Income Tax Law Compliance
Taxpayer advocates and the Internal Revenue Service (IRS) have continually debated issues of income tax compliance. Some of these issues include costs of compliance for taxpayers and loss of government revenue from tax avoidance.
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Self-Assessment
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The federal income tax is based upon a self-assessment system. This means taxpayers are trusted to determine their own tax obligations and voluntarily pay, according to the IRS. This helps the government avoid administrative costs of determining each individual's tax liability.
Allingham and Sandmo Model
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Created in 1972, the Allingham and Sandmo model predicts that taxpayers are more likely to report income as a result of increasing probability of being detected, according to the IRS. The model also predicts that increases in penalties for avoidance will also increase income tax compliance.
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Cost of Compliance
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The cost of income tax compliance can be measured by the total time and money expended on filling out tax forms, keeping records, learning tax rules and other tax-related tasks. Income tax compliance costs have been estimated to be 10 to 24 percent of a person's total income, according to Fair Tax.
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References
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
