William W. Oliver Professor of Tax Law at Indiana University Maurer School of Law in Bloomington. Find my research at http://ssrn.com/author=48125 and my full publication list at http://www.law.indiana.edu/people/lederman/publications.shtml. I teach Income Tax, Corporate Tax, Tax Procedure, and Tax Policy Colloquium. I generally write about tax compliance and tax administration, the U.S. Tax Court, and the federal income tax as it applies to individuals and corporations. I'm on Twitter at https://twitter.com/leandra2848; come for the law and policy tweets, stay for the #taxvalentines!
Yesterday, the IRS released new federal tax gap estimates, including a new Tax Gap Map. My first substantive post on this blog, back in May 2016 (linked here), was on the IRS’s tax gap study for the 2008-2010 tax years. The new report covers averages from tax years 2011-2013, i.e., picking up where the 2016 report left off.
The new estimates show an average estimated gross tax gap of $441 billion (compared to $458 billion on average for 2008-2010) and an estimated overall “voluntary compliance rate” of 83.6% of tax liability. The new Tax Gap Map shows that, according to the IRS’s estimates, the single largest contributor to the federal tax gap, in dollars, remains underreporting by individuals of business income, at an average of $110 billion per year.
The new report is not only careful to state that methodology changes from the previous tax gap study influence the gross and net tax gap figures, it redoes the 2008-2010 voluntary compliance rate calculation with its revised methodology, to provide an apples-to-apples comparison. The IRS reports that, under the current methodology, the voluntary compliance rate for those years would be 83.8% instead of the 81.7% reported—very similar to the 83.6% voluntary compliance rate the IRS estimates for 2011-2013.
One thing that’s obvious in reviewing the new report is that the format of the new Tax Gap Map is different. (Compare the 2019 version with the 2016 version.) One difference from the previous Tax Gap Map is that the new release does not color code or label “Actual Amounts,” “Updated Estimates,” and “No Estimates Available.” The new version instead adds a visual illustration of the relative sizes of estimated total tax liabilities, tax collections and tax gap amounts. The color coding in the “map” reflects those categories. Another difference is that the new version does not include excise taxes in the map. The previous Tax Gap Map included them, although the dollar amount of the underpayment gap for excise taxes was small and the IRS did not have estimates for nonfiling or underreporting of those taxes. Continue reading “The IRS’s new Tax Gap Map”→
On February 28, Indiana University Maurer School of Law’s Tax Policy Colloquium, hosted this year by my colleague David Gamage, welcomed Vanessa Williamson from the Brookings Institution. Vanessa presented a report that is due to be released at the end of March on a “Filer Voter” experiment she conducted at Volunteer Income Tax Assistance (VITA) sites in Cleveland, Ohio and Dallas, Texas.
For those who may not be familiar with it, VITA is an IRS-run program that offers free tax return preparation (generally federal and state) for taxpayers who made $54,000 in income or less (for 2018) and meet certain other requirements. An IRS web page provides training materials and certification tests for volunteers. The IRS works with local groups in that it provides VITA grants to partner organizations. For example, in Bloomington, the VITA program is run by United Way of Monroe County.
Vanessa’s Filer Voter experiment involved offering some taxpayers who come to VITA sites for tax-return preparation the opportunity to register to vote. The experiment was structured as follows: Each VITA session was divided in half by time, and within each session, the first half or second half was randomly assigned the treatment of offering voter registration, and the other half of the session was the control. The study included collection of demographic information and consent forms from taxpayers in both the treatment and control groups. Continue reading “IU Tax Policy Colloquium: Williamson, Filer Voter: An Experiment Testing Voter Registration at Tax Time”→
On February 14, the Indiana University Maurer School of Law’s Tax Policy Colloquium hosted Larry Zelenak from Duke University School of Law. Larry presented his fun new paper, co-authored with his colleague Rich Schmalbeck, “The NCAA and the IRS: Life at the Intersection of College Sports and the Federal Income Tax.” Larry really hit this one out of the park, with a crowd that was nearly standing-room-only! Larry also hosted a terrific Valentine’s evening event, “Tax Sitcom Night,” featuring three classic sitcom episodes in which couples encounter the federal income tax together. I’ll discuss each of these briefly in this blog post.
Larry and Rich’s paper argues that the IRS has not done as much as Congress to cut back on “unreasonably generous tax treatment” of college athletics. The paper covers four principal topics, which Larry explained was a combination of Rich’s work on two issues and Larry’s on the other two. The four topics are:
The possible application of the unrelated business income tax to college sports;
the federal income tax treatment of athletic scholarships;
the recently changed tax treatment of charitable deductions for most of the cost of season tickets to college ball games; and
the new 21% excise tax of IRC § 4960 on compensation in excess of $1 million on certain employees of tax-exempt organizations.
