FAYETTEVILLE, Ark. — Each year an estimated 33 percent of American taxpayers who intentionally fail to file tax returns know they are due a refund, according to University of Arkansas researcher Deborah Thomas. Her study focused on identifying the factors for intentional and unintentional noncompliance with tax laws, which costs the federal government an estimated at $125 billion each year.

"These taxpayers are not avoiding their responsibility to pay taxes — they merely viewed the return preparation as not worth their effort," explained Thomas, associate professor of accounting in the Walton College of Business. "Some respondents said things like 'the state should be happy I did not file them’."

Thomas conducted her research with Christine Ritsema of Hope College and Tracy Manly of the University of Tulsa. They studied the comments from taxpayers participating in a tax amnesty program in Arkansas in 1997. The results of their study appeared recently in the journal State Tax Notes.

Taxpayer noncompliance is difficult to study because the data are not available. Amnesty programs, which allow noncompliant taxpayers to pay their taxes without penalties, allow information to be collected on these individuals. The 1997 Arkansas amnesty program gave participants the opportunity to complete a voluntary survey and include comments.

"Although the identity of taxpayers was kept confidential, we were fortunate that Arkansas made the entire data set, including comments, available to us," said Thomas. "The federal income tax system has never implemented an amnesty program, but we were able to extend this research at the state level to address federal concerns as well."

The researchers studied data from the 1,025 returns that included comments. They found that noncompliant taxpayers fell into four basic categories: 1) unintentionally noncompliant (35 percent), 2) intentionally noncompliant (44 percent), 3) noncompliant due to error (10 percent) and 4) noncompliant due to complexity of the tax system (11 percent).

Unintentional noncompliance included simple oversight (43 percent) or forgetfulness due to a specific life circumstance (29 percent), such as a death in the family, divorce or illiteracy. Another 28 percent completed the forms, but forgot to mail them. Typical comments from this group attributed the problem to the fact that the state filing deadline was a month later than the federal filing date.

Intentionally noncompliant taxpayers included those who did not have the money to pay taxes (6 percent), those who were dissatisfied with the government (20 percent) and those who procrastinated or were afraid of being caught for not filing in a previous year (17 percent). However, the largest segment of this group, 33 percent, included those who owed no taxes or were due a refund.

In this group, comments ranged from "I was due a refund and I didn’t think it was important to get it back" to "I didn’t owe any taxes. I just didn’t file." Other participants blamed a lack of forms: "I did not file because the state did not send the booklets. My local revenue office claimed they did not have any." Procrastination showed up in comments like: "I intended to try to gather information for state file but just neglected it," while one fearful taxpayer commented, "I didn’t file in 1989 and it kept getting worse. I was afraid after the first year."

Some taxpayers did not file because they did not have the money. One participant noted, "I did not have the money at the time. The refinery where I was employed exploded." Others had a clear anti-government reason, stating that "the tax is both morally and constitutionally wrong" or "This is a bedroom tax. I work out of state. I pay federal tax."

Of those who were noncompliant due to error, 86 percent said that their returns were lost, either in the mail or by the state. Many respondents indicated that they had mailing receipts or other records of filing. In his group, 14 percent said the error was made by a tax preparer.

"This doesn’t apply to us," commented one taxpayer. "We filed the income tax return and sent the money at the right time. That office lost the envelope. I have proof as I mailed it certified with a return receipt. I have the receipt where that office stamped a name on it."

The last category, complexity of the tax system, is a widely recognized problem. While 28 percent of these taxpayers cited general confusion, the majority (46 percent) attributed their confusion to the differences between state income tax systems. Another 18 percent cited confusion about their filing status, either because they were in the military or only lived in the state part of the year. The other 6 percent were confused about the border-city exemption, a unique Arkansas statute that currently applies only to residents of Texarkana, Ark.

"The growing complexity of the tax system has been recognized as a deterrent to tax compliance," said Thomas. "The largest source of difficulty is the difference among state income tax systems, including states that have no income tax. One respondent summarized this position by saying 'Had no idea that Arkansas had a state income tax, never thought to ask’."

The researchers concluded that increased coordination of federal and state tax rules, including filing deadlines, might increase tax compliance in both the intentional and unintentional categories. They also suggest that additional public service announcements and advertising about tax filing deadlines would increase awareness and limit unintentional noncompliance.

According to Thomas, targeting state processes instead of taxpayer behavior could reduce noncompliance due to errors or tax complexity. For example, control measures within the state tax system could reduce the number of "lost" returns. While the IRS has a stated goal of reducing tax complexity, the researchers believe that this also should be a goal for state tax authorities.

"Increased understanding of the motivation for taxpayer noncompliance aids in the identification of strategies to increase compliance," explained Thomas. "Additional public announcements of tax code changes and aligning of state tax rules with the federal rules might both be beneficial in increasing compliance."