Use power such as audit and enforcement actions in a way that strengthens trust
Research shows that actions by a Tax Administration whether audits, enforcement or recovery actions may have a positive or negative impact on taxpayers’ motivation to comply with their obligations. The effects may be short-term or long-term, and in some cases, the short-term effects may be different from the long-term ones. For example, an enforcement action may be immediately effective but if it is seen as illegitimate or unfair, it may reduce the motivation to comply in the future.
Powerful tools such as enforcement, used in the correct way by a Tax Administration, can influence norms and strengthen trust. As a result, if enforcement is viewed to be legitimate, supportive and fair it will influence the right behaviours and trust in the system will grow. Consequently, enforcement should always be viewed as a tool to protect compliant taxpayers.
Power and enforcement actions should be used primarily as an action to improve compliant behaviour. The perception that the vast majority of taxpayers are compliant increases voluntary compliance. For this reason, it is important to assist taxpayers that want to comply but are unable to do so and to show compliant taxpayers that fraudsters and cheats will not get away with tax evasion or tax avoidance. In this regard, enforcement is protecting the compliant majority from being exploited by those who do not pay their correct taxes with the added benefit of helping to maintain fair competition and ensuring a level playing field for all.
Detecting and sanctioning non-compliance is the primary goal of auditing programmes. These programmes should also aim to raise awareness that risk based audits are targeted at non-compliant behaviour. The main message should be one that underlines the social norm (most people comply) and highlights that enforcement is there to target tax evaders and tax avoiders. Proactive and clear communication with taxpayers will strengthen trust and increase voluntary tax compliance. Enforcement actions should be well targeted, correctly explained and operated in a correct manner, showing respect and aiming to treat the taxpayer in a fair way.
In the area of Compliance Risk Management (CRM), in depth work has been carried out by the Fiscalis Risk Analysis project group. The aim of the CRM’s work is for Tax Administrations to have strategies in place that will help them improve voluntary compliance levels and to ensure that non-compliance with tax laws is kept to a minimum. In this regard, trust is an essential cornerstone of voluntary compliance, with CRM as an important tool to achieve this goal.
The use of power in the sense of forced compliance, as a contrast to voluntary compliance, should be reserved primarily for addressing instances of deliberate non-compliant behaviour. This has a direct effect on those targeted and an indirect effect in that compliant taxpayers can see that non-compliant behaviour is being tackled and corrected. Resources and sanctions should be focused on high risk cases, as actions against compliant taxpayers could have a negative effect. This could be complemented by random audits, specifically to gather information on the type of errors made and to estimate the tax gap. Generally speaking, enforcement should always be proactive and transparent, i.e. aiming to change existing behaviours. This ensures that the use of power is perceived as legitimate.
A culture that assumes that all taxpayers are trying their best to do the right thing should be recognised by the Tax Administrations employees. If an error is identified by the Tax Administration, the proactive solution would be to offer guidance and assistance on how to correct the mistake before any enforcement actions are undertaken. Documents written in plain and understandable language, online services that are designed with the customer in mind, comprehensible tax laws and procedures will assist taxpayers to comply with their tax obligations.
Bearing in mind that taxpayers want to do the right thing, Tax Administrations should consider providing opportunities for taxpayers to correct any unintentional errors made without penalties. This approach will encourage engagement between the Tax Administration and the taxpayer on any possible tax defaults. This approach could be useful when new legislation or criteria are introduced and taxpayers make unintentional mistakes because they are unfamiliar with the new rules.