Tuesday, January 10, 2012
Rachelle Y. Holmes (George Mason), Forcing Cooperation: A Strategy for Improving Tax Compliance, 79 U. Cin. L. Rev. 1415 (2011):
The current U.S. deterrence-based tax enforcement regime is failing. Despite the continual passage of new penalties and reporting requirements, large businesses remain able to keep 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 with 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, this Article argues 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 noncooperation 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, which the IRS can then dynamically use this information to make its post-filing efforts more effective and “force” more taxpayers onto the path of cooperation.