Tax time brings out the procrastination impulses many of us have, especially when the postponed action has to do with something as distasteful as paying taxes, says Joel Slemrod, professor of business economics and director of the School of Business Administrations Office of Tax Policy Research. Many taxpayers wait until the last possible moment to send in their return.
And with more than 70 percent of taxpayers entitled to a refund, procrastination amounts to giving the government an interest-free loan, he adds.
Even 30 percent of returns claiming refunds do not come in until April, Slemrod says. These loans cost taxpayers well over $1 billion every year. Those that file later, on average, have lower refunds, more complex returns and higher incomes.
While procrastinating may cost many taxpayers who receive refunds, many of those who owe tax upon filing fail to act penny-wise by doing just the oppositenot procrastinating, Slemrod says.
No matter when these people actually complete the tax returns, there is no reason to send them in until the deadline, he says. Yet, more than 20 percent of people in this situationespecially the elderlysend in their returns before April, at a cost of more than $50 million in foregone interest.
Slemrod says that during tax time, Americans think not only about when to file their tax return, but also how much income to report. According to the Internal Revenue Service, about 18 percent of what should be paid is not, although the evasion percentages vary widely across type of income, ranging from 32 percent for self-employed earnings to just 1 percent for wage income.
With the percentage of returns audited falling to about one-half of 1 percent in 1999, down from 1.67 percent in 1995, there is much concern about evasion becoming a bigger problem in the future, Slemrod says.
In a 1995 study by Slemrod and colleagues to learn more about the extent of tax evasion and its susceptibility to enforcement policy, a group of more than 1,700 randomly selected Minnesota taxpayers was informed by letter that the returns they were about to file would be closely examined. The tax returns this group eventually filed were tracked and closely compared to a group of similar taxpayers who did not receive the letter.
Compared to the control group, low- and middle-income taxpayers who received the letter increased tax payments compared to the previous year, a clear indication that those receiving the letter increased their tax reports, Slemrod says. The effect was much stronger for those with more opportunity to evade, such as those with returns containing self-employment or farm income.
The reported tax liability of high-income recipients of the letter decreased sharply, relative to the control group.
This response was not due to their hiring professional tax help upon receipt of the letter, because most people in this group already used tax preparers, Slemrod says. The conversation between the taxpayer and the preparer might have changed, although we dont know this for sure.
Another possibility is that, faced with a certain audit, taxpayers decided to begin a negotiated settlement with a low bid, expecting that they eventually would agree to pay more tax than what was stated on their return but betting that this negotiating strategy would lead to a better outcome than any other.
Another two groups of taxpayers in the study received one of two letters that carried no audit threat, but rather either reminded them of the uses to which their tax dollars went or informed them that most people honestly report their taxes. However, the research found no evidence that receiving either letter induced taxpayers to change their reporting behavior.
Thus the stick of threatened audits, says Slemrod, induced a much bigger change in behavior, sometimes in an unexpected direction, than the carrot of explaining the usefulness of tax payments and the ubiquity of tax compliance.
Slemrods Office of Tax Policy Research is a nonpartisan research office that supports and disseminates academic research on all aspects of the tax system, with the goal of informing discussion about the future course of policy. For more information, contact email@example.com or at (734) 763-3068, or visit the Web at www.otpr.org.