The US Income Tax System

In the United States, the income tax system is based on two basic assumptions:

1. Taxation in the U.S. is referred to as “voluntary compliance”. Voluntary compliance refers to the principle that citizens will cooperate with their government by filing honest and accurate annual returns. You can see why it is referred to as an assumption. Voluntary, in this case, implies that the individual taxpayer will prepare and file a return without proactive action by the government.Payment of income taxes is, of course, mandatory. But the burden of reporting income falls upon each individual taxpayer. That is the meaning of “voluntary compliance”. The government expects and assumes that U.S. taxpayers will be forthcoming in calculating and reporting their incomes and will remit any unpaid amount to the government by the tax deadline each year. Why did the US Government develop this type of system? Because it discovered early on that auditing and monitoring every individual tax return is impossible, therefore, it must assume that taxpayers will voluntarily comply to the best of their abilities. Of course, the government doesn’t generally take the taxpayer’s word for it. For example, a taxpayer who receives a W-2 form from its employer should report the income to the IRS by filling the Form 1040. Remember though that the IRS receives a copy of that W-2 directly from the employer and so it is already aware of that income. An individual may also have a business that does not involve a W-2 filing or use a 1099, which is a form that a self-employed contractor uses, or use other similar statements of earnings or other income. Under the principle of voluntary compliance, the taxpayer is expected to report that additional income in their annual return.
2. The 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. The government is also aware that this may occur either by intentional evasion or through an innocent misunderstanding or mistake, therefore the IRS is responsible for enforcing compliance and does so through a system of audits.

Audits and Voluntary Compliance

Around 1913, U.S. tax law began requiring that every tax return be audited by the Commissioner of Internal Revenue’s office. This soon proved to be an impossible task, even as the commissioner’s staff grew. A 1954 law removed that requirement and since then, audits have been undertaken on about one percent of returns each year.

The government’s implicit acceptance that it does not have the resources for comprehensive auditing, helps define voluntary compliance. Compliance is voluntary because total enforcement is impossible.

Audits are most often triggered by a mismatch in the information reported on a tax return and on the related 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 individuals who are under audit. Audits can be conducted via mail or in person.

Author: Sanda Kruger

Sanda is an entrepreneur, real estate investor, health coach and professional dancer. Sanda is an entrepreneur with more than 20-year experience in business development and project management in the fields of life, health and fitness coaching. She is also a real estate investor and a banker, who learned outstanding adapted business strategies, sales and marketing techniques, communication, and goal setting skills, hands-on, through life and work experiences. She is a certified fitness professional and is the creator of two original fitness programs, called BellyCore® Fitness and AquaCor®.