Net income provides a more accurate account of the financial status. Here’s why.
What is voluntary compliance?
Voluntary compliance is the assumption that taxpayers will report all of their income and take tax deductions as accurately as possible.
The U.S. tax system operates on the principle of voluntary compliance. Instead of the IRS completing tax returns for every single taxpayer, each taxpayer must complete his or her own return.
The idea of voluntary compliance does not lie in the completion of the tax return, but rather in the manner in which an individual reports income or claims deductions.
The IRS expects taxpayers to follow the tax code as they complete their tax returns. Due to the complexity of the tax code, the IRS provides taxpayers with numerous schedules and guidelines.
Taxpayers should use these items to see what deductions or credits they qualify for. The taxpayer also can use this information to find the right filing status or to see if a person qualifies as the taxpayer’s dependent.
Ready to estimate your income tax obligation? Put in your income, filing status and withholdings to see if you will owe money or get a return.
Voluntary compliance example
When it is tax time, the taxpayer should adhere to voluntary compliance when filling out a tax return.
For example, assume that a taxpayer has income from multiple sources to report on his or her tax return. The taxpayer receives a W-2 that reports income received from an employer.
However, if the taxpayer does part-time work on the side for extra income, the entity that the taxpayer works for may not be required to send the taxpayer a form that reports the income. In that instance, it is up to the taxpayer to voluntarily comply with IRS regulations and report the income on the tax return.
If the taxpayer decides not to report the income, the IRS may audit the tax return and recalculate the taxpayer’s income tax obligation.
Want to see what tax bracket you’re in? Check out this tax bracket calculator.