IRS Should Be Asking For Cooperation Not Volunteering

This post was originally published on Forbes Oct 23, 2015

The passing of Irwin Schiff, grandfather of the contemporary tax protester (or "tax honesty", if you will) movement, makes a recent article by  Jack Manhire rather timely. The article is titled What Does Voluntary Compliance Mean?: A Government Perspective.  In The Federal Mafia, Irwin Schiff leads with statements from IRS officials on voluntary compliance.  Like Jerome Kurtz in the Internal Revenue Annual Report of 1980 - "The IRS' primary task is to collect taxes under a voluntary compliance system" or Johnie M. Walters in 1971 "Each year American taxpayers voluntarily file their tax returns and make a special effort to pay the taxes they owe".  Schiff goes on for several pages citing examples.

What's In A Name?

When it comes to military service, we make the distinction between volunteering and being drafted.  So why is the term "voluntary" used in connection with taxation?  Irwin Schiff believed that there really was no requirement that people pay individual income tax.  His theory did not go over well in the courts, which accounts for his dying in prison.  Professor Manhire writes:

To the common ear, the term "voluntary compliance" may seem an odd, even Pickwickian, turn of phrase.  It implies that compliance with the federal tax laws is voluntary.  The Tax Court, however, has labeled such an interpretation as "arrogant sophistry".  Taxpayers have a legal obligation to comply with tax laws, just as they are obligated to comply with all rules that carry the force and effect of law.  Penal sections of the tax code reinforce this obligation.  Therefore, the government's position is that taxpayers behave in a way required by law, but without direct compulsion from the IRS.

Still it is a confusing term.  First he looks at scholastic philosophy and notes that in the view of Thomas Aquinas, the voluntary nature of an act was not changed because you acted out of fear of the consequences.

For example, if I am a a band leader and Luca Brasi holds a gun to my head while Vito Corleone demands that I sign a release on the contract of my favorite crooner, that act of signing, according to scholastics, is still voluntary.

Nothing like a Godfather reference in a tax article.

So I guess if it were 1260 or thereabout rather than 2015, people wouldn't be getting so confused about this voluntary thing. Professor Manhire does not think that it is all explained by some theology majors who ended up working at the IRS, indicating that there is no evidence that the IRS meant to use the term in a scholastic sense.

Early in the history of the modern income tax, it was recognized that the IRS did not have sufficient resources to directly assess every taxpayer or even audit more than a fraction of those who self-assessed.

Since the IRS cannot execute either of these practices, it instead relies on individual taxpayers to accurately assess their own tax liability on individual taxpayers to accurately assess their own tax liability on annual returns and timely pay the correct amount due.

Professor Manhire proposes that it would be more accurate to characterize the system as "self-assessment-with-a-low-audit-rate" rather than "voluntary", but that just does not sound that good.

What's The Solution?

Professor Manhire presents a four cell quadrant that illustrates the choices available to taxpayers - cooperate or evade - and the IRS - audit or don't audit.  He notes that the ideal situation is one in which the taxpayer cooperates and the IRS does not audit at all or at least not very often is the ideal.  Lots of audits of compliant taxpayers feels like harassment.  Audits of non-compliant taxpayers will have them "busted" which is unpleasant, whereas non-compliant taxpayers not being audited make the rest of us feel like chumps.

So it would be less confusing if the IRS were to say that the system is based on "cooperative compliance".  Since most people cooperate, enforcement resources can focus on those that do not.  It actually sounds like a pretty good idea.  We'll see if it takes off.