Collateral compliance.

• Author: Blank, Joshua D.
• Position: Promoting tax compliance using combination of monetary and nonmonetary penalties - Introduction through II. Why Collateral Tax Sanctions Promote Compliance B. Collateral Tax Sanctions and Motivations of Compliance 4. Certain Collateral Tax Sanctions Emit Negative Signals, p. 719-761

As most of us are aware, noncompliance with the tax law can lead to tax penalties, which almost always take the form of monetary sanctions. But noncompliance with the tax law can have other consequences as well. Collateral sanctions for tax noncompliance--which apply on top of traditional tax penalties to revoke or deny government-provided benefits--increasingly apply to individuals who have failed to obey the tax law. They range from denial of hunting permits to suspension of driver's licenses to revocation of passports. Further, as the recent Supreme Court case Kawashima v. Holder demonstrates, some individuals who are subject to tax penalties for committing tax offenses involving "fraud or deceit" may even face deportation from the United States.

When analyzing sanctions as incentives for tax compliance, tax scholars have focused almost exclusively on the design and implementation of monetary penalties. This Article, in contrast, introduces the collateral tax sanction as a new form of tax penalty that does not require noncompliant taxpayers to pay the government money and that does not require a taxing authority to implement it. Drawing on behavioral research and experiments in the tax context and other areas, I argue that collateral tax sanctions can promote voluntary tax compliance more effectively than the threat of additional monetary tax penalties, especially if governments increase public awareness of these sanctions. Governments should therefore embrace collateral tax sanctions as a means of tax enforcement, and taxing authorities should publicize them affirmatively.

After considering the effects of collateral tax sanctions under the predominant theories of voluntary compliance, I propose principles that governments should consider when designing collateral tax sanctions. These principles suggest, for example, that initiatives to revoke driver's licenses or professional licenses from individuals who fail to file tax returns or pay outstanding taxes would likely promote tax compliance. However, whether the sanction of deportation for tax offenses involving fraud or deceit will have positive compliance effects is far less certain. Finally, I suggest how taxing authorities should publicize these sanctions to foster voluntary compliance.

INTRODUCTION I. The Rise of Collateral Tax Sanctions A. Monetary Tax Penalties 1. Percentage Tax Penalties 2. Flat Tax Penalties B. Collateral Tax Sanctions 1. Collateral Consequences in the Criminal Context 2. Collateral Tax Sanctions Defined 3. Examples a. Federal Examples i. Passports ii. Residency iii. Housing Assistance iv. Government Contracts and Employment b. State and Local Examples i. Driver's Licenses and Vehicle Registration ii. Professional Licenses iii. Liquor Licenses iv. Recreational Licenses C. Unanswered Questions II. WHY COLLATERAL TAX SANCTIONS PROMOTE COMPLIANCE A. Why Do People Pay Taxes? B. Collateral Tax Sanctions and Motivations of Compliance 1. Collateral Tax Sanctions Are More Salient than Monetary Tax Penalties 2. Collateral Tax Sanctions Provoke Loss Aversion and the Endowment Effect 3. Certain Collateral Tax Sanctions Can Impose Greater Economic Costs than Monetary Tax Penalties 4. Certain Collateral Tax Sanctions Emit Negative Signals a. Professional Signals b. Personal Signals 5. Collateral Tax Sanctions Bolster Confidence Among Taxpayers Motivated by Feelings of Reciprocity a. Publicity b. Observability c. Peer Group Examples 6. Collateral Tax Sanctions Reinforce Tax Compliance as a Duty of Citizenship C. Drawbacks 1. Spillover Effects 2. Brute Deterrence 3. Horizontal Equity 4. Tax Privacy 5. Observability III. When Should Collateral Tax Sanctions Apply? A. Proposed Principles 1. Tax Offense Is a Violation of a Tax Rule, Not a Tax Standard 2. Tax Offense Should Be Defined by Tax Law and Identified by the Taxing Authority 3. The Collateral Tax Sanction Should Be Proportionate to the Tax Offense B. Beyond Tax Delinquency? 1. Nonfiling and Professional Licenses a. Tax Rule b. Tax Law and Taxing Authority c. Proportionality 2. Household Employment Taxes and FDIC Insurance a. Tax Rule b. Tax Law and Taxing Authority c. Proportionality 3. "Fraud and Deceit" Tax Offenses and Deportation a. Tax Rule b. Tax Law and Taxing Authority c. Proportionality C. Publicity by Taxing Authorities 1. Strategic Publicity 2. Specificity 3. Results 4. When Drawbacks Outweigh Benefits CONCLUSION INTRODUCTION

