Gaming the IRS’S Third-Party Reporting System: Evidence from Pari-Mutuel Wagering
Abstract
This study examines whether taxpayers intentionally avoid IRS third-party reports. In 2017 an IRS amendment created an exogenous shock that impacted how third parties report gambling winnings to the IRS. In thoroughbred racing, this shock had a substantial impact on certain types of wagers. This paper considers how gamblers reallocated their money following the shock. Using a difference-in-differences research design that compares U.S. tracks to Canadian tracks, I find that gamblers increased their investment in wager types that had become less likely to trigger third-party reports by 27 percent. In the U.S., over $400 billion in tax revenue goes uncollected annually, largely due to unreported income. Third-party IRS reporting is considered the most effective way to reduce underreporting, but there is limited understanding of how taxpayers interact with third-party reporting rules. This paper provides evidence on this interaction, showing that taxpayers purposefully avoid third-party reports to facilitate tax evasion.
Degree
Ph.D.
Advisors
Laux, Purdue University.
Subject Area
Design
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