Abstract
This is an exploratory study to analyse whether the Tax Investigation Diamond (TID) model is a necessary and useful tool for tax investigations. The TID meant to have a special role within tax compliance as an alternative strategy mechanism to maximise the likelihood of restoration by the offender. Through an analysis of interviews of Portuguese Tax Inspectors, we show that in tax investigations it is not always desirable to fulfil all steps of escalation. This study provides data that indicates that TID can be an innovative strategy for adapting responsive regulation strategies to tax investigations, based on the tax inspector’s perception of the taxpayer’s motivational posture and the way in which power actions are used according to these motivational postures.
Introduction
Responsive regulation has a special role within compliance. Marques et al. (2020) suggest the Tax Investigations Diamond (TID) as a regulatory strategy because it predicts a better chance to reach a positive outcome of compliance or redress in comparison to prosecution.
Deterrence is a critical part of responsive regulation and tax investigations could be a unique opportunity to not only tackle tax evasion but also to promote a better relationship between tax authorities and taxpayers, including those that are not being investigated.
The TID utilises Kirchler’s Slippery Slope Framework (Kirchler, 2007) and the Braithwaitian Compliance Pyramid (Braithwaite, 2003) to design an alternative strategy mechanism to maximise the likelihood of restoration by the offender, during a tax investigation. As Figure 1 shows, when the course of a tax investigations is undefined at the beginning that is considered a slippery stage. The inspector will take into account the perceived motivational posture of the person or entity under investigation. For example, if the taxpayer is perceived to be non-cooperative, the inspector is more likely to adopt an investigative mode. Whereas if the subject is more cooperative the inspector is likely to adopt an advisory mode.
The tax investigation diamond (Marques et al., 2020).
The Portuguese Tax and Customs Authority (PTCA) has the main mission of administering the taxes and customs duties, and carries out, in particular, the task to ensure the settlement and collection of taxes on income, wealth and consumption, customs duties and other taxes. It also has the task to exercise the tax inspection action. The inspection of large companies (for example, companies with a turnover of more than 200 million euros) and people with a high net wealth (for example, beneficiaries of assets greater than 5 million euros), is a duty of the Major Taxpayers Unit, a unit with territorial competence that covers the entire country. For all other taxpayers, tax inspection is the responsibility of each of the 21 regional units in Portugal. Madeira has an autonomous regime differentiated from the rest of the territory of Portugal.
In Portugal, tax inspectors work with a wide range of missions. In general, the same tax inspectors can have processes ranging from minor offenses by small taxpayers, to extremely complex cases of tax avoidance. Their mission includes the detection of tax crimes and may include, as a result, criminal investigation. In these cases, first, PTCA inform the Public Prosecutor (PP) of the possible tax crime, who will coordinate the investigation and assign the PTCA as the criminal police responsible for that investigation. Consequently, the Portuguese tax inspectors is responsible for carrying out the investigation. After the investigation is completed, the report is sent to the PP’s Office, who decides whether there will be an indictment.
According to the 2019 Portuguese report on tackling tax fraud and tax evasion, the Tax Authority carried out 14,548 external inspection actions and initiated 321 tax fraud investigations. These data suggest that in Portugal, as in other developed countries, there is a prevalence in penalizing tax infractions without resorting to criminal investigation. As Levi (2010) argues, civil penalties are more attractive for both the authorities and the offenders, once they are cheaper, faster and more predictable. The TID aims at cases in which there is a non-criminal tax investigation, so its scope covers most of the actions of tax inspection in Portugal.
Taking Portugal as an example, the Law predicts tax investigations as a relationship between the inspector and the taxpayer in its general aspects. It offers the necessary tools of deterrence for the inspector, but at the same time, its use is limited by specific legal requirements and by a general legal consideration of proportion in the conduct of the tax inspector. On the other hand, the Law also clearly intends to reward redress by offering differential opportunities for reductions in fines in return for timely acknowledgement and correction of deviant behaviour.
These incentives stand in contrast to harsher measures which could be employed when there is resistance or disengagement. In fact, if taxpayers understand the high risks and costs behind being non-compliant, their motivational stance might shift to one of cooperation and compliance. This shift might be facilitated through the tax inspector informing the taxpayers on how they can correct their situation with reduced penalties. If taxpayers perceive their situation well and regularise their faults, the tax inspector will be ready to conclude the tax investigation faster by carrying out only confirmatory procedures and avoiding unnecessary investigations. This common interest creates a dynamic relation between tax inspector and taxpayers.