I just finished drafting a paper that got me reading a lot about corporate fraud. I find fraud fascinating, so this was a bit of a treat! The new paper is Information Matters in Tax Enforcement, and it’s co-authored with my former student Joe Dugan (JD ’15), who is an attorney at DOJ (but did not write in his official capacity). We recently posted the article on SSRN (here), and will soon be looking for a home for it.
This article was prompted by Professor Wei Cui’s publication of Taxation Without Information: The Institutional Foundations of Modern Tax Collection, 20 U. Pa. J. Bus. L. 93 (2018). Cui sets forth the contrarian thesis that “modern governments can practice ‘taxation without information.’” His argument rests on two premises: (1) “giving governments effective access to taxpayer information through third parties does not explain the success of modern tax administration”; and (2) modern tax administration succeeds because business firms are pro-social, fostering compliance. Professor Daniel Hemel favorably reviewed Cui’s article on TaxProf blog.
Cui particularly takes issue with Henrik J. Kleven et al., Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries, 83 Economica 219 (2016), and Dina Pomeranz, No Taxation Without Information: Deterrence and Self-Enforcement in the Value Added Tax, 105 Am. Econ. Rev. 2539 (2015), both of which show the importance of third-party information reporting to tax enforcement. Cui’s article also criticizes Leandra Lederman, Reducing Information Gaps to Reduce the Tax Gap: When Is Information Reporting Warranted?, 78 Fordham L. Rev. 1733 (2010), which argued that information reporting is useful but not a panacea, and set forth six factors to evaluate the likely effectiveness of proposed information-reporting requirements.
Information Matters in Tax Enforcement takes on both of Cui’s arguments, as well as his subsidiary claim that the value-added tax (VAT) does not involve third-party reporting or reporting of individual transactions. Joe and I marshal a lot of evidence to show (1) third-party information reporting is generally very effective, and (2) firms are not inherently pro-social. Rather, the literature supports Kleven et al.’s argument that numerosity increases compliance. That is, where more people would have to collude, cheating is less likely due to the increased risk of defection. The fact that large firms generally are more tax compliant than small ones—a point Cui concedes—is consistent with that. Large firms are also subject to more regulation and oversight, which produce reliable information flows from the firm to the government. Joe and I also show that VATs do involve third-party reporting, with the modern trend being digital real-time reporting. Continue reading “New Paper on Tax Enforcement and Corporate Malfeasance”→
On April 5, Indiana University Maurer School of Law’s Tax Policy Colloquium welcomed Andrew Hayashi from the University of Virginia School of Law. Andrew presented his fascinating new paper, “Countercyclical Tax Bases.” (The paper isn’t publicly available yet, but Andrew offered to share it by email with interested readers.)
The paper argues that the choice of tax base should take into account what tax base is most helpful to the economy in recessions. It points out that recessions are not rare; between 1980 and 2010, there were 5 recessions, covering 16% of that period. The paper does two main things. First, it provides interesting stylized examples showing how, following an economic shock that reduces income or housing value, three types of tax bases (income, sales, and property) each interact with household credit constraints and adjustment costs (committed consumption of housing) to either stabilize or aggravate the negative economic shock. These examples illustrate quantitatively how different tax bases can affect taxpayer behavior in a recession, and thus the local economy.
Second, the paper contains an original empirical study of county tax bases for 2007-2014, to see the effect of tax bases on the recessions of 2001 and the Great Recession of 2008-2009. Andrew combined data from the Government Finance Database, Zillow, the FBI’s Uniform Crime Reports, and the IRS’s Statistics of Income, among other places. Although the results for the two recessions were not identical, Andrew generally found in his OLS regressions that counties that relied more on property taxes had smaller increases in unemployment during the two recessions and may have recovered from the recession more quickly. Sales taxes generally had countercyclical effects, as well, particularly in stabilizing government revenues during the Great Recession. In general, counties that were most reliant on income taxes suffered the most in the two recessions (though the results for income taxes generally were not statistically significant). Continue reading “IU Tax Policy Colloquium: Hayashi, “Countercyclical Tax Bases””→
Indiana University Maurer School of Law’s 2019 Tax Policy Colloquium will kick off on Thursday, January 17. My colleague David Gamage is hosting the Colloquium this year, and I’m really excited to hear from the terrific line-up of speakers! Andrew Hayashi from Viriginia Law School will kick off the semester with his work in progress, Countercyclical Tax Bases.
