Monthly Archives: June 2012

Responsive Regulation and Large Business Tax Compliance

Leigh Osofsky, Getting Realistic about Responsive Tax Administration, 66 Tax L. Rev. __ (forthcoming 2012) available at SSRN.

Leigh Osofsky’s paper, Getting Realistic about Responsive Tax Administration, studies an important feature of tax collections procedure, the IRS’s Compliance Assurance Process (CAP). CAP is a program—piloted in 2005 and extended to all large business taxpayers in 2011—by which the Service reviews the compliance of large business taxpayers prior to the filing of a tax return. The goal here is to resolve all tax positions before the return is filed, and to thereby move from a post-return filing audit system to a pre-filing cooperative conversation between taxpayer and Service. According to Osofsky, supporters tout several supposed benefits of CAP: it reduces IRS resource spending on large businesses, letting the IRS focus its energies on other areas; it helps taxpayers minimize uncertainty and hence compliance costs; it provides the Service with real-time data on compliance issues; it may encourage strong tax compliance norms; and it discourages impermissible tax planning by offering incentives for choosing compliance. Osofsky doesn’t think current empirical evidence is strong enough to allow us to rely on this story. She presents an alternative story: Increased resource wastage by taxpayers resulting from insufficient scrutiny and revenue losses to the government that offset IRS cost savings may mean that CAP is not as appealing as its supporters claim.

As an investigation of CAP, a little-known tax administration procedure for dealing with large business taxpayers, Getting Realistic is already an interesting and timely piece. However, the paper’s true uniqueness lies in its evaluation of CAP in the broader theoretical context of “responsive regulation” and “responsive tax administration” approaches. Responsive regulation is broadly used to denote approaches emphasizing a shift away from traditional, top-down regulation towards more participatory, bottom-up regulation. Osofsky describes its central tenets as including a notion that regulators should use persuasion to obtain compliance, an emphasis on procedural justice to encourage more compliance, and a notion that punishment should only be meted out only after cooperation hasn’t worked. In the tax administration context, the theory emphasizes the importance of understanding diverse taxpayer motivations and of trust building between taxpayers and Service, rather than traditional audit-style penalties. It also focuses on reciprocity and service as ways to increase compliance. Continue reading "Responsive Regulation and Large Business Tax Compliance"