Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Don’t Tell Mom I Didn’t Pay My Taxes!: The Efficacy of State Shaming Campaigns on Taxpayer Compliance and Ideas for the Future
Dear Noncompliant Taxpayer,
Our records indicate that you have unpaid personal income tax liabilities in the amount of $50,492.27 with the State of X Department of Taxation. This amount includes unpaid income tax and accrued interest and penalties. In compliance with the Department’s legal obligations, set forth in section 39(f)(4) of the Tax Law, we hereby notify you that if the above balance is not received by the Department on or before October 22, 2010, your full name, home address, place of employment, and amount of liability will be:
(1) Published on the Department’s Delinquent Taxpayer website;
(2) Published on the Department’s Facebook Fan Page;
(3) Published on the Department’s Twitter page;
(4) Published in the Department’s printed newsletter, Neighborhood Delinquent Taxpayers, which is mailed monthly to all residents in your ZIP code; and
(5) Published in the Department’s e-newsletter, Delinquent Taxpayers of State X, which is emailed monthly to all subscribers.
To avoid the above sanctions and additional interest and penalties, please remit a payment of $50,492.27 to the Department on or before October 22, 2010.
If you received this letter as a result of unpaid income tax, how likely would you be to remit the outstanding liability to State X’s Tax Department? Moreover, if you were aware that such letters were being mailed to noncompliant taxpayers across the state, how likely would you be to accurately report your income and pay your taxes on time in the first place? These questions are precisely what this Comment addresses—the efficacy of so-called state “shaming campaigns” on taxpayer compliance.
State tax gaps represent a staggering amount of foregone revenue each year in all 50 states. Although the mock letter above incorporates several ideas that have yet to be utilized by any state, the general concept of income tax shaming has been in existence since 1994, and at least 25 states have engaged in some form of it. Furthermore, the concept of publicly shaming offenders is not unique to taxpayer noncompliance. It has been used for myriad offenses, including solicitation of prostitution, driving under the influence, child molestation, and engaging in terrorist website activities.
The primary purpose of shaming is straightforward: deterrence. If would-be noncompliant taxpayers are aware of the potential consequences of noncompliance, and those consequences (i.e., sanctions) are made more severe, such individuals will be less likely to commit the offense. Moreover, if offenders are given an opportunity to avoid the heightened penalty (i.e., pay the established tax liability to avoid shaming), they will be more likely to rectify their wrongdoing.
Part II of this Comment provides a brief overview of the state tax gap problem, first by defining the “tax gap,” and then by looking at state-specific tax gap statistics. Part III describes the taxpayer’s decision-making process, introducing several factors that influence a taxpayer’s compliance decision. Part IV presents the concept of shaming campaigns, identifies the elements necessary for an effective shaming campaign, and examines several state taxpayer shaming campaigns. Part V concludes with recommendations for improving the efficacy of state shaming campaigns, primarily through the use of modern social media and the inclusion of underreporting taxpayers in state shaming campaigns.
At the outset, it is important to note the limited scope of this Comment. First, it is limited to state income tax shaming campaigns (i.e., not federal tax shaming campaigns and not non income-tax shaming campaigns). Second, this Comment does not discuss the efficacy of other methods of increasing taxpayer compliance, such as tax amnesty programs, reforms for tax penalty provisions, regulating tax preparers, or changes in the way tax officials communicate with taxpayers. Indeed, this author acknowledges that shaming campaigns should not be the exclusive means for increasing taxpayer compliance. Third, this Comment focuses on individual, as opposed to corporate, taxpayers. And fourth, this Comment addresses only those individuals who are intentionally noncompliant (i.e., not those who made honest mistakes on their return or forgot to remit payment for established tax liabilities).
Even within the limited scope of this Comment, however, the potential for shaming campaigns to positively affect taxpayer compliance is significant, and thus such campaigns should not be ignored by states looking to reduce their tax gaps.