The different dynamics predicted for a tax investigation, start from the tax inspector’s perception of taxpayers’ motivational postures at different moments of the tax investigation procedure until a responsive regulation’s approach increases the hypothesis of redress. Accordingly, if tax investigations are efficient, tax inspectors might nudge taxpayers to a positive outcome, even if they were resistant at an earlier stage of the investigation.
A tax inspector then needs to adapt her conduct to different scenarios and be prepared to behave as an advisor or as an investigator. It is necessary to understand when there are opportunities to work as an advisor, without compromising the compliance hypothesis through inadequate use of power. In Portugal, the legal power actions predicted for the tax inspectors can be used in escalation, in full respect of the principles of responsive regulation theory (Marques & Tavares, 2020).
This study aims to make an exploratory approach for the confirmation of four assumptions of the TID model: 1) Tax investigations are likely to result in win-win situations; 2) There are different dynamics between tax inspectors and taxpayers according to different taxpayers’ motivational postures; 3) In tax investigations power actions could be used in escalation; 4) Tax inspectors have a double role as investigators and as advisors. This is achieved through a study of Portuguese Tax Inspectors, with an overall objective of obtaining some preliminary conclusions on whether it is possible to utilize responsive regulatory strategies in order to improve compliance at tax investigations.
We first describe the case selection and methods, before presenting our findings. We conclude the article with a discussion and directions for future research.
Research Methods
Interviews are the main data collection tool in the social sciences (Hunter, 2015). However, the literature focused on tax officials and their regulatory interactions is not very abundant (Raaphorst, 2018).
The methodology chosen was to conduct semi-structured interviews, in the form of a guided conversation in which we pursue various vectors, such as the characterization of inspected taxpayers, the relationship of tax inspectors with taxpayers, the use of power actions by tax inspectors and the way they act.
Sampling design patterns include Purposive Sampling and Respondent Driven Sampling. Our first strategy was purposive sampling once this study has an ethnography approach of qualitative design and it was intended to recruit tax inspectors that perform face-to-face interactions with individual taxpayers. Therefore, we selected as research sites one PTCA regional offices that allow sampling with greater focus on the selection of cases needed for the research aims (Boeri & Lamonica, 2015).
Afterwards, we use Respondent Driven Sampling. Since the interviewer himself is a tax inspector, the initial selection of tax inspectors (seeds) was by personal acquaintance. The seeds were only used to recruit the first wave of participants. First-wave respondents recruit a maximum of two second-wave participants, who then recruit third wave participants. This process went until the fifth wave of participants, and spread to another PTCA regional office. Thus, although a single recruiter selected the seeds, the bias is substantially reduced because of how the sample as grown from wave to wave (Boeri & Lamonica, 2015).
All respondents voluntarily participated in this investigation and no financial or other incentives of any kind were provided. Confidentiality and anonymity were guaranteed to all participants. These conditions were explained in the invitation and later at the beginning of the interview. Data was processed anonymously, treated confidentially and was not disclosed or distributed to other people, inside or outside the PTCA. The interviewer assured the interviewees that there were no right or wrong answers. It was also guaranteed that at any time they could end their participation in this task or ask further questions about how the data would be treated.
Data collection took place in July and August 2020. Taking into account the limitations of personal contact and the need for social distance motivated by the Covid-19 pandemic, the interviews were conducted through video calls.
Characterization of Respondents.
Interviewees were previously informed that the interviewer was also a tax inspector and that, combined with the condition of recording the interview, possibly explain the difference between scheduled and productive interviews. Alternatively, this may have also led to a high confidence for those who agreed to participate, which may translate into increased reliability of their responses. The interviewer’s familiarity and substantive knowledge about the development of inspection procedures facilitated the development of the interviews.
Semi-structured interviews were used to understand the subjective experience and its meaning for the tax inspectors who lived such experiences. Consequently, the main method of qualitative data analysis used was the Interpretative Phenomenological Analysis (Smith et al., 2009), closely related to Grounded Theory approach (Glaser & Strauss, 1967), which was used for initial coding and identification of relevant themes. Combining these two strategies, quotes of the interviews and the coding tables are presented, from which an analysis is made.
