PSU research on how the IRS can build trust in the event of taxpayer identity theft

Tax identity theft happens when an individual uses the personal information of another taxpayer, filing a falsified tax return to obtain an unauthorized refund. If the victim believes the IRS did not do enough to prevent the crime — or did not adequately respond to it — society suffers. Prior research has established that high levels of trust lead to high levels of compliance; high tax compliance is essential to having a functioning government.

The IRS has earmarked responding to tax-related identity theft as a top priority. Tax-related identity theft has become increasingly prevalent as nefarious online tools have become more sophisticated; in 2019, there were over 45,000 cases in the U.S.

How can the IRS establish trust? In a new study, assistant professor of the Master of Taxation Cass Hausserman and her team help the IRS understand how to best build trust with the American public.

Responsiveness and responsibility

Prior research has established that accountability leads to trust. Two aspects of accountability, responsiveness and responsibility, are relatively easy to measure and affect a clearly defined set of stakeholders.

“IRS responsiveness positively influences trust, and trust in turn positively influences compliance,” writes Hausserman and her team. “When the IRS is not to blame for identity theft, more responsiveness by the IRS significantly influences compliance through trust.” 

But trust was contingent on responsibility. In the hypothetical scenario the researchers set up, the IRS was considered responsible for the crime if their technology and protocols were not sufficiently up-to-date to have prevented it. If the taxpayer thought the IRS could have done more to prevent the attack, the response from the IRS did not have much of an effect. “These findings suggest that when the IRS is to blame for identity theft, there may be little the IRS can do to increase taxpayers’ trust and subsequent compliance, which highlights the importance of preventing identity theft in the first place.” The team felt the IRS can allocate more resources to prevent identity theft.

Tax and society

Hausserman’s research methodology relied on inputs from a representative selection of hundreds of taxpayers across many demographic groups, including gender, age, income and education level, political beliefs and subjective experiences with the IRS. Obtaining robust data from real taxpayers puts the researchers in a good position to make an informed recommendation that is useful for the IRS.

There are steps the IRS can take to cut down on tax-related identity theft — for example, the National Taxpayer Advocate, an independent organization in the IRS, has published actionable items that the IRS is working on incorporating. In the meantime, Hausserman’s behavioral research provides invaluable insights into what taxpayers actually value from their tax authority in the aftermath of fraud.