New Technologies and the Evolution of Tax Compliance

Abstract

Improving tax compliance is a common goal of governments worldwide. The United States is no exception. The size of the nation’s “tax gap” — or the difference between what taxpayers pay in taxes in a timely manner and what they should pay if they fully complied with the tax laws — is hundreds of billions of dollars annually, significantly depriving the nation of much needed revenue.

This paper explores the mixed effects of technological advancements on tax compliance — and, thus, its counterpart, tax noncompliance. On the one hand, technological advances have largely eradicated many of the commonplace tax-noncompliance techniques that once reigned during the twentieth century. On the other hand, many of these very same technological advances threaten to usher in new modes of tax evasion.

Which of these emergent trends will dominate is unclear. The outcome will largely depend upon whether Congress updates the tax laws to address technological advances and grants sufficient funding to the Internal Revenue Service to maintain robust enforcement efforts in an ever-changing technological landscape. Failure to take these steps will destine the size of the tax gap to expand.

Many prior studies have addressed discreet effects of specific technologies on tax compliance. This paper contributes to this developing literature by offering a cohesive framework to address technological advancement and tax compliance.