Responsive Regulation as a Strategy to Improve Compliance at Tax Investigations
The TID model was proposed as an innovative tool based on Responsive Regulation Theory, by predicting strategies to improve compliance in tax investigations. The main aim of this study is to draw some preliminary conclusions about the verification of four of TID’s assumptions. Through the interviews, we wanted to explore if there were win-win situations for the tax inspector and the taxpayer, if it was possible to define different dynamics between the tax inspector and the taxpayer, how escalation to more aggressive power actions occur, and if tax inspectors acknowledge the existence of a dual role as an investigator and advisor.
In an initial approach, an attempt was made to verify whether tax inspectors considered that the relationship between them and taxpayers could be considered as one based on trust. On the one hand, tax inspectors do not find taxpayers to be reliable and the majority disagree that a taxpayer’s formal statements correspond to the truth. On the other hand, the majority of tax inspectors agree that if a taxpayer makes a commitment to the tax inspector they comply with the commitment made, and half agree that inspected taxpayers rely on what tax inspectors say. This may suggest that despite the initial distrust of tax inspectors, when they are able to establish conditions of commitment, this commitment tends to be fulfilled by taxpayers. This signs of trust inspectors have in the taxpayer, signals new possibilities to enhance coercive tax compliance. Taxpayers who are more open and transparent about their accounting errors, give the tax inspector signs of honesty and change towards better compliance (Raaphorst & Van de Walle, 2020).
These ingredients are fundamental for the application of the TID model to be effective. It also suggest that the strengthening of interpersonal relationships, based on trust, can contribute positively to the improvement of coercive fiscal length indices. In addition, it must be considered that a correct management of the different levels of aggressiveness of coercive power by tax inspectors, and the fear that the adoption of certain power actions may cause among the taxpayers, is another of the necessary conditions for the correct use of this model.
Win-Win Situations
Description of the Kinds of Gains Identified by the Tax Inspectors.
Although the majority of respondents understand that voluntary coercive compliance is the most desirable situation, defining win-win situations generated the most controversy, as it was possible to notice that some tax inspectors had difficulties in mentioning other gains for taxpayers, in addition to the conception of mere monetary gains in tax. For example, E2, who stated that voluntary coercive compliance “is important and will be good even for the institution’s own efficiency” when asked about the existence of win-win situations, replied that “No, it is not a reciprocal gain. (…) There will be no negotiation with taxpayers. (…) I don’t see how that can be done”.
The consideration that a gain for the taxpayer would have to be a monetary gain like tax reductions raises significant questions, because it conflicts with the principle of legality and the principle of unavailability of the tax credit, predicted by the Portuguese legal framework. It is prohibited to the tax inspector any possibility of granting a tax advantage however small it may be (Rocha & Silva, 2017). E10, agreeing with the importance voluntary coercive compliance, establishes a condition: “As long as no benefits are given for them to regularize, I think it is great that it is so.”
However, there are tax inspectors who admit to balance between the benefits of voluntary coercive compliance and the imposition of corrections. [“I think that even if one can, in some way, condescend, voluntary regularization is advantageous for the State” (E9); “In voluntary coercive compliance, (…) in a situation where there are corrections, we might allow the correction to be made in the last statement, and then there is a saving in compensatory interest. In some situations, there may be some savings for taxpayers there.” (E3); “if it is to go to indirect methods of taxation, they end up winning because we end up being a little more benevolent in the application of indirect methods taking into account that they will voluntarily settle.” (E8)].
Although “bending the rules” can be considered as a positive behavior (Vande Walle & Keulemans, 2019), in this case it is at the threshold of legality. Tax inspectors refer to the possibility of adjusting deadlines, granting no penalties for some infractions and even, in the case of indirect taxation, managing the amount of tax to be paid in order to achieve voluntary regularization. The responses of those who do not see voluntary coercive compliance as an important factor, point out precisely the lack of legal certainty as one of the problems.
