Attitudes towards payment of debt and compliance

Prepared for the:
Public Affairs Branch
Canada Revenue Agency
FINAL REPORT
December 2009
POR# 022-09
Contract #46558-108944/001/CY

Prepared by:
Sage Research

Le rapport complet en français sera fourni sur demande.

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Executive summary

There has been an identified need in the Canada Revenue Agency (CRA) to understand the factors that influence taxpayers' payment and filing compliance and their impact on accounts receivables. Agency administrative databases are limited in their ability to explain the reasons why individuals who owe taxes do not pay or file on time. The research objectives were:

• To obtain greater in-depth understanding of individuals with positive tax at risk (e.g., who either pay by instalment, or who typically owe money when filing their tax return) to understand what qualitative factors influence whether an individual will be compliant or non-compliant with the requirements to file on time and to pay their tax liability to the Government.
• To determine the perceived efficacy of penalties and interest.

This research will be used to help the CRA better understand the motivations of taxpayers regarding their tax debts, thereby aiding the Agency in developing strategies and communications to help Canadians voluntarily comply with their tax obligations.

Eight focus groups were conducted September 22-29, 2009 in Halifax, Montreal, Toronto and Saskatoon. Two of the groups were with Instalment Payers, and six were with Other Payers – i.e., people who usually have tax owing at the income tax filing deadline. All participants had made at least one late payment in the past five years and been charged interest as a result. At least one participant in each focus group had also filed a tax return late in the past five years. There was an approximately equal split between men and women, and the large majority of participants were self-employed and between 35 and 64 years of age.

This research was contracted at $46,100 (GST/HST excluded).

Attitudes towards debt and tax debt

Overall, most participants believed late tax payment is typically a result of a person's financial circumstances, rather than associated with particular types of people in terms of general attitudes or feelings with regard to tax debt. The views of most participants can be summarized as follows:

• They generally do not like being in debt.
• They do not like being late making an income tax payment. Being late causes some anxiety and concern because the money has to be paid eventually and because of the perceived powers of the government to ensure the money is collected.
• They perceive tax debt as different from other forms of debt such as credit card debt, because the government has powers that other organizations do not have.
• Due to any of a variety of circumstances, a person may not have enough money to pay their instalments or final tax owing at the deadline, and as a result will be late making payments.

While most participants believed late payment is driven by circumstances and is not specific to certain "types" of people, there was some discussion of types of people who might be prone to late payment. The most commonly mentioned type was people who are generally disorganized or prone to procrastination. Other types of people discussed but believed to be only a small proportion of late tax/instalment payers are people with a generally casual attitude towards owing money, and people who do not pay on time because of certain opinions about the government or tax system. Another possibility to consider is that late tax/instalment payers may be distinctive in the priority they place on paying tax debt relative to other types of debt, although this could not be fully explored in the research because the research did not include people who always pay on time. But, it is notable that participants referenced a variety of types of expenses as getting higher priority for payment than a tax amount.

Late filing

The primary reason most participants gave for late payment was lack of money to make the payment at the deadline. In connection with this, the most widely given reason for late filing was avoidance of having to deal with lack of money to make the tax payment. In this situation, late payment could be said to cause late filing:  the person knows they are going to be late making the tax payment, and because of this deliberately decides to file their tax return late.

The avoidance is of both the internal pressure a person feels to deal with the situation, but even more importantly of external pressure from the CRA. It was suggested a person in this situation is hoping to accumulate enough money sometime in the future to pay the entire amount owing, and will file the return at that time.

Several factors were mentioned which can support this "avoidance" rationale for late filing when a person does not have enough money to pay the full amount owing:

• Lack of awareness of options for partial payments:  Quite a few participants said that particularly among people who have not been late before there is lack of awareness of options to make partial payments. There is a belief the CRA will not work with people to develop a payment schedule, but rather will insist on receiving the full amount immediately.
• Lack of awareness of when interest charges start:  Some participants thought the CRA does not start charging interest until the tax return is filed, even if it is filed late.
• Lack of awareness of the late-filing penalty:  While most participants thought some sort of interest would be charged on late amounts, it appeared that awareness of the late filing penalty was much lower.

