A Modest Proposal to Improve Tax Compliance: Curbing Penalty-Protection Opinions

89 Pages Posted: 16 Oct 2008 Last revised: 18 Jul 2013

See all articles by Steve R. Johnson

Steve R. Johnson

Florida State University - College of Law

Abstract

In this time of record federal budget deficits, policymakers are devoting great attention to the tax gap, a measure of tax compliance (or noncompliance). The gap is estimated to be over a third of a trillion dollars, and it has grown rapidly in recent decades. There is no "silver bullet" to improve compliance across the board; a mix of strategies will be needed. This article suggests one such strategy, a new proposal to reduce noncompliance by wealthy individuals and corporations.

Many wealthy taxpayers decide whether to take tenuous tax return positions by weighing rewards against risks. Civil tax penalties are crucial to that calculation. Without a viable penalty regime, perceived rewards from noncompliant behavior will often outweigh perceived risks. The deterrent effect of penalties is undercut by the ability of wealthy taxpayers to obtain favorable opinions from their attorneys and accountants blessing even dubious transactions, providing colorable "reasonable cause" defenses to deflect penalties. This article proposes that the reliance defense be means-tested, that is, be made categorically unavailable to corporate and individual taxpayers whose net worths exceed specified levels.

This change would transform the conversations between wealthy taxpayers and their advisers. Since "wink and nod" opinions would no longer be valuable, taxpayers would now want their advisers' candid views of the tax merits of proposed transactions, improving compliance. Moreover, means-testing would be fair. This proposal would merely extend to the penalty context the means-testing that the tax law already requires in other contexts. Means-testing recognizes that wealthy taxpayers have options unavailable to others. After means-testing, wealthy taxpayers would still be able to protect themselves by obtaining rulings or second opinions in close cases and by bringing malpractice actions if they wind up paying penalties as a result of poor advice.

Keywords: Tax compliance

Suggested Citation

Johnson, Steve R., A Modest Proposal to Improve Tax Compliance: Curbing Penalty-Protection Opinions. Florida Tax Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1285282 or http://dx.doi.org/10.2139/ssrn.1285282

Steve R. Johnson (Contact Author)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Room R210
Tallahassee, FL 32306
United States
850-644-1777 (Phone)

HOME PAGE: http://www.law.fsu.edu/faculty/sjohnson.html

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