Web-based tactics publicly embarrass tax cheats

Tax day is Wednesday, and once again the Internal Revenue Service won’t collect billions of dollars owed by taxpayers. The gross tax gap — the difference between what taxpayers should pay and what they actually pony up on a timely basis — exceeds $300 billion each year.

Let me go on record as saying that I don’t like paying taxes. Who does?

But I pay more than my fair share.

Because I do, I resent people who don’t. By shortchanging the government, tax cheats shift the burden to the rest of us.

The IRS doesn’t take tax cheating lightly, of course. It takes all steps possible to scare us into compliance and spends lots of taxpayer dollars to bolster enforcement and track down deadbeats.

The IRS also claims that it is ramping up its audits on high-income taxpayers and corporations, focusing more attention on abusive shelters and launching more criminal investigations.

That all sounds great, but I think the federal government could learn a thing or two from states that are facing the same dilemma.

More than 20 states rely on public humiliation by posting the names of tax delinquents on their respective websites. Apparently, the electronic-scarlet-letter approach works, because the postings have shamed businesses and individuals into paying millions of dollars in overdue state taxes.

For example, state officials in Delaware have been posting the names, addresses and amount of taxes owed by the top 100 individuals and business cheats since 2007.

It has paid off big-time. Patrick Carter, Delaware’s director of revenue, said that the state has collected almost $4 million in back taxes from hundreds of businesses and individuals who were placed on the list. Shame works, he explained in a published report, recounting how one accounting firm that was on the Delaware list ponied up after losing several clients. He also said that many state residents somehow managed to settle their tax bills because they were publicly embarrassed.

This shaming technique works because it relies on a time-tested method: a vocal condemnation of cheating followed by a display of the cheater’s bad acts for all to see.

Meanwhile, when Wisconsin launched its “website of shame” in 2006, it was projected to collect $1.5 million in unpaid taxes that first year. It generated seven times that amount, a success rate that officials attribute to taxpayers’ desire to avoid public humiliation.

Connecticut’s top-100 list is the longest-running online tax delinquency program in the country. It has collected more than $161 million in overdue taxes in the past seven years and expects to bring in another $21 million from payment plans worked out with debtors.

Georgia also publishes a tax delinquency list on the Internet. The state targeted 420,000 taxpayers who owed $1.6 billion in unpaid state taxes. In the process, it flushed out eight state lawmakers with delinquent state tax bills. After they were notified, all eight paid up before their names were posted on the website.

Maryland has collected $10.5 million since the state launched its “caught-in-the-web” list in June 2000. Ironically, nearly all of that cash came from people and businesses not posted on the Internet list. Most of those who paid were notified and coughed up back taxes in time to keep their names from going up on the website, according to the state’s comptroller.

Shaming has obviously helped states collect hundreds of millions of dollars in unpaid taxes as taxpayers have rushed to expunge their names from the shame lists.

It’s beyond me why every state has not launched a hall-of-shame website. What’s more, one has to believe that these programs can be equally effective at the federal level. The revenue can help close the IRS’ huge annual tax gap.

It’s evident that doing the right thing is not enough of a motivation for those who have decided either not to pay their taxes or have neglected to make repayment arrangements. Therefore, tax cheats are fair game to be publicly outed and entered into the hall of shame.

Jim Pavia is the editor of –InvestmentNews.