Dynamics Between the Tax Inspector and the Taxpayer
To study the dynamics of the interactions between the tax inspector and the taxpayer was based on realizing whether it was easy to obtain a first perception of the taxpayer’s behavior and whether there were changes in posture during the inspection procedure. When asked about if in the first assessment of the taxpayers' motivational posture would be enough to predict the outcome of the tax investigation, the majority of the respondents said that is impossible or very difficult. [“No. I can not. In fact, in two recent cases, (…) two similar situations, (…) at the end of the meeting we had, we said: these taxpayers will regularize the situation. And in a meeting we had that day, with other taxpayers, we said that these taxpayers are certainly not going to regularize the situation. And what is happening in practice is that those that we thought were not going to regularize, are regularizing at this moment, and those that we thought were going to regularize, have not regularized. So it’s really a long shot (…), during the inspection, you can have an idea, but it is very difficult until you have the numbers.” (E3); “No. Not on the first visit. It seems to me that it is not the first contact that will reveal it. It seems to me much more with evolving action and, in the end, with the attitude that we encounter on the other side, we see more at least if the person… and even by the arguments that we are presenting and the situations that are occurring can be verified.” (E5)].
Taxpayers’ Posture Changes Throughout the Tax Investigation.
The positive posture change was related to more collaborative postures by the taxpayer and is associated with the ability of the tax inspector to demonstrate and explain the need for correction and the establishment of a trust relationship. [“Initially, when taxpayers hear about the Tax Authority, they are always a bit afraid. But as the procedure develops they end up realizing, in my specific case, I speak for myself, I do not speak for other colleagues, I am not there to harm them. Especially because I think that the taxpayers' reaction always has to do with the attitude with which we address to them, the way we talk to them. And if we have a calmer, more accessible attitude, they end up being calmer and more accessible to us.” (E8)].
The most mentioned negative posture change is the existence of less cooperation and the creation of conflicts, associated with the amount of corrections, the continuance of the tax investigation over time and the detection of unexpected infractions. The tax inspectors who identified this negative posture change were very detailed. [“There are changes. Sure. The postures are altered, perhaps, with the development of the tax investigation, if situations that are not correct begin to be detected, or that we consider that have not been properly treated, in tax terms, sometimes there is not much responsiveness of the taxpayer to assume this errors right from the start ... that is to say he is collaborating, but even in the face of the facts sometimes, he starts to have a more oppositional attitude there. When you start to feel that there will actually be a correction there.” (E2); “There may even be initially an attitude of openness and acceptability that there may be situations that are not right, but then, when the values are realized, the attitude can change completely. And I have already had situations where there was, suddenly, the collaboration ended (…) and they try to ensure that the tax investigation did not take place or did not end. (…) I think that basically everyone is aware of what they did and what could be wrong. But most think that we will never find out (…) they don’t have great technical respect for us, because maybe they think we don’t have the competence.” (E3)].
Several tax inspectors mention detecting infractions that the taxpayer did not think were detectable. E7 refers with some irony that at the beginning “They are mostly cordial. Yes. Overtime ... Our approach to taxpayers is a lighter, more polished approach. I think that time has taught us. And this polite attitude makes everything nice at first. I mean, no problem. Now, when you start looking (laughs)… Especially when they feel uncovered, stuck, then things change, and I had situations (…) one of them did not suppose that this would happen, which can be considered very aggressive.”
On more than one occasion it was mentioned the withdrawal of the taxpayer, who ceased to participate in the tax investigations and appointed a representative. [“If the taxpayer already has, in advance, some difficulties in accepting the reason why he was selected, it is clear that cooperation will be more difficult, and the taxpayer may tend to avoid contacts, and then even pass it on to other people, namely the chartered accountant who then enter into a conversation with the inspector. He tries to avoid contact or even talk to the inspector. (E1)”].
In relation to smaller taxpayers, it was also mentioned the taxpayers’ breach of commitment and their feeling of anger. [“It is also true that when we start to realize that they are in an attitude of denial, in an attitude that they do not want to collaborate with us, they do not want to help, I also change my position a little bit there, too. I am a little more abrupt, so to speak.” (E8); “Initially, everything is always fine, things are great, you will see that everything is ok. When you start to question certain things that they already know that something will come out of it, you can clearly see it. I think it’s more of a feeling of anger. There it is. We always return to that situation of the taxpayer size. (…) Smaller taxpayers, and inserted in sectors of activity with a lot of competition, and which are also sectors of activity very directed to small fraud behaviors, such in the case of hairdressers for example. They are those situations in which if I do not do this, I will not be able to compete with the one next door. And you came to inspect me, but you are not going to inspect the one who is here at the door. And when you get closer to the end of the tax investigation, and you confront it with the outcome, there is always a feeling of anger, of, man, but I had this bad luck, but why is it not done next door?” (E10)].
