The Essence of Voluntary Compliance
Voluntary compliance reflects the principle that citizens will cooperate with their government by filing honest and accurate annual returns. The U.S. income tax system thrives on this fundamental assumption while also employing necessary checks and balances to ensure compliance.
True Meaning of Voluntary Compliance
Within this principle, ‘voluntary’ implies that individual taxpayers prepare and file their returns without proactive enforcement from the government.
Breaking Down Voluntary Compliance
The act of paying income taxes is mandatory; however, the responsibility of reporting income lies with each individual taxpayer.
Key Insights
- The government realized early on that auditing every individual tax return is an unfeasible task.
- Consequently, the system relies on the expectation that taxpayers will voluntarily comply to the best of their abilities.
- To discourage non-compliance, mechanisms such as W-2 forms are in place.
Despite reliance on voluntary reporting, the government doesn’t accept taxpayers’ word at face value. For example, a taxpayer who receives a W-2 form from an employer must report the income on Form 1040. Concurrently, the IRS receives a duplicate of the W-2, keeping them informed about reported incomes.
Furthermore, individuals may have part-time jobs without W-2 filings or similar earnings statements. Under the principle of voluntary compliance, these income sources are expected to be reported in annual returns.
Another underlying, albeit less optimistic assumption of the U.S. tax system, is partial non-compliance. It may arise due to intentional evasion or honest mistakes. The IRS ensures enforcement through audits.
Audits: The Backbone of Ensuring Compliance
After the federal income tax was established in 1913, each return was mandated to be audited by the Commissioner of Internal Revenue’s office, initially.
This soon emerged as a herculean task even with an expanding staff. By 1954, all-around audits were dismissed, and now, audits are conducted on roughly one percent of returns.
The implicit governmental acknowledgment that exhaustive audits are financially and logistically impracticable further defines voluntary compliance. Thus, the idea of voluntary compliance does not render paying taxes as optional.
Most audits are triggered by discrepancies between reported information on tax returns and corresponding official forms like the W-2 or 1099, unusual earnings compared to previous years, or transactions with individuals subjected to audits.
Audits can be conducted via mail or in person. Generally, tax fraud accusations arise if unpaid taxes cross $70,000 and if deliberate fraud spans three years. These guidelines help minimize prosecution risks for taxpayers whose mistakes are genuine.
Related Terms: IRS, Form 1040, W-2 Form, Income Tax, Tax Evasion, Tax Fraud, Tax Code.
References
- Internal Revenue Service. “The Impact of the IRS on Voluntary Tax Compliance: Preliminary Empirical Results”, Page 3.
- Internal Revenue Service. “About Form W-2, Wage and Tax Statement”.
- Internal Revenue Service. “IRS Audits”.
- University of Pennsylvania Law Review Online. “What Does Voluntary Tax Compliance Mean?: A Government Perspective”, Page 14.
- Internal Revenue Service. “Anti-Tax Law Evasion Schemes - Law and Arguments (Section I)”.
