Contemporary Accounting Research Vol. 22 No. 2 (Summer 2005) pp. 409–47 © CAAA Taxpayers’ Prepayment Positions and Tax Return Preparation Fees * SCOTT B. JACKSON, University of South Carolina PAUL A. SHOEMAKER, University of Nebraska-Lincoln JOHN A. BARRICK, Brigham Young University F. GREG BURTON, Brigham Young University Abstract Individuals who have their tax returns professionally prepared often overpay estimated income taxes, effectively giving the government an interest-free loan. To understand why tax professionals may place their clients in positive prepayment positions, we draw on mental accounting theory. Mental accounting theory suggests that by placing taxpayers in positive prepayment positions, tax professionals induce a favorable mental representation of tax return preparation fees, perhaps allowing them to collect larger fractions of billable time and costs incurred on taxpayers’ behalves. Thus, we hypothesize that tax return preparation fees are higher for taxpayers in positive prepayment positions than for taxpayers in negative prepayment positions. Regression results using tax return data for 68,736 taxpayers provide strong support for this hypothesis. To more fully understand the general nature of the rela- tionship between taxpayers’ prepayment positions and tax return preparation fees, we adapt the prospect theory value function to the tax domain and formulate three additional hypoth- eses. Consistent with theory, regression results indicate that the relation between taxpayers’ prepayment positions and tax return preparation fees is (1) positive, (2) stronger for taxpay- ers who receive refunds that are less than fees than it is for taxpayers who receive refunds that are greater than fees, and (3) stronger for taxpayers in negative prepayment positions than for taxpayers in positive prepayment positions. * Accepted by Alan Macnaughton. This paper was presented at the 2001 Contemporary Accounting Research Conference, generously supported by the CGA-Canada Research Foundation, the Canadian Institute of Chartered Accountants, the CMA Canada — Ontario, the Certified General Accountants of Ontario, the Institute of Chartered Accountants of Ontario, Arthur Andersen, LLP , Deloitte & Touche, LLP , Ernst & Young, LLP , KMPG, LLP , and Price- waterhouseCoopers, LLP . We gratefully acknowledge the insightful comments provided by Lillian Mills (a discussant at the 2001 CAR Conference), Alan Macnaughton, and two anonymous referees. We also thank Linda Bamber, Sandy Callaghan, Tong Chau, Charles Christian, Andrew Cuccia, Dennis Duchon, Jim Groff, Rick Hatfield, Dianne Jackson, Don Lien, Marlys Lipe, Silvia Madeo, Robin Radtke, Linda Ruchala, Brian Spilker, and Bob Yetman for insightful comments. We thank workshop participants at Brigham Young University, Pepperdine University, the Univer- sity of Texas at San Antonio, and the 2000 American Accounting Association Annual Meeting. Scott Jackson gratefully acknowledges a University of Texas at San Antonio summer research grant from the Dean’s Faculty Development Fund.