From these responses, it is possible to deduce that tax investigations are indeed dynamic procedures, based on the interpersonal relationship established between the tax inspector and the taxpayers. Tax inspectors react differently, depending on the motivational posture they perceive, looking for clues to identify taxpayers’ behavior, adapting to its changes and processing new ways of reacting. Taxpayers’ posture changes throughout the tax investigation and tax inspectors relate the positive changes to the establishment of relationships based on collaboration, which in turn, are related to the tax inspector’s own competences in conducting the relationship with the taxpayer. Interestingly, negative changes are usually pointed to factors external to the relationship established with the taxpayer, with the exception of cases where taxpayers do not comply with their commitments. Another negative factor for the development of the investigation, pointed out by tax inspectors, is the situations in which the taxpayers appoint a representative to replace them in the relationship. In the case of very small taxpayers, tax inspectors seem to understand their evasive behavior, even showing some sympathy for the feelings and regrets they share throughout the tax investigations.
Escalation to More Aggressive Power Actions
In a tax investigation, tax inspectors have the possibility to use power actions in escalation, from a starting set of non-aggressive power actions until a set of very aggressive power actions, to be used in extreme situations. Recently, Marques and Tavares (2020), showed from the results of a questionnaire carried out with 85 tax inspectors, that the legal prerogatives of tax inspection in Portugal, defined as power actions, can be divided into five different categories, in a continuum of power actions from non-aggressive (g.e obtaining informal or not written clarifications with the certified accountant, sampling procedures, or obtaining written statements from taxpayer´s administrators, managers or partners) to extremely aggressive (g.e to promote the judicial exemption of professional secrecy, to promote the exemption of bank secrecy from a third party or to apprehend the accounting and other related elements of the inspected).
Most of the respondents demonstrate an effective perception of the use of escalating power actions. [“First the least aggressive and so on.” (E6); “I think collaboration is essential. Then, the other power actions. I try to use it as I see the need to use it” (E8)].
It was also mentioned that escalation into more aggressive power actions depends on the level of cooperation of taxpayers. [“If the taxpayer is in a cooperative behavior, then one should help and cooperate with the taxpayer and not escalate to legal situations, which would possibly even be useless, out of time. It doesn’t suit the process.” (E1)].
The need to adjust the behavior of the tax inspector to the behavior of the taxpayer was mentioned several times as a factor to contain the escalation. [“Behavior generates behavior, and through the attitude shown by the taxpayer and also according to the data that we have, that is, what are our goals and what are we going to do and that we already have in hand and that we know is in other side. If we know that there are objective and concrete elements that prove a certain infraction, or an unlawful conduct, and if we have no other way to reach them but by using some more invasive measures, we have no alternative.” (E9); “If with what the taxpayer provides us right from the start we think we have all the elements we need there, we don’t need to go up to the next step. I think so, it should be done that way.” (E2); “Yes, clearly. The least aggressive first. Unless, in face of taxpayers' reactions or attitudes, one immediately know that the most tenuous ones will not work. Then move on to a more aggressive path. Apart from these cases, I don’t think so.” (E10); “Our objective is to safeguard any eventual debt that cannot be collected… if an individual, perhaps, made a mistake, maybe he didn’t even know he was making it, or eventually he is a respectful person, then applying the most aggressive ones is not the most correct. I think it all depends on each case.” (E5)]
Three of the respondents that argue that escalation is not mandatory, claim that in some situations to use less aggressive power actions increases the risk of the assets or the evidence to disappear. Those tax inspectors mentioned that there are situations in which the taxpayers already have a history of non-collaboration, namely when they have already been identified in other investigations as individuals who started companies with strictly fraudulent objectives. Contrarily to the general relation between tax authorities and taxpayers, in the specific case of tax investigation escalation does not always start with less aggressive power actions. Hence, in this case, an escalating model does not imply that the use of power actions must always start with less aggressive power actions. In certain situations, it is necessary to use more aggressive power actions from an early stage, or even be extremely aggressive. [“I think this has to be evaluated on a case-by-case basis. By chance, for example, I recently suggested that a forfeiture of assets to be made, right at the beginning of the action.” (E3); “It depends. There are situations where it won’t be worth it. Because it can allow proof to be destroyed that later will not be obtained. It depends on the situations… when I perceive, or even already know, that a taxpayer will initially be non-cooperative, I admit to start with the “maximum” power actions.” (E4)].
