This chapter considers how the statute of limitations can enable high-end tax noncompliance and prevent the IRS from challenging tax positions of high-end taxpayers. The chapter begins by describing the statute of limitations on tax assessment and the rationale underlying its design, which is followed by an explanation of how it encourages and facilitates abusive tax avoidance by high-end taxpayers. Following this discussion, we present a proposal for incorporating means adjustments into the statute of limitations in order to level the playing field between high-end taxpayers and the IRS.

This chapter turns to the structure of the tax compliance system and how it attempts to address high-end noncompliance. It begins by situating the tax compliance rules within the broader tax system. The discussion considers what they share with all tax rules and what sets them apart. The following sections begin a more detailed dive into the structure of the tax compliance system. After addressing what motivates taxpayers to comply with the tax law, the discussion considers the main components of the tax compliance system, and how these components leverage taxpayer motivations to improve compliance. With this important context on the tax compliance system established, the discussion then returns to the challenges of high-end noncompliance. The final part of this chapter describes the two most prominent approaches in current law and reform proposals. The first general approach is to increase funding of the Internal Revenue Service so it can more effectively deter noncompliance and recover unpaid taxes. The second general approach is what this book terms “activity-based” rules, targeting the specific taxpayer activities that can either indicate or enable tax noncompliance.

What are the weaknesses of the current tax compliance rules, and how can these rules more effectively address the challenge of high-end tax noncompliance? This chapter first describes the limitations of the traditional responses to tax noncompliance in the law and in prominent reform proposals. It then introduces a new approach: a system of means-adjusted tax compliance rules. As we argue, this approach can both complement the traditional responses to noncompliance and counter their limitations to build a more robust and effective tax compliance system. The final section of this chapter describes how introducing means adjustments to the tax compliance rules would not be a radically new direction for tax reform, but rather an extension and rationalization of principles that are already embedded in the current tax law.

Tax-information reporting is an essential element of the tax compliance system. Despite the power of tax-information reporting to maximize the IRS’s ability to collect taxes owed, these rules also contain significant gaps. High-end taxpayers can often earn their income through transactions that do not require a third party to file tax-information reports with the IRS. This chapter demonstrates how the activity-based approach to information reporting often allows high-end taxpayers to engage in noncompliance with the tax law, while other taxpayers face significant automatic IRS scrutiny. It also shows that the government’s approach to tax-information reporting applies almost exclusively to specific activities, ranging from methods of earning income to designated transactions. This approach is consistent with the government’s design of other tax compliance rules that apply to certain types of activities, such as the use of tax shelters, offshore bank accounts, and transactions lacking economic substance to avoid tax liability.