Enforcement of revenue collections.

• Author: Allan, Ian J.

The enforcement of tax and revenue laws is an important part of any local government's revenue collections operation. Revenues that are owed must be collected in order for the government to continue to function properly. The loss of revenue from tax evasion contributes to fiscal problems, may require short-term borrowing and can disrupt a government's normal functioning. Significant levels of delinquencies, which strain a local government's cash flow needs, also could have a negative effect on credit ratings and increase the cost of borrowing.

The three basic tasks associated with the enforcement of revenue collections are controlling delinquency, discovering nonpayers and auditing taxpayers. Delinquency control involves notifying taxpayers of their delinquent account status, following up on those accounts and initiating legal action, if necessary. The discovery of nonpayers is concerned primarily with identifying businesses that have failed to notify the revenue collections office of their operation or of a change of address and contacting the business through investigators and collections staff. Compliance audits of taxpayers are aimed for the most part at existing accounts, with the purpose of determining whether the reported figures and calculations upon which the tax or other revenue payment is due are correct.

Enforcement Actions

To increase a government's collection rate, a number of enforcement actions can be taken before and after a delinquency occurs. Many of the frequently used enforcement actions are briefly described in the following sections. Revenue collection administrators should review state and local laws to determine if their government has the legal authority to pursue these and other enforcement actions.

Charging Penalties and Interest.

Penalties and interest should be set at a level which effectively deters taxpayers from becoming delinquent, should be charged each time a delinquency occurs and should be enforced. Penalty and interest charges combined should exceed the prevailing rates on short-term loans in order to encourage taxpayers to pay promptly. The failure to do so provides the delinquent taxpayer with an interest rate subsidy and will result in more late payments. Given the volatility of the financial markets, local governments should regularly review the rates of penalty and interest charges and make changes when appropriate.

Checks that are returned due to insufficient funds in a bank account should be subject to penalties. Taxpayers who submit checks with insufficient funds also should be required to pay for the additional costs incurred by the government in handling the check and pursuing the delinquency. This additional penalty could be a lump sum amount or a percentage of the size of the check.

Filing a Tax Warrant. This is equivalent to obtaining a court order for a money judgment against a delinquent taxpayer. The warrant is docketed in...