Voluntary Compliance: What it Means, How it Works

Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.

What Is Voluntary Compliance?

Voluntary compliance refers to citizens cooperating with their government by filing honest and accurate annual returns. The U.S. income tax system operates under this assumption, though not without checks and balances.

Voluntary in this case implies that individual taxpayers will prepare and file a return without proactive action by the government.

Understanding Voluntary Compliance

Payment of income taxes is mandatory. But the burden of reporting income falls upon each individual taxpayer.

That is the meaning of voluntary compliance. The government expects 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.

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.

The government doesn’t generally take the taxpayer’s word for it. For example, a taxpayer who receives a W-2 form from an employer reports the income on Form 1040. The Internal Revenue Service (IRS) receives a copy of that W-2 and is thus aware of that income.

The individual may also have a part-time job that does not involve a W-2 filing or similar statement of earnings or other income. Under the principle of voluntary compliance, the taxpayer is expected to report that additional income in the annual return.

A 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. This may occur by intentional evasion or through an innocent misunderstanding. The IRS is responsible for enforcing compliance and does so through a system of audits.

Audits and Voluntary Compliance

In the early days following the 1913 establishment of a federal income tax, U.S. law required 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 the requirement and audits have been undertaken on about one percent of returns ever since.

The government’s implicit acceptance that it does not have the resources for comprehensive auditing, and never did, helps define voluntary compliance. Compliance is voluntary because total enforcement is impossible. The voluntary nature of compliance does not mean paying taxes is a voluntary action.

Audits are most commonly 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. The unofficial thresholds for charges of tax fraud are $70,000 in unpaid taxes and three years of deliberate fraud. These guidelines are set to minimize the prosecution risk for taxpayers whose non-compliance is truly an honest oversight.

Audits can be conducted via mail or in person. The unofficial thresholds for charges of tax fraud are $70,000 in unpaid taxes and three years of deliberate fraud. These guidelines are set to minimize the prosecution risk for taxpayers whose non-compliance is truly an honest oversight.