Stay Informed!

Posted on 03/21/2011 @ 12:45 PM

Tags: Behavioral Economics

The Campaign for Working Families (CWF) offers special tax preparation services for self-employed individuals and is also a partner in CFED’s Self Employment Tax Initiative. To encourage clients to come prepared for tax day, clients must complete a tax orientation before tax preparation with CWF.

But CWF staff noticed that despite the orientation, many clients came to their tax appointments with little or no preparation, a common challenge for VITA sites (and tax preparers) around the country. Because, really, who wants to prepare for tax day?

Specifically, clients at CWF very often did not have business receipts or itemized lists of business expenses. For self-employed individuals, failure to prepare for the tax season can have significant and expensive repercussions. Every piece of business expense documentation is tax-deductible, and therefore the more self-employed people are able to document, the more they are eligible to receive in tax deductions. CWF believed that the failure to prepare at tax time was costing their clients hundreds of dollars.

Before going into detail about our intervention, it's important to figure out if CWF's assumption is correct: does tax preparedness lead to greater returns?

It's a reasonable assumption, but nobody had actually tested it to see if it held up. I wanted to find out more.

It turns out it matters. A lot.

In a study with Foundation Communities in Austin Texas, tax preparers rated clients preparedness on a scale of 0 to 3 where 0 was not at all prepared and 3 was extremely prepared. We then analyzed the data to see if there was a correlation between refund amount and level of preparedness.

We found a very clear (and statistically significant) correlation: the more prepared a client was, the higher her refund. And we found this to be true when all other variables available (business type, business income) were accounted for.

Is it possible there is some unobservable difference between the people who come prepared and those who do not that might explain this refund amount difference? Absolutely. This makes it an interesting area for further research.

What might happen if we took similar people, randomized them, and then used some behavioral insights to motivate half to come prepared while the others received the standard information?

That is exactly what we did in Philadelphia. The results surprised everyone.

Check out the next blog post for details.