Human or Computer? How Trust and Procedural Justice Influence Tax Preparation Decisions

As April 15 approaches each year, people across America scramble to get their taxes filed. While some people have likely gotten into a routine, doing them the same way each year, others might not be so sure of the process. Either way, many people dislike doing taxes and resort to using different preparation methods to make completing their civic duties easier.  As such, satisfaction with the preparation may vary widely from person to person. In a recent NSF-funded study by Dr. Krystia Reed (of the Legal Decision Lab) and colleagues, the researchers  pioneered a unique and intensive data collection process to be able to compare perceptions of tax preparation methods by American taxpayers, specifically by comparing perceptions on tax experts and online preparation software. 

With an increasing reliance on electronic tax software among taxpayers, there is also a rising need to understand how these tools are perceived and trusted. Previous research has found that people tend to trust a new piece of technology more if they have trust higher general trust of technology and software. There is prior research showing that when people perceive organizations or entities as trustworthy and fair, they are in turn more compliant. Similarly, when people perceive their government as trustworthy, they have more positive perceptions that processes, such as taxes, are legitimate and used for good causes, in turn leading to greater compliance with the law. Therefore,researchers were interested in the perceptions of taxpayers while filing in different preparation ways to examine if there is a difference in methods and how factors like trust in that method and whether the person perceived that method and process as fair (procedural justice).

In the paper “Experts, Commercial Software, and the Internal Revenue Service: American Taxpayer Perceptions of Trust and Procedural Justice,” Dr. Reed and colleagues brought 146 community members into the laboratory to prepare their 2023 taxes using three different methods: a popular online commercial software, the IRS’s Free Fillable Forms online software, and an in-person tax professional. Participants completed several surveys throughout the process, reporting their trust in the method and any difficulties or questions that came up during each method. After preparing their taxes using the three methods, participants indicated which method they would be most likely to file with and ranked the methods on trustworthiness, confusion, ease of use, and intention to use in the future. Once they completed the study and were paid and debriefed, participants had the opportunity to file their tax return from any of the methods used during the study, and any preparation costs of the method chosen were covered by the study.

The results showed that participants preferred preparing their taxes with the tax professional compared to online software. The more interactive commercial software was also preferred over the IRS Free Fillable Forms software. While the results indicate the tax professionals were the most highly ranked method, there were many participants who had preexisting strong trust in the commercial tax software who expressed willingness to continue using it in the future. This could be due to many participants having a prior history with the software, or because of the savings on the preparation costs compared to professional services.

Most participants made their decisions based on their trust in the methods, meaning how much the person trusted the method mattered more than the monetary value of their return; specifically, the participant’s trustworthiness of software mattered. When participants had higher trustworthiness of software generally, they were more likely to indicate wanting to file with the software versus the tax professional. Further, many participants indicated they wanted to file their return with the tax professional, but that, in future years, would be equally likely to choose the commercial software or the tax professional when preparing their next tax return. This indicates that it is possible that increasing a person’s trust in software could affect their future use of and trust in software, which could have positive, cost effective benefits in the realm of tax preparation, as professional tax preparation services can cost hundreds of dollars, while commercial software often has free or lower cost services (depending on the complexity of the return).

 Ensuring the development of affordable, reliable, and accountable tax preparation methods is extremely important, especially for taxpayers who cannot afford to see a professional tax preparer every season. Overall, it is noteworthy that perceptions of trust affect tax preparation decisions, and while there is still a great need for further research on taxpayer oversight and procedures, this study is a step in the right direction, offering novel and noteworthy discoveries on differing tax preparation models in the United States.