Voluntary Compliance

Voluntary compliance refers to the principle that taxpayers will cooperate with the tax system by filing honest and accurate annual returns. The U.S. income tax system operates under this assumption. Voluntary means that each taxpayer is expected to prepare and file returns without government involvement.

Voluntary compliance refers to the expectation that U.S. taxpayers will be forthcoming in reporting income and calculating their individual income tax burdens. Payment of income and all other federal taxes is, of course, mandatory, but the burden of reporting income falls upon each individual taxpayer.

For example, a taxpayer who receives a W-2 form from their employer reports that income on their form 1040. The Internal Revenue Service (IRS) also receives a copy of that W-2 and is aware of that income. That individual may also have a part-time job that does not file a W-2. Under the principle of voluntary compliance, the taxpayer is expected to report that second income in their annual return.

A second and less optimistic assumption of the U.S. tax system is that some portion of the taxpaying public will not fully comply with tax requirements. This occurs regularly due to both intentional evasion and innocent misunderstanding of tax obligations. The IRS is responsible for enforcing compliance, and does so through a system of audits.

In the early days following the 1913 establishment of a federal income tax, U.S. law required that every tax return be audited by the Commissioner of Internal Revenue’s office. This soon became an impossible task, even as the Commissioner’s staff grew. A 1954 law removed that requirement, and audits have taken place on around 1 percent of returns since then. The government’s acceptance that it does not have, and never has, the resources for comprehensive auditing helps define voluntary compliance. Compliance is voluntary because total enforcement is impossible. The voluntary nature of compliance does not mean paying taxes is a voluntary act.

Audits are most commonly triggered by a mismatch in information reported on tax returns and official forms such as the W-2 or 1099. Other red flags include earnings that are out of line with past years or financial transactions with other individuals who are under audit. Audits can be conducted via mail or in person, and the unofficial threshold for charges of tax fraud are $70,000 in unpaid taxes and three years of deliberate fraud. These guidelines are set to minimize prosecution risk for taxpayers whose non-compliance is truly an honest oversight.