Should the IRS Think More Like a Marketing Company?

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Should the IRS Think More Like a Marketing Company?

I don’t know about you… but being self employed gives a lot of flexibility on when and how much you pay in both Federal and State Taxes. This year, I was EARLY – and no, I did not have a refund coming to me. I thought to myself… what if the IRS gave away trips, cars, and prizes? Would that motivate tax payers in a positive way to pay their taxes on time?

The IRS imposes strict penalties on citizens that fail to file their tax return by the deadline. However, those penalties don’t appear to be an effective way to get people to file on time.  The IRS may need to find a new approach to encourage people to file their taxes by the deadline. The agency may want to consider giving people incentives to file early instead.

IRS Penalties Seem Ineffective

The IRS reported that over 8 million people owed back taxes in 2009. Approximately 7% of people filed for an extension, while others either chose to file late or never filed at all.

Some people are obviously want to avoid paying their taxes and believe that the IRS will never audit them. However, the majority of people that fail to file on time are honest citizens that fall behind. Surveys from CPAs throughout the country found that most people miss the deadline because they procrastinated. The threat of late penalties clearly wasn’t enough to force them to file on time.

Another reason the IRS rules are ineffective is that the IRS can’t really do anything against people that file a few days late. The agency can charge a 5% penalty on all owed taxes every month that you fail to file on time. People that are aware of this policy are probably less concerned about the deadline.

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Would Another System Work Better?

Since tax penalties don’t stop millions of people from filing late, the IRS may want to consider a new system. Many private businesses have started paying rewards to customers to encourage them to make early payments instead of charging late penalties. Here are a couple examples that have been tried.

Redskins Reward Season Ticket Holders for Filing Early

The Washington Redskins had difficulty getting many of its season ticket holders to pay their fees by the spring deadline. The franchise sued a number of its fans in 2009 for violating their contracts when they didn’t make their payments on time.

The team faced a lot of bad publicity from the lawsuit. They decided to pursue a friendlier strategy in 2011, when they started offering incentives to season ticket holders that paid before the March 1 deadline. Redskins fans were far more receptive to this proposal and many of them took advantage of the incentives.

Early Payment Incentives in Europe

Vince Cable, the Business Secretary in the UK, is also considering using incentives to pay early rather than charging late penalties. He said that many suppliers are scared to charge late fees to their largest customers. Many companies pay their invoices late, because they don’t feel the late penalties will be enforced.

Cable said that Sweden has a system that encourages companies to pay early instead. He said that Sweden has the lowest rate of delinquent accounts in Europe, which suggests that their early payment incentives seem to be a great solution.

Could Such a System Work With the IRS?

Early payment incentives are becoming increasingly popular in the private sector. The IRS may want to consider implementing a similar system, because charging late penalties clearly isn’t stopping millions of people from filing late.

 So tell me, if you could win a fancy car or some trip to paradise, would you file your taxes early or on time?