Confidentiality and Taxpayer Compliance

Abstract

Internal Revenue Code guarantees privacy of taxpayer information in the administration of the U.S. income tax. Many state and local governments also support the confidentiality of taxpayer data. However, given the growth in on–line tax filing and reports of breaches in confidentiality of credit and banking data, individuals are likely to be increasingly wary of the privacy of their tax return data. Might we expect, as taxpayers question the confidentiality of their information, that their tax compliance would be affected? In this paper, we use experimental methods to analyze the relationship between the perception of confidentiality and taxpayer compliance. We find some evidence suggesting that when individuals perceive a breach in confidentiality, they actually increase their level of compliance.