blacklistThe Oregon Department of Revenue recently held a hearing on a proposed rule that would authorize the Department to post a list of delinquent taxpayers online. Although the IRS is prohibited from publishing the information of delinquent taxpayers, almost half of the states in the U.S. use “naming and shaming” to improve tax compliance. Studies suggest that this practice can facilitate the collection of taxes if done properly. However, there is reason to believe that the use of a delinquent taxpayer list can backfire if taxpayers view an agency’s collection procedures as unfair or coercive.

As part of its public disclosure pilot program, the Department of Revenue will publish a list of the “largest tax delinquencies” for which a warrant has been recorded in any Oregon county clerk’s office. The rule provides no indication as to exactly how many delinquencies will be included on the list, but a previous draft of the rule limited the list to the 25 largest delinquencies. The removal of that limitation in the current draft could be a bad omen for Oregon taxpayers with outstanding balances.

On December 1, the Department rolled out its new computer system, which includes an automated warrant system. Previously, revenue agents had to manually review each account to decide when a delinquent liability should be subject to a recorded warrant. Now, any liability over $2500 not paid within 60 days of assessment will be subject to an automatic, recorded warrant. The new automated warrant system streamlines the process and greatly expands the pool of delinquent taxpayers potentially eligible for public disclosure. Before a taxpayer is placed on the public delinquency list, the Department must send a written notice giving the taxpayer 30 days to correct the delinquency, either by paying in full or entering into an approved payment plan. Taxpayers can also stay off the list by initiating a bankruptcy proceeding or by convincing the Department that the delinquency is uncollectible due to financial hardship (an unlikely prospect).

Is “naming and shaming” good policy? Will it promote compliance with Oregon’s tax laws? I recently attended the inaugural International Conference on Taxpayer Rights in Washington, D.C., where government initiatives to promote voluntary compliance were heavily discussed.

The keynote address by Eric Kirchler, Professor of Economic Psychology at the University of Vienna, looked at the ways in which taxpayers’ attitudes towards tax agencies affect voluntary compliance. Mr. Kirchler distinquished an agency’s use of legitimate power (based on the agency’s professionalism, expertise, and legal authority) from the agency’s use of coercive power (such as asset seizure, penalties, and public shaming). If an agency exercises too much coercive power in relation to its exercise of legitimate power, the agency’s use of that power will be viewed as unfair and oppressive. As a result, taxpayer trust in the agency will suffer and overall levels of compliance will decrease. To be effective in promoting compliance, Kirchler said, coercive power should be used only in limited circumstances.

Lennart Wittberg, a strategist with the Swedish Tax Agency, discussed the application of these ideas in Sweden, which has one of the world’s highest voluntary compliance rates. In 2006, Sweden changed its approach to audits and tax enforcement, recognizing that if taxpayers perceive the tax system as fair and just, they are more willing to accept decisions of the taxing agency that negatively affect them. Wittberg noted that most Swedish taxpayers feel that they are treated with fairness and respect during the audit process. Because they are given a meaningful chance to present their case to the auditor, taxpayers tend to view the agency’s final decision as an exercise of legitimate power. As a result, Swedish taxpayers are highly likely to comply with the tax laws following an audit, regardless of the audit outcome.

In order to promote voluntary compliance, the Oregon Department of Revenue should apply these principles to its tax collection policies. Publicly disclosing the names and addresses of delinquent taxpayers is a coercive power which must be used with caution. If the collection process is viewed as unfair and unjust, taxpayer compliance will likely decrease. For example, the proposed rules provide that Oregon taxpayers may avoid the disclosure list by entering into a payment agreement for satisfaction of their liabilities. But if taxpayers are not offered a meaningful opportunity to enter into a payment agreement based on an amount they can reasonably afford to pay, public shaming will likely build resentment towards the Department. Shaming should be strictly reserved for taxpayers who are able to pay and have been offered an opportunity to pay, but who choose not to. The power to destroy the reputations of businesses and individual taxpayers should not be taken lightly.

If you are being pursued by the Oregon Department of Revenue for past-due tax liabilities, you know what the collections process is like. Many taxpayers seek the assistance of an attorney because they feel that they are being treated unfairly by revenue agents who don’t give them the opportunity to make reasonable payment arrangements. Whether or not the Department of Revenue’s collection policies are fair and just (or even legal, in some cases) is a complicated question that will be the subject of future discussions. In the meantime, as the Department of Revenue ramps up collections efforts, policymakers would be well advised to keep in mind that when it comes to promoting voluntary compliance, winning the trust and respect of taxpayers is vital to success.