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1 1 (August 1, 2019)

handle is hein.crs/govbapw0001 and id is 1 raw text is: Congressional ____ '~Research Service .... .. nformrng the Ieg Iastive debate since 1914 Behavioral Economics, IRS Letter Campaigns, and Tax Compliance August 1, 2019 Research from the fields of behavioral economics and behavioral science suggests there may be cost- effective ways for the Internal Revenue Service (IRS) to increase tax compliance and collections. This Insight discusses one relatively simple approach to potentially increase compliance: carefully crafted letters to taxpayers. The discussion below is also intended to introduce the reader to a small portion of the vocabulary used by behavioral economists. Classical and Behavioral Theories According to the most recent estimates, the IRS collects about 84% of the taxes it should be collecting. The classical economic theory of tax compliance assumes that rational individuals purposefully compare the expected monetary costs and benefits of gaming the tax system, and that compliance can be increased by increasing audits, increasing penalties, or a combination of the two. In contrast, behavioral theories of tax compliance question whether people are the rational beings that the classical theory assumes, and also propose that individuals consider the psychological or moral costs of not complying with the tax code as well as the monetary costs. Additionally, researchers have observed that individuals are prone to making honest mistakes when completing complex tasks, which completing a tax return may be for some people. An Effective Letter Campaign Economists have found that carefully crafted letters can encourage individuals to comply with the tax code. The tax system can be complex and difficult to understand, and individuals are susceptible to information overload and confusion-what behavioral economists refer to as bounded rationality- because of cognitive limits on memory, computation capacity, and the ability to process information. One suggestion behavioralists have is the use of clear and concise writing in plain English when communicating with taxpayers. Reader-friendly letters can reduce the cognitive load placed on everyday taxpayers and increase the likelihood that they comply with the tax code. Congressional Research Service https://crsreports.congress.gov IN11151 CRS INSIGHT Prepared for Members and Committees of Congress

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