Tucked in the corner of one of the dozens of strip malls along Ventura Boulevard in California's San Fernando Valley, the Japanese restaurant Cho Cho San serves spicy tuna rolls, shrimp tempura, and a menu of other entrees favored by the American palate. (1) Its owners, Akio and Fusako Kawashima, arrived in the United States in 1982 in search of opportunity, and through hard work and good fortune, established the profitable restaurant chain. (2) Their business success, however, did not extend to their dealings with the Internal Revenue Service (IRS). In 1997, IRS agents determined that the couple underpaid taxes on their restaurant income by nearly a quarter of a million dollars over several years. (3) Rather than face a criminal trial, Mr. Kawashima pleaded guilty to willfully making a false tax return, and Mrs. Kawashima pleaded guilty to aiding and assisting the preparation of a false tax return. (4) The Kawashimas agreed to pay back the taxes owed plus tax penalties and interest and were sentenced to four months in prison. (5) Almost three years later, after reestablishing themselves as "exemplary" members of their community, (6) the Kawashimas received an unexpected notice from the immigration authorities. (7) As a result of their prior guilty pleas in their tax case, they faced deportation to their native country of Japan and the prospect of leaving their children and American lives behind. (8)

The story of Kawashima v. Holder, (9) decided by the United States Supreme Court in 2012, illustrates a curious chain of events. After incurring a tax penalty and prison time, the taxpayers faced the additional sanction of deportation as a result of the same tax offense. Criminal law scholars refer to such additional sanctions as the "collateral consequences" of criminal convictions. (10) For example, a convicted individual may be prohibited from holding certain public or private sector employment (11) or from serving on juries (12) following a prison sentence. I describe the Kawashimas' added sanction here as a "collateral tax sanction." The sanction applied on top of monetary tax penalties and prison sentences, revoked a privilege provided by the government instead of requiring additional monetary payment, and was imposed by an agency other than the taxing authority.

It may appear unusual to tax practitioners and tax scholars that the Kawashimas' additional, nonmonetary sanction for tax noncompliance was levied by an agency other than the IRS. However, collateral tax sanctions are increasingly used in other contexts. In recent years, federal agencies and state governments have started to apply collateral tax sanctions to combat tax delinquency, an offense that occurs when a taxpayer fails to pay an established tax liability in a timely manner. For example, under current and proposed federal rules, failure to pay taxes owed may result not only in civil and criminal tax penalties, (13) but also in loss of ability to apply for Federal Housing Authority (FHA) mortgages, (14) enter into contracts with the federal government, (15) and hold a United States passport. (16) Likewise, several states suspend driver's licenses and vehicle registrations, (17) revoke law and other professional licenses, (18) and deny hunting and gaming permits (19) to residents who fail to satisfy their tax obligations. Criminal law scholars have written dozens of articles on the collateral consequences of criminal convictions. (20) Yet tax scholars have virtually ignored similar consequences in the taxation context.

Instead, when analyzing sanctions as incentives for tax compliance, tax scholars have focused almost exclusively on the design and implementation of monetary tax penalties. (21) This Article, in contrast, introduces the collateral tax sanction as a new form of tax penalty that neither requires noncompliant taxpayers to pay the government money nor requires the taxing authority to apply it. To explore this overlooked aspect of tax enforcement, this Article considers several questions: Why do collateral tax sanctions appear to encourage individuals to pay their tax debts where monetary tax penalties have failed? Could collateral tax sanctions influence individuals' tax compliance decisions in areas other than the payment of outstanding tax liabilities? And how, if at all, should taxing authorities, as opposed to other government agencies, publicize the existence of collateral tax sanctions? Drawing on behavioral research and experiments in the tax context and other areas, I argue that collateral tax sanctions can promote voluntary tax compliance more effectively than the threat of additional monetary tax penalties, especially if governments increase public awareness of these sanctions. I conclude that governments should embrace collateral tax sanctions as a means of tax enforcement and that taxing authorities should publicize them affirmatively.

To begin this investigation, I examine differences between collateral tax sanctions and traditional monetary tax penalties. I also consider the significance of these differences in light of potential tax compliance motivations presented in the tax literature. (22) I find that collateral tax sanctions possess several unique features that traditional monetary tax penalties lack. Several features, I argue, enable collateral tax sanctions to encourage voluntary compliance more effectively than traditional monetary tax penalties.

First, collateral tax sanctions are more salient than traditional monetary tax penalties, thus...