These elements seem to confirm that the TID model, assuming a diamond shape is adapted to the specifics of the tax investigations. It distinguishes, in the upper half of the figure, the situations in which the tax inspector considers that the motivational posture of the taxpayer is perceived as more resistant, from the situations of the lower half of the figure, in which the taxpayer has a more collaborative posture. The first situation foresees the use of more aggressive power actions and the second situation the use of less or no aggressive power actions.
The framing at the top of the diamond does not imply that previously non-aggressive power actions must been carried out. If the taxpayer is firstly perceived with a motivational stance of resistance, this escalation can start from aggressive and very aggressive power actions.
Tax Inspectors’ Dual Role
The TID model predicts that the tax inspector will be able to adopt a dual role as an investigator and as an advisor. To validate the feasibility of this assumption, we asked the respondents to comment on a statement that indicated this assumption: “A tax inspector is not just an agent of authority who represses non-compliant taxpayers. She also has to know how to act as an advisor, who can guide the taxpayer so that she is more compliant”.
In general terms, most tax inspectors showed agreement with the statement, with references to which they recognized this role in their usual practice. This prediction of the TID model seems to be adequate for the purposes for which it is proposed, being widely accepted by respondents.
The adoption of this advisor role is justified by an idea of improving tax compliance, offering support for voluntary coercive compliance, in strategies to improve the taxpayer’s future compliance or with support for the understanding of the legal framework. Without anyone questioning the role of authority officer, the debate focused on the role of advisor. Most respondents recognize and approve this role, sustaining the double role for the tax inspector, as predicted in the TID Model. Tax inspectors recognize that they can play an important role in helping taxpayers improve their current and future tax compliance, as there are many situations in which this assistance is needed.
The complexity of the tax law is one of the main reasons for tax inspectors to understand the need to adopt this role. ["I fully agree. (…) I think this is very important. Tax legislation is so complex; it leaves so many situations that they are not properly clarified.” (E10)].
The interviewees also pointed out that the possibility of this type of attitude by the tax inspector could be important for changing taxpayers' behavior. [“It is not just getting there to the taxpayer and making the corrections we have to make, but we must also try, in a pedagogical way, to demonstrate to the taxpayer what was the most appropriate behavior to have and guide him in that direction. Sometimes it can be as important as a correction. Counseling in the most correct way of dealing with different situations and also making him realize that evasive behavior may have an immediate advantage, but in the long term it will have consequences and try to demonstrate it in a way that he realizes that the compliance is the right way. (E2)]. The concerns of tax inspectors are not limited to trying to influence the future behavior of taxpayers, but also include an educational aspect. The way in which change is promoted and its long-term goals, weighted with immediate benefits, are very relevant for tax inspectors.
Another aspect mentioned to highlight the importance of this double role is the fact that the tax inspector represents what the Tax Authority is, that is, the materialization of an entity. ["I think so. I think that we must, above all, also clarify the taxpayer of the situations and speak openly of the situations. We too, after all, are the face of the Tax Authority. I also think, our own image also goes a little way there. (E5)].”
Most of the interviewees felt an objective need to clarify the concept of advisor and to define limits to its amplitude, framing it in a strict perspective of legality and fulfillment of duties inherent to the function. For these tax inspectors, the adoption of an advisor role must be clearly distinguished from actions that may conflict with the legal imperatives and obligations to which tax inspectors are subject. The conflict of interest issue is a central point, debated by many tax inspectors, and it can be interpreted so strictly that it can lead to the non-acceptance of this double role. [“I believe that our role is, in the course, to alert, inform, clarify. But always within what is possible. This is not to say that we will become a lawyer, as soon as a professional relationship is established, to which you contact whenever there is a doubt. I think there are limits. During the inspection procedure, yes. After that, it does not make any sense. Of course not.” (E4); “The role of the inspector goes through this a lot, also being able to advise them, in order to help them in any doubt they have. It is not advising to go there to provide advice. This is not at all my area, nor am I facing it.” (E8)].
