The Effect of Enacting Third-Party Verification on Taxpayer Behavior: A Cryptocurrency Setting

ABSTRACT Third-party verification rules are intended to increase compliance and can split taxpayers’ evasion decision into two stages. First, taxpayers must decide to commit to full tax compliance or search for ways to avoid third-party verification. Second, taxpayers make their tax compliance decisions when filing their tax returns. We expect new rules for third-party verification will increase the use of methods that avoid third-party verification, as taxpayers want to keep their compliance options open. The choice to avoid third-party verification itself may not be unethical, but it has ethical undertones and can start taxpayers down a slippery slope of unethical decision-making. We conduct a series of experiments showing the introduction of third-party verification rules significantly increases the use of methods that avoid verification. Among those using these methods, tax evasion significantly increases. We find no evidence that overall tax evasion decreases when new third-party verification is implemented, despite regulators’ intentions. Data Availability: Data are available upon request.