Giving details of a taxpayer’s income boosted the response rate by 63 percent. But a letter that combined a threat with income information was less effective than a threat by itself. “Keeping it simple seems to be the key,” Pospiech said. Appeals to civic pride fell flat, with a response rate just 0.8 percentage points higher than that of a basic letter.
Detroit still has a long way to go, even if it manages to apply the results of the experiment and triple the response rate from tax delinquents. About 6 percent of U.S. taxpayers break the law by not filing with the Internal Revenue Service each year, according to research by economic consultant Brian Erard. In Detroit, Meiselman estimated, 46 percent of taxpayers hadn’t submitted their 2014 returns by the due date in the following year—and things were getting worse.
Detroit’s next step was to back up threats with action. No matter what letters from the city suggest, taxpayers could maintain a sense of impunity. The city hadn’t undertaken an audit or tax investigation in more than a decade. The city tax office, which once had a staff of about 70, was down to fewer than three dozen employees who spent all their time processing paper returns.
The department recently reorganized—last year the state of Michigan took over collecting and processing Detroit’s current-year returns—to free up city employees to collect unpaid taxes. Detroit also allowed taxpayers to file electronically for the first time, and 77 percent of filers took advantage. The city has sent out 15,000 letters since July 2016 and has collected $5.3 million through letters, audits, and investigations. Some of the amounts collected are significant, particularly for those who have dodged taxes for years. In one case, a taxpayer agreed to pay $400,000.
Detroit also started filing misdemeanor charges and lawsuits in small claims court to get its tax money. Officials noticed that only one in five residents in several high-end apartments buildings had filed income taxes. The city persuaded a judge to issue an order requiring landlords to turn over tenant information.
So far the more aggressive approach seems to be working. The number of residents filing returns more than doubled last year from the previous year. Filing by nonresidents rose 37 percent. It’s too early to tell how seriously taxpayers are taking their filing obligations this year. City returns from 2016 are due, along with state and federal returns, by April 18.
City officials are optimistic. In the past, “people knew we weren’t coming after them,” Pospiech said. “Now we are following up on those threats.”
This article was provided by Bloomberg News.