Voluntary Compliance

What Is Voluntary Compliance?

Voluntary Compliance is the principle assumption that individuals and corporations will cooperate with the government rules, regulations, and laws without being forced/coerced

Voluntary compliance means people will assist their government by submitting truthful and correct yearly returns. Under this premise, the U.S. income tax system functions, though with safeguards.

In this context, the word "voluntary" means that the individual taxpayer will create and submit a return on their initiative.

Of course, paying income taxes is required. However, it is the responsibility of each taxpayer to record their income.

That is what voluntary compliance means. The government anticipates that American taxpayers will be truthful in determining and disclosing their incomes and will pay any unpaid balance to the government by the annual tax deadline.

Of course, the government rarely believes what the taxpayer says. For instance, a taxpayer who receives a W-2 form from their job must fill out Form 1040 to report their income. 

A copy of that W-2 is provided to the Internal Revenue Service (IRS), which is subsequently informed of that income.

The person might also work a part-time job that does not need them to file a W-2 or other equivalent statement of earnings or other sources of income. 

The taxpayer must include that additional income in the annual return per the principle of voluntary compliance.

The American tax system also suggests a less optimistic premise that some taxpayers will not follow tax laws to the letter. 

This could happen through wilful dodging or a simple misunderstanding. The IRS is in charge of enforcing compliance through an auditing mechanism.

Voluntary Compliance and Audits

U.S. law mandated that the office of the Commissioner of Internal Revenue audit every tax return in the early years after the introduction of a federal income tax in 1913.

Even as the commissioner's staff grew, it soon became clear that this was impossible. Since then, audits have been conducted on about 1% of returns due to a 1954 law that removed the necessity.

The government's implied admission that it lacks the resources for in-depth auditing and never has defined voluntary compliance. 

Because complete enforcement is not practicable, compliance is voluntary. However, while compliance is largely voluntary, paying taxes is not entirely voluntary.

The most frequent cause of audits is a discrepancy between the data recorded on a tax return and the relevant official records, like the W-2 or 1099. 

Inconsistent earnings with prior years or financial dealings with people whose finances are being audited are additional warning signs.

Voluntary Compliance Example

The taxpayer should comply voluntarily while filing a tax return during tax season.

Consider a scenario where a taxpayer needs to record income from several different sources on their tax return. First, a W-2 is given to the taxpayer, which details any earnings from an employer.

However, the organization that the taxpayer works for might not be obligated to submit the taxpayer a form that reports the income if the taxpayer works part-time for additional money. 

In that case, it is the taxpayer's responsibility to voluntarily abide by IRS rules and record the income on the tax return.

The IRS may audit the tax return and recalculate the taxpayer's income tax liability if the taxpayer chooses not to declare the income.

Let's use another example to clarify how voluntary compliance operates. Assume a major organization employs Jack. The organization will give him a W-2, a report detailing his earnings from the corporation for the previous year.

But Jack also makes money from other places. Along with his regular employment, he also teaches English to children from other countries. Jack makes extra money from these endeavors but does not get a W-2 form.

Jack can now voluntarily include the additional income in his final tax return. If he chooses not to disclose the additional income, the IRS might not be aware of it. We term voluntary compliance as putting your faith in Jack to file a complete tax return.

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