As I explained last year, The Tax Policy Colloquium is a course for students that features a series of speakers. The structure involves a background session with the students in alternate weeks, to help them get up to speed on the concepts presented in the paper draft. The workshops are open to the law school community and interested guests. They are usually attended not only by the students in the course but also by me, David Gamage, senior tax attorney/Maurer alumnus Tim Riffle, and a few other faculty, typically law school colleagues and/or tax or economics faculty from other schools on campus. We also invite other attorneys practicing in Bloomington and Indianapolis, tax Continue reading “The IU Maurer Law School’s 2019 Tax Policy Colloquium”→
There is an extensive set of literatures on tax compliance and evasion, often discussing the traditional economic model (the deterrence model) and/or behavioral theories such as social norms or tax morale. (For recent examples summarizing the theories, see this article by Kathleen Delaney Thomas, this one by Adam Thimmesch, or this one by yours truly.) There is also a separate accounting literature on fraud.
A key concept in this accounting literature is the “Fraud Triangle.” Yet despite the important role this theory plays within the accounting literature, the Fraud Triangle does not seem to have permeated the tax compliance literature, particularly the relevant legal literature.
For example, a search in “Secondary Materials” in Lexis for “‘fraud triangle’ w/50 tax!” turns up only one article, which is not a tax article but does cite a 2006 Tax Notes article authored by three CPAs. That article is James A. Tackett et al., “A Criminological Perspective of Tax Evasion” (paywalled). Yet, the Fraud Triangle should not be overlooked by scholars outside of accounting. It provides a powerful tool with which to conceptualize tax evasion. And, as discussed below, it helps provide a framework that both supports the deterrence model and allows other factors to coexist with deterrence.
The Fraud Triangle and the Fraud Diamond
The Fraud Triangle derives from three factors that criminologist Donald R. Cressey originally identified in a 1951 article in the Journal of Accountancy, “Why Do Trusted Persons Commit Fraud?: A Social-Psychological Study of Defalcators.” As discussed in his 1951 article and his 1953 book, “Other People’s Money: A Study in the Social Psychology of Embezzlement,” Cressey developed the factors that became the Fraud Triangle out of in-depth interviews with inmates who had been convicted of trust violations such as embezzlement. The three factors were labelled the “fraud triangle” by Steve Albrecht in the early 1990s. The elements of the Fraud Triangle, as discussed by Albrecht and others, are “perceived pressure” (usually financial), “perceived opportunity” to commit the fraud, and “rationalization” that the actions are justifiable or appropriate in the context of the situation. Albrecht and his coauthors of a 1979 KPMG study of convicted perpetrators of fraud “found that the decision to commit fraud is determined by the interaction of all three forces.” Continue reading “Tax Evasion and the Fraud Diamond”→
Transparency is a widely accepted judicial norm. It increases courts’ accountability and thereby increases the confidence and trust litigants and the general public have in courts’ decisionmaking. The comparatively limited access afforded to Tax Court documents is a longstanding issue. The reason Tax Court transparency differs from that of other courts is partly structural, in that the Tax Court isn’t as neatly situated in the federal government’s org chart as Article III courts, administrative agencies, or even Article I courts such as the Court of Federal Claims. (In fact, even which branch of government the Tax Court is located in has presented a puzzle.) Accordingly, the Tax Court traditionally has created many of its own rules and procedures, such as ones governing access to its documents. This means that the question is also partly cultural. As discussed below, access to Tax Court documents has increased over time, and the appointment of several new Tax Court judges may mean that we see further changes in the future.
In the past, the Tax Court’s more limited transparency has sometimes violated judicial norms and has sometimes created access inequities. For example, although the Tax Court is required by statute to make its reports and evidence “public records open to the inspection of the public,” for years the Tax Court kept its Summary Opinions confidential, which I protested in 1998 in a short Tax Notes article called “Tax Court S Cases: Does the ‘S’ Stand For Secret?”. Although Summary Opinions lack precedential value, they are Tax Court opinions, revealing how the judge deciding the case (typically a Special Trial Judge) thinks about the issues. The Tax Court’s practice of sharing those opinions only with the parties to the case meant that the IRS had a copy of every Summary Opinion but taxpayers typically could not access the opinions in other Small Tax Cases (S cases). This created an uneven playing field. Secrecy can also lead to suspicion of favoritism or other inequities, concerns that existed in an analogous situation, in the era when the IRS did not make Private Letter Rulings (PLRs) public but large firms collected them. Litigation challenging this lack of transparency resulted in legislation, requiring PLRs to be disclosed (with taxpayer information redacted). Continue reading “Increased Transparency in the U.S. Tax Court: Has the Moment Arrived?”→