It is still relevant that prejudices are visible in relation to the adopted nomenclature, regardless of whether, in objective terms, the adoption of this double role is unanimous. [“The advisors part… I wasn’t going there. The inspector himself should not be… One thing is more supportive action. (…) We do not have to be advisors to companies, not least because we can then, ourselves, get into conflicts of interest.” (E7); “As an advisor in order to clarify the tax situations that are at stake, yes. But not as a tax advisor or as a taxpayer financial advisor, to optimize tax law, I think not. It depends on how we interpret the sentence.” (E1)].
The Tax Inspectors’ Performance and Its Relevance to Tax Compliance
In addition, we sought to understand how tax inspectors viewed the performance of the tax inspector and its relevance to tax compliance. Most tax inspectors believe that tax investigation has a positive effect on the taxpayer’s future tax compliance.
The positive effects referred to a possible improvement in the taxpayer’s future tax compliance, a better understanding of the tax law by the taxpayer, which reduces negligent error in the future and the visibility of tax investigation. The visibility of tax investigation is a positive effect, but it was often referred to as the greatest risk of tax investigation, when errors in the detection of violations occur. [“Maybe it works the other way around, doesn’t it? Then it turns out to work exactly the opposite. On top of that he went there and didn’t see it ... so it is a sign that ... We will continue to do it and with more and more strength! (…) Just as the presence of the inspection and the detection of an irregularity works in favor of the Administration, because it gives an image that the situation is being seen, that is being corrected, on the contrary, having been there and not even having been seen is like an highway to fraud!” (E2)]
Taxpayers' discussion power was also widely discussed as a significant variable on the effects that tax investigation. [“It depends on them, doesn’t it? This then depends on the discussion, that they do. Eventually, if he says he has been corrected and tells the third parties around him that it’s probably not worth it (…) If eventually the individual is even happy with what has been corrected or fled, maybe he will even tell the third parties to continue to run away at ease that the guys see nothing.” (E5)]. In addition to the risk of bad publicity, and the tax non-compliance it can generate, several tax inspectors mentioned that there are not significant effects, because taxpayers do not normally advertise the tax investigation. Another stream of tax inspectors, referred that the inspected taxpayers can contribute to improving tax compliance, by sharing with others the fair interactions of tax investigation.
There were tax inspectors who were not so effective in identifying positive effects, drawing attention to several factors in the equation: The taxpayer’s understanding of the relevance of the correction, the volume of violations detected in relation to the violations committed and the taxpayer’s permeability to change their behavior.
Several tax inspectors also addressed the cultural context in Portugal, where the existence of highly non-compliant individuals is still common and uncensored. This is associated with the risk of recurrence, which may be independent of the tax inspector’s performance. [“In my experience, and now here speaking a little without being an inspector, I believe that they are not intending to recover the lost, that is already innate. Tax evasion and evading taxes is already inborn in the citizen, so it ends up only continuing what had already been done.” (E6); “But there it is, we always have to pay attention to what kind of taxpayer is before us. There are taxpayers who deserve to be inspected for three and 4 years, and beat them up. There are taxpayers who deserve this. Their conduct legally obliges us to act this way”. (E9)].
Most tax inspectors, in addition to considering that there is a positive effect associated with the performance of tax investigation, also consider that this positive effect goes beyond the taxpayer’s personal perimeter. The determining factor for this effect to be positive is the level detection of violations that is reached. If an acceptable level of infractions is not detected, in relation to the actual infractions, there is a tendency for tax inspectors to consider that the effects of tax investigation can be very negative.
Discussion
Using the Interpretative Phenomenological Analysis as the main method of analysis, this study reproduces several quotes from the interviews, which bring a greater knowledge about the subjective experience and its meaning for the tax inspectors who lived face-to-face experiences with taxpayers in tax investigations context. The codification and identification of several relevant themes was the starting point from which the analysis of the collected data was carried out.
This study suggests that tax inspectors tend not to trust taxpayers. Despite this initial distrust, most of the tax inspectors interviewed agree that, as a rule, taxpayers comply with commitments made to tax inspectors, and feel that taxpayers trust what the tax inspector says. In other words, it seems that if tax inspectors define a personal commitment strategy for taxpayers, such as defining deadlines and forms of voluntary compliance, and taxpayers accept it, there is a greater possibility that redress will be effective. The definition of commitment agreements as a way to facilitate voluntary regularization is one of the foundations of TID.
