What Is Voluntary Compliance?
Let me explain voluntary compliance to you directly: it's the principle that you, as a citizen, will cooperate with the government by filing honest and accurate annual tax returns. The U.S. income tax system runs on this assumption, but it includes checks and balances to keep things in line.
When we say 'voluntary' here, I mean that you, the individual taxpayer, will prepare and file your return without the government having to chase you down.
Understanding Voluntary Compliance
You know that paying income taxes is mandatory, but the responsibility to report your income falls on you as the taxpayer.
That's what voluntary compliance boils down to. The government expects you to be forthcoming in calculating and reporting your incomes and to send in any unpaid amounts by the tax deadline each year.
Key Takeaways
- The U.S. government discovered early on that auditing every individual tax return is impossible.
- Therefore, it must assume that taxpayers will voluntarily comply to the best of their abilities.
- Checks and balances like W-2 forms are in place to discourage non-compliance.
How It Works in Practice
Of course, the government doesn't just take your word for it. For instance, if you receive a W-2 form from your employer, you report that income on Form 1040, and the IRS gets a copy too, so they're aware of it.
You might also have a part-time job without a W-2 or similar earnings statement. Under voluntary compliance, you're expected to report that additional income on your annual return.
There's a less optimistic side: the system assumes some taxpayers won't fully comply, either intentionally or by mistake. The IRS enforces this through audits.
Audits and Voluntary Compliance
Back in the early days after the 1913 establishment of federal income tax, the law required auditing every return by the Commissioner of Internal Revenue’s office.
This quickly proved impossible, even as staff grew. A 1954 law ended that requirement, and since then, audits cover about one percent of returns.
The government's acceptance that it lacks resources for full auditing defines voluntary compliance. Compliance is voluntary because total enforcement isn't feasible, but that doesn't make paying taxes optional.
Audits often start from mismatches between your tax return and forms like W-2 or 1099. Other triggers include earnings inconsistent with past years or dealings with audited individuals.
Audits can happen by mail or in person. Unofficial thresholds for tax fraud charges are $70,000 in unpaid taxes and three years of deliberate fraud, set to avoid prosecuting honest mistakes.
