Accuracy-related penalties are supposed to promote voluntary compliance by taxpayers. However, this study found that those who were subject to the penalty had no better subsequent compliance than those who were not. In estimating the effect of accuracy-related penalties on Schedule C filers (i.e., sole proprietors), comparing their later compliance to that of similar taxpayers who the IRS didn’t penalize, we found that accuracy-related penalties did not appear to improve compliance among those who were subject to them. One of the policy implications of this study is that the IRS shouldn’t propose a penalty before exhausting efforts to communicate with the taxpayer to be sure the penalty actually applies.
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