From the interviews, we gathered data that seems to support the verification of the four assumptions of the TID that were analyzed. 1) Tax investigations are likely to result in win-win situations; 2) There are different dynamics between tax inspectors and taxpayers according to different taxpayers’ motivational postures; 3) In tax investigations power actions could be used in escalation; 4) Tax inspectors have a double role as investigators and as advisors.
As the TID model predicts, coercive tax compliance at the initiative of the taxpayer potentiate win-win situations, for both tax inspectors and taxpayers. For taxpayers, were identified monetary benefits, such as the benefit of lower fines, and non-monetary benefits, associated with reduced administrative costs. Interestingly, one of the benefits noted was a lower probability of taxpayers being reselected for future inspections. For tax inspectors, the advantages relates to a feeling of greater fulfillment of their mission and to advantages associated with the reduction of administrative tasks. Savings in the time factor is a very important advantage for both parties.
The dynamics of the interactions between tax inspector and taxpayer were identified as being closely related to how the escalation of power actions occurs and with the double role of the tax inspector, as an investigator and as an advisor, which seems to confirm the other assumptions of the TID model. The interviews show a general idea of process and changes on the relational interaction between the two parts. Changes to attitudes that are more positive, are less common, and depend a lot on the strategies used by tax inspectors, namely, if they are concerned to demonstrate in detail the need for tax correction and if, during the tax investigation, they manage to establish a relationship with the taxpayer based on trust. More frequent and more diversified are the changes to more negative postures, mainly related to correction values greater than expected by taxpayers or with the detection of situations that the taxpayers thought would not be detected. These events are the main cause of conflicts, less cooperation or even situations in which taxpayers show signs of aggressiveness.
The study on the use of power actions in escalation was the one that most contributed for a preliminary validation of the representation of the TID model in the shape of a diamond, as an alternative to the pyramid of conventional models. In fact, although most tax inspectors consider legal power actions to be used in escalation, as a way of avoiding the use of excessive power actions, there is also a tendency to consider that, in some conditions, power actions should not be used in escalation. In cases where there is a high risk of asset dissipation, concealment or destruction of evidence or in the case of taxpayers with a history of significant non-compliance, it would be counterproductive to use the earlier stages of escalations, contrary to the traditional concept of minimally sufficient deterrence (Braithwaite, 2018). In cases where individuals are already recognized and identified as fraudulent, Portuguese tax inspectors tend to consider the use of less aggressive power actions as redundant and ineffective. Tax inspectors look for objective signs and not only to the taxpayers personal posture.
There is a range of taxpayers perceived as resistant, who in the TID model would be seen in the upper part of the diamond from the beginning, and who, as such, are soon subject to more aggressive power actions. The distinction of taxpayers with this type of motivational posture from the taxpayers most willing to collaborate, is reflected in the category of power actions to be used by the tax inspector and is well represented in the TID model.
In conclusion, this exploratory study made it possible to gather a set of data that seems to indicate that TID model is specifically adapted to the tax investigation context and therefore is more suitable to implement responsive regulations strategies at this coercive stage of the relationship between tax authorities and taxpayers than the traditional regulation models. Tax inspectors are very aware of the importance of their mission and identify many positive aspects of their performance, recognizing that there is enormous potential to improve this performance even further. Tax inspectors feel the need for more training and seem eager to obtain more and better knowledge to allow for even better and more effective practices. From the study carried out, the TID seems to be a necessary instrument that can help tax inspectors in this objective.
Future Research
The present study can be considered as a first step to validate the TID as an innovative strategy that adapts responsive regulation to tax investigations. However, taking into account the small number of interviews that were possible, additional empirical work is required to strengthen the preliminary conclusions.
The reality that appears to result from the interviews is that a majority of tax inspectors do not use the most aggressive power actions, either because they do not feel an objective need, or by pointing out organizational reasons as an obstacle in using more aggressive power actions. However, a significant group of tax inspectors recognized that more aggressive power actions can be more efficient, as they reduced the risk of non-detection, provided better evidence and more effectively ensured collection of the tax. This conclusion is in line with the results of a questionnaire carried out with 85 tax inspectors (Marques & Tavares, 2020).
Interviews suggest that there is indeed a very complex context for decision making to adopt more aggressive power actions, which results into several constraints. The identification of these constraints is the motto for future research.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
