Can the IRS tap citizen power to police tax-evading corporations?

It sounds like an outtake from the Lives of Others or another surveillance conspiracy theory: what if you mobilized an entire country to make sure businesses paid their taxes?

Slovakia is trying this with its year-old plan for a tax lottery. And it might be a stretch, but who knows whether the beleaguered IRS might consider one day following suit for America’s corporate scofflaws? After all, there’s no question the IRS needs help. Thanks to budget cuts, the agency is so short staffed that this year it will audit fewer Americans than at any time since the 1980s.

“We keep going after the people who look like the worst of the bad guys, but there are going to be some people that we should catch, either in terms of collecting the revenue from them or prosecuting them, that we’re not going to catch,” IRS Commissioner John Koshinen said earlier this month.

So let’s turn our eyes to Slovakia.

In an attempt to get companies to pay their fair share of value-added tax (a type of sales tax) Slovakia has decided to recruit its masses to keep its businesses honest. It’s like crowdsourcing for public revenue.

Here’s how it works: Slovakia has asked its citizens to collect all their sales receipts for anything over one euro, whether at a store or a restaurant. Each receipt is printed with the business’s company tax ID. Slovakian authorities want citizens to go home, look up the receipt with the tax ID, and enter it into a national database. The Slovakian finance ministry will look through the database to double-check that the businesses are correctly reporting their income – or so they say.

What’s in it for citizens? As a reward for each sales receipt a taxpayer registers from a store or a restaurant, he or she will be registered into a monthly lottery and get a chance to win a car, €10,000 or to appear on the country’s version of The Price is Right.

In this age of post-Occupy, when corporate tax breaks reliably get US citizens riled up, why wouldn’t we try the Slovakian experiment here? After all, the country’s finance minister touted the program as a “huge success“.

Here’s the thing: that may be true, but not for the reasons one would think.

Scaring merchants into compliance

Slovakia’s goal is to unite its populace in a widespread respect for taxes – an ambition that may be out of reach for America, which is far more sprawling and harbors dedicated tax resisters.

If every man is the tax man, the thinking goes, citizens and businesses will behave better. The real purpose of the tax lottery is not to create a potential database of relevant receipts, but to increase tax compliance by changing the dynamic of government’s relationship with taxpayers and business it regulates. By making businesses think that the government is recreating paper trails, which may lead to a potential audit, the tax lottery increases tax compliance just by existing. No actual analysis of receipts required.

A despatcher looks on as he guards the train's safe departure from the foggy station in Cierna nad Tisou, Slovakia. A thick layer of fog is seen above the train lines near Cierna nad Tisou while an older double-carriage electric train leaves the station in Slovakia.
A foggy train station in Slovakia, where Slovaks gather to talk about tax incentives and government mind games. Photograph: Robert Nemeti/Barcroft Media

But it’s hard to pull this off. Tax auditing is a difficult and expensive process, whether in the US or Slovakia. A country that can’t hire enough auditors to keep up with business taxes is also unlikely to pay enough people to sift through databases of tax IDs from registered receipts that live, crumpled, in the pockets of forgetful citizens.

“My guess is that if it works, it is through the mechanism of scaring merchants into collecting and remitting [tax payments], because they know government has more information – which is very different than tracking down whether tax was submitted on each of thousands of registered receipts,” says Mitchell Kane, Gerald L Wallace professor of taxation at NYU’s School of Law.

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