diversity of cases is important in order to maximize overall impact.
  • Even if a particular case is not perceived as directly relevant, the description of the consequences of tax cheating can still have some impact in terms of generally educating people on how serious the consequences can be. For example, even if a case was not perceived as personally relevant, references to jail time would get attention because some participants were not previously clearly aware that this can be a consequence of tax cheating. Another example is that Self-Employed participants, particularly those in smaller communities, were likely to be sensitive to the fact that the individual’s name is published.
  • Participants tended to analyze the individual’s perceived gain relative to the perceived consequences in order to assess whether the tax fraud was "worth it."
  • If a case of tax fraud is seen as blatant/obvious/extreme, people may conclude that while the CRA can detect obvious cases of fraud, it may not necessarily be very good at catching less blatant cases, which can lessen the perceived deterrent impact on "small" tax cheaters.
• Use of language in terms of vocabulary and style is important, and use of plain language is particularly important for the Wage Earner target. For example, some of the CRA news releases contained language participants perceived to be "dry" and "too technical." Associated with this, some participants -- especially Wage Earners -- had difficulty understanding some of the terms used, and found the writing "boring."