Rounded Up: Using round numbers to identify tax evasion

Abstract

Australian taxpayers display a clear preference for round numbers for end-of-year tax refunds, bunching at positive and salient thresholds such as the tens, hundreds and thousands. Bunching appears to be driven by tax evasion. Data from audited returns shows that bunching is present in returns before audit, but does not persist post-audit. Tax preparers play an important role, being twice as likely to deliver positive round-number refunds as individuals who file their own tax returns. Preparers with greater propensity to bunch deliver larger refunds by lifting deductions and lowering reported income for return items where audits are costly. This highlights how bunching behaviors can help identify tax evasion, including tax preparers who facilitate it and the tax return items which are manipulated.