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Prof. Joel Slemrod

University of Michigan, Ann Arbor, USA

Authors: Joel Slemrod, Brett Collins, Jeffrey Hoopes, Daniel Reck, and Michael Sebastiani

Abstract: Third-party information has greatly decreased tax underreporting, but substantial underreporting persists where third-party information is not present. We investigate the preliminary response of businesses filing a Schedule C to the introduction in 2011 of Form 1099-K, which provides the Internal Revenue Service (IRS) and taxpayers with information about small businesses’ sales done by payment card and other electronic means. We find evidence that taxpayers with high prior noncompliance and/or sufficient use of electronic payment methods did adjust their behavior in response to the new information returns. Theory and distributional analysis isolate a subset of taxpayers who respond to information reporting by reporting receipts equal to or slightly exceeding the amount of receipts reported on 1099-K. Information reporting made these taxpayers much more likely to file Schedule C and, conditional on filing a Schedule C, increased their reported receipts by up to 24 percent. However, firms largely offset this change with increased reported expenses (an area not subject to information reporting), so that the overall effect on reported net taxable income was significantly smaller than would otherwise be expected without the increase in expenses.

Full Text:  “Does Credit-Card Information Reporting Improve Small-Business Tax Compliance?”