Taxpayer Compliance in Reporting Interest Income under the Wisconsin State Individual Income Tax

Abstract

The degree of compliance in reporting interest income by Wisconsin taxpayers for purposes of the State's individual income tax law has been investigated by means of empirical study of two of the major categories of interest income received by individuals. The relatively good compliance score in the reporting of interest received on personal notes and mortgages is perhaps explained by the fact that the payor is required to list the recipient's name on his tax return (when itemizing his deductions), thereby permitting a cross-check to be made between the payor's and payee's tax returns. The compliance score for interest received on bank time deposits was much lower. While both studies showed that compliance increased as the size of the recipient's income rose, only the latter study showed this relationship between compliance and size of interest payment. The fact that Wisconsin matches all information returns on interest payments of $100 and over each year undoubtedly accounts for the much higher compliance found for recipients of “covered” interest payments.