Sloppiness in Tax Disputes: How to Prevent Litigation?

Daniel Dyck (), Johannes Lorenz () and Caren Sureth-Sloane ()
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Daniel Dyck: Paderborn University
Johannes Lorenz: University of Regensburg
Caren Sureth-Sloane: Paderborn University

No 155, Working Papers Dissertations from Paderborn University, Faculty of Business Administration and Economics

Abstract: This study introduces sloppiness---the inaccurate preparation of supporting information during tax disputes---as a neglected but critical factor influencing taxpayer noncompliance. We conceptualize sloppiness as arising both from imperfections in the internal information environment, exacerbated by structural uncertainty over litigation outcomes (factual dimension), and from strategic aversion to compliance effort (strategic dimension). We examine whether and to what extent improved documentation and engaging an internal monitoring expert can mitigate sloppiness and prevent litigation. Using a game-theoretic model, we derive equilibrium strategies for a tax manager's compliance effort, a monitoring expert's dispute resolution effort, and a tax authority's litigation decision. Absent a monitoring expert, we find that improved documentation consistently reduces the litigation probability. However, when a monitoring expert is present, we surprisingly find that improved documentation crowds out compliance effort and can increase the litigation probability. Overall, our results suggest that sloppiness can be overcome either through strong documentation alone or by engaging a monitoring expert when documentation is weak, with the latter approach becoming more attractive as the dispute resolution costs decline.

Keywords: sloppiness; tax dispute; monitoring experts; litigation (search for similar items in EconPapers)
JEL-codes: C72 H25 H26 K34 (search for similar items in EconPapers)
Pages: 43
Date: 2025-08
New Economics Papers: this item is included in nep-iue and nep-law
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