Other reasons mentioned by at least several participants for late filing included:

• General procrastination or disorganization
• Do not realize one will owe money, and therefore complete the tax return late
• Waiting for late receipts
• Unable to devote time to completing the tax return due to such factors as illness, family emergency, or being particularly busy at work around the tax filing deadline
• Lack of awareness of filing requirements

Note that almost none of the participants had personally filed late due to lack of awareness of the filing deadline. However, some participants suggested that young people and newcomers to Canada might be at risk of filing late due to lack of awareness of filing requirements, including both the need to file and the filing deadline date. In this context, some suggested targeting communication campaigns towards these groups to help make them aware of the requirements.

Late payment

Lack of Money as a Reason for Late Payment

For both those who owe tax on the payment due date and those who pay by instalments, the large majority of participants said the most common reason for late payment is lack of money to make the payment around the time the payment is due.

Participants mentioned a wide variety of reasons why there can be a lack of money to make a payment, which can be categorized as follows:

• Lack of anticipation of the amount owing – for example:
  • Completing the tax return close to the deadline and being unable to come up with the payment money by the deadline
  • Do not expect to owe tax, and therefore complete the return at the last minute or late
  • Income fluctuation for self-employed people which makes it difficult to estimate what might be owing
  • New to having to make payments, and therefore unsure of how to estimate what might be owed, or are unaware there will be an amount owing
• Cash flow:  Unexpected expenses or revenue losses can cut into cash savings and result in inability to make an instalment or final tax payment.
• Not saving enough on an ongoing basis to cover the payments:  This might occur simply because of poor planning or financial management. But, many of the participants in business said that trends in level of business income over time can result in insufficient saving of money for an instalment or final tax payment. The most common reference was to a downward trend in business income:  a relatively rapid drop in sales can make meeting business expenses a challenge, and cut into ability to put money aside for payments to the CRA. Several participants commented that an upward trend in business income can also result in payment problems if the business owner does not at the same time increase the amount of money set aside for instalment or final tax payments.

In the "lack of money" scenario, a factor that contributed significantly to the magnitude of tax amounts paid late was lack of awareness that making partial payments can be a viable option (it should be noted this is primarily a point about final tax payments, as instalment payers were more likely to understand the possibility and value of paying at least part of the instalment due on the deadline date). There was a belief the CRA will not work with people to develop a payment schedule, but rather will insist on receiving the full amount immediately. The result is that instead of filing on time and making a partial payment at the deadline, a person will delay filing altogether and pay the entire amount late.

When there is insufficient money to pay all bills, choices have to be made as to which bills are paid first, and which are put off for payment at a later date. While most participants said they viewed tax debt as important and serious, most also attached lower priority to paying tax than to a variety of other expenses. The following are the types of expenses given higher priority for payment over taxes:

• Basic home expenses:  e.g., food, housing, utilities, medical, and transportation.
• Costs associated with generating income:  e.g., transportation costs associated with working, childcare, and for participants in business costs associated with keeping their business running such as paying for materials, paying suppliers, paying workers, "keeping the bank happy" by staying current with any bank loans or lines of credit.
• Credit card debt:  Some participants mentioned giving higher priority to paying off credit card debt than to paying tax, because they believed the interest cost of credit card debt would be higher than the cost of tax debt. This belief was not always based on factual knowledge of interest rates charged on tax debt, but rather on an assumption that the government – because it is government – would not charge the high rates charged by some credit card companies.

Another factor mentioned by some participants in deciding to give higher priority to other types of debt over tax debt was a belief that failure to pay other types of debt can result in a lower credit rating, but that this does not happen with tax debt.

Other Reasons for Late Payment

Some of the other reasons for late payment have already been mentioned earlier:

• In the earlier section Attitudes towards Debt and Tax Debt, the types of people discussed as prone to being late were:  disorganized people, people with a casual attitude towards owing money, and people who do not pay on time because of opinions about the government or tax system. However, most participants felt that usually late payment is a result of a person's circumstances – such as lack of money – rather than a result of their general attitudes or character.
• In the section on Late Filing, the following factors were discussed where a decision to file late can cause late payment:  do not realize they owe money, late receipts, unable to devote time to completing a tax return, and lack of awareness of filing requirements.

