Tax Collection Methods: Understanding Business Tax Collection and the Psyche of Evasion

“Taxes are the life-blood of government, and their prompt and certain availability an imperious need (Justice Owen J Roberts, Bull V US 295 U. S. 247 (1935))” (Scharf). Tax collection is necessary to ensure revenues are collected to fund governmental services. States are losing tax revenue for a variety of reasons; this paper explores some of the major factors causing states to lose out on tax revenue. It addresses the tax gap, or unpaid taxes due and the economic inefficiencies caused by tax evasion. It analyzes the psyche of noncompliance in an attempt to discover the most efficient manner of collecting taxes. This understanding of noncompliant behavior is used to help identify the most effective tax collection methods available. This study focuses on the Kentucky Department of Revenue, Division of Collections, Corporation/Limited Liability Company Branch. The CP/LLC Branch focuses on enforced collection activities against corporations and limited liability companies. The enforced collection tools available to the branch are: jeopardy assessments, corporate officer notice of assessments, limited liability company member notice of assessments, final notice before seizures, liens, bank levies, and wage levies. Data from the CP/LLC Branch from July 2006-June 2009 were used to determine which of the enforced collection activities listed above have the most effect on total collections revenue. A lag regression analysis model was used. This was to account for mail float and response time. This analysis found a positive relationship between only one of the enforced collection activities and collections revenue, officer Notice of Assessments (NOA). A positive relationship was also discovered between total collections revenue and both the total number of cases in a previous month and incoming calls in the current month. These three factors, officer NOA’s, number of collection cases, and incoming phone calls all effect total collections in a statistically significant positive manner. There are other collection activities that a priori might seem to be related to these factors as well, but this analysis showed no connection. First, though the number of cases in collections has a positive effect on collections revenue, the total amount of accounts receivable for collections does not have the same relationship. This analysis showed that more cases entering collection leads to more collections revenue, independent of accounts receivable. This relationship could mean that cases new to collections are more likely to make payments. With this knowledge, management could decide to have collection officers focus on cases new to collections. Second, incoming calls have a positive influence on collections revenue. This was the least surprising part of the analysis. An incoming call from a business ensures that someone is contacting DOR concerning the case. When taxpayers are contacting the CP/LLC branch they are usually trying to work toward resolution. Another possible explanation for the correlation could be that taxpayers are calling in due to a refund offset. If a taxpayer owes tax liability for a business or for their individual income and he or she has been properly assessed as an officer of the business, then any tax refund due to that person, state or federal, will be offset and applied to the tax debt. These offsets often prompt an incoming call. This information emphasizes the importance of adequate phone coverage to CP/LLC Collections. The only enforced collection action shown to have a statistically significant effect on collections revenue is the officer NOA. Currently, collectors are instructed to wait until there is a total trust tax due of at least $1000(including tax, penalty, and interest) before starting officer NOA action. I recommend that management decide to lower this threshold, at least for the purpose of corporate collections (the same relationship was not found between LLC member NOA’s and collections revenue)