Working Paper No. 14-34:
Forcing Cooperation: A Strategy for Improving Tax Compliance
Date Posted: August 2014
Abstract (below) | Full text (most recent) on SSRN
The current U.S. deterrence-based tax enforcement regime is failing, particularly with respect to large multinational corporations. Despite the continual passage of new penalties and reporting requirements, large businesses remain able to keep much of their income out of the reach of the federal treasury. While the IRS has struggled with the decreasing effectiveness of its enforcement efforts, jurisdictions such as Australia have been able to achieve increased compliance rates as a result of transitioning to a cooperative tax model. This type of regime focuses on resolving emerging taxpayer issues in real-time, providing taxpayers with helpful, readily available guidance, and creating positive incentives for compliant taxpayers, such as the ability to book tax benefits more quickly and lower compliance costs.
This Article argues for an adoption of a cooperative tax regime in the U.S., and more importantly proposes a framework for its implementation. Because many businesses are already able to successfully game the current system, they may be reluctant to voluntarily cooperate with the IRS based on the mere expectation of cooperation-based benefits. In order to combat this resistance, I argue that the IRS will have to delineate sharper compliance choices for taxpayers by broadening the spectrum of applicable compliance standards.
This Article proposes that the IRS implement a system in which non-cooperation is met with strict liability and heightened compliance standards, while cooperation is rewarded with expanded pre-filing programs, decreased liability standards, and lower compliance costs. When faced with these two choices, most taxpayers should, over time, choose to cooperate. Those who do not, however, will be met with more targeted enforcement. By widening the gap between the two enforcement regimes, taxpayers will be forced to signal their cooperative intentions to the IRS. The IRS can then dynamically use this information to make its post-filing efforts more effective and “force” more taxpayers onto the path of compliance.