The following are other reasons mentioned for late payment:

• The filing deadline for people who are self-employed is June 15, but if they have tax owing they are supposed to pay by April 30. When participants were asked their understanding of the date they are supposed to pay income taxes owing, some of the self-employed participants thought the payment date is the same as the filing date – i.e., that both the tax return and tax payment are due in June. This can lead to late payment.
  It should also be noted that some self-employed participants commented they pay when told to do so by their accountant. This can potentially mitigate the impact of any misunderstanding over deadline dates, but only if they use an accountant to do their tax return and the accountant has been given sufficient information to do tax calculations prior to the April 30 deadline.
• Some participants said a person owing tax may wait to pay until they receive the Notice of Assessment and get the exact amount owing according to the CRA. These people may not be sure whether the CRA will agree with the calculated amount owing and do not want to send in the money until they get the "official" figure from the CRA. As well, several participants were under the impression that interest is not charged until after the Notice of Assessment is sent.
• A couple of participants suggested that people who file their tax return electronically using NETFILE may be more prone to paying late. The idea was that it is natural to include a cheque in the envelope when mailing in a return, but with NETFILE submitting the return is a separate step from making a payment, and some people may not immediately take the second step of sending in a payment.

In order to put discussion of reasons for late payment in context, participants were also asked the reasons for making payments on time. One important category of reasons mentioned by many participants is that paying on time is the "right" thing to do – e.g., it is appropriate to generally follow the rules, it is better not to owe money, and paying on time helps one keep control over one's finances. The other important category of reasons was to avoid negative consequences, the two most widely mentioned being increased attention from the CRA (e.g., "audit") and interest or penalties. Notably, participants tended to perceive avoidance of increased attention by the CRA as a stronger motivation to pay on time than avoidance of interest or penalties. The reason appeared to be that interest/penalties – while they may be large – can be paid and then the matter is closed, while increased attention from the CRA carries with it the stress of dealing with communication from the CRA and a more open-ended and unknown risk.

Role of Interest/Penalties in Late Payment

To qualify for the focus groups, all of the participants had to have been late with an instalment or final tax payment sometime in the past five years and paid interest charges as a result. Participants were asked whether at the time of the decision to pay late they were aware of the possible interest charges or penalties. Almost none said they had any specific knowledge of the interest or penalties the CRA might charge. The large majority of participants said they assumed there would be some sort of adverse financial consequence such as interest, but beyond that did not know any specifics.

Awareness of the late-filing penalty appeared to be low, based on both the lack of spontaneous mention of this penalty, and the surprise many participants expressed when learning about it later in the focus group when shown a description of the CRA's interest and penalty charges.

Participants were asked for their overall subjective reaction to any interest or penalties they were assessed associated with paying late. In the case of those who owed tax after the payment due date, the majority said the charges were not out of line with what they thought might happen, although they had not had any specific numeric expectations. Among the balance, some said the charges were higher than they had thought, while some others said the charges were lower than they had feared. In the case of late instalment payments, participants were somewhat more likely to say the charges were larger than expected. Perhaps the latter occurred because instalment interest (and the penalty) is not determined until after the tax return has been assessed, so perhaps interest charges may have been accruing for a longer period of time.

Participants were asked whether the charges they incurred were such that in the future, under similar financial circumstances, they would be more likely to pay on time. Some did say they would be more likely to pay on time in the future, but about an equal number said that if the circumstances were repeated they would pay late again. So, experiencing interest/penalty charges does have a deterrent impact on late payment in the future for some people, but not for others.

Later in the focus groups when participants read a description of interest and penalty charges, many viewed the magnitude of the charges as being very serious. Indeed, the impression is that some had a stronger reaction to the description of the charges than to the actual charges they experienced.

Overall, it appears that specific knowledge of what interest and penalties the CRA charges and how these are calculated could have had a stronger deterrent impact at the time of the decision to pay late. In this context, some participants suggested the CRA should do more to advertise the specific consequences of not filing or paying by the deadline.

Reactions to descriptions of interest and penalty charges

Near the end of most of the focus groups, participants were provided a handout showing the description of interest and penalty charges given on the CRA Web site, and asked for their reactions.

The overall reaction on first reading was similar for the instalment and final tax payment versions of the handouts:  most participants found the text hard to understand, but also had the impression that the financial consequences of late payment can be very serious. Indeed, quite a few participants appeared to find the description of the interest and penalty more scary than the actual interest or penalty they were charged in connection with their own late payments.

One difference between the handout for those owing tax after the payment deadline (April 30th) and the one for late instalment payers is that while both were perceived to be difficult to understand, the instalment text was seen as particularly difficult to follow. This was especially true for the penalty section.

Although most participants said the information was hard to understand, there were various aspects of the text that created an impression that the financial consequences of late payment can be very serious:

• At least on first reading, participants tended to react to the interest and penalty as a whole, without clearly distinguishing what each is nor the circumstances in which the penalty applies versus when it does not apply. Therefore, in judging the perceived seriousness of the financial consequences the first reaction was to combine both the interest and the penalty.
  In the case of the handout for those owing tax after the payment due date, when the moderator directed attention separately to the interest and penalty sections, some participants, but not all, realized (a) that the late-filing penalty only applies when the return is filed, and (b) the late-filing penalty appears to be more serious than the interest component. Some of these participants subsequently differentiated their reaction to the interest versus penalty:  the interest component began to look less severe because it is only 5% compared to the much higher rates charged by credit card companies, while the late-filing penalty continued to look very serious. They concluded they would be much less likely to consider filing late in the future, but were less deterred with respect to late payment.
• "Compound daily interest":  Quite a few participants referred to the "compound daily interest" when asked why the financial consequences of late payment appeared so serious. Evidently compounding is perceived to greatly increase the effective rate.
• "The rate of interest charged can change every three months":  Some participants thought the changes would be used in a punitive way. For example, the interest would be increased if "the CRA does not like you" or would be increased the longer you do not pay.
• In the description of the late-filing penalty, many participants perceived this as being very serious because of the bolded percentage amounts and the "plus 1%" or "plus 2%" for each full month the return is late.

Perceptions of CRA communications

Virtually all participants said the written communications received from the CRA with regard to late payment were clear, and said sufficient information was provided on any interest or penalties owing. Most found the tone of the communications acceptable, describing it as "straightforward" or "businesslike."

The one significant perceived issue with the communications pertained to messaging:  specifically, the majority of participants did not feel the written communication from the CRA gave any indication that the CRA is willing to work with people unable to pay the full amount right away, or that it is possible to work out a schedule of partial payments. Essentially, the perceived message was "pay the full amount right away", with no offer of any other alternatives. It should be noted, though, that some participants did claim to see in the written communication a statement that if one is unable to pay, then one should contact the CRA at a telephone number provided in the letter.

Some participants paid in full, but some did end up making a series of partial payments. The latter typically said they arranged this by calling the CRA, stating they were unable to pay in full, and requesting the option to make partial payments. These participants said that in these phone calls the onus was on them to ask for a partial payment option, as it was not offered proactively by the CRA agent. Only one participant arranged a payment schedule by using the CRA Web site.

Many participants suggested the CRA should, in its written communications to a late payer, explicitly offer an alternative to people who are unable to pay in full right away. This might be as simple as an instruction to call if one is unable to pay, or it might involve detailing payment options.

Some participants said that not only would this make it easier for the taxpayer to deal with not having enough money to pay an amount in full right away, but they also believed the CRA would collect amounts owing more quickly. The reason is that not offering options, or not offering to work with the payer, can lead to avoidance behaviour:  e.g., not filing the return on time, avoiding calls from the CRA, and generally not dealing with the situation until the person has enough money to pay the entire amount at once. Offering to work with the taxpayer or offering options would, they felt, result in a higher likelihood of the CRA more quickly receiving at least partial payments.

A couple of participants suggested addressing right on the tax return the issue of not being able to pay a full amount owing right away. In the two focus groups where this occurred, the other participants agreed with this suggestion. One version of the suggestion was to put a check box on the tax return which would allow a person to communicate that they need to talk with the CRA about alternative payment arrangements. The CRA could then follow up with communication of options. The other version of the suggestion was to list payment options on the tax form from which the taxpayer could choose.

A written communication issue specific to instalment payers was timeliness of the communication:  some instalment payers said too much time elapsed before they received communication about their late payment. This perception may exist because communication of instalment interest or penalties may not be received until the following year (after the tax return has been assessed).

In some of the focus groups, participants were asked whether in a late payment situation they would prefer to get a telephone call from the CRA instead of or prior to written communication. Virtually all of the participants said they would not want to be contacted in this way, and strongly prefer receiving the written communication and then if need be calling the CRA. They were concerned about not being prepared for a telephone call from the CRA, or the call not coming at a convenient time and place.