Equilibrium Enforcement and Compliance in the Presence of Tax Practitioners

Abstract

We develop a game-theoretic model in which taxpayers, tax practitioners and a tax agency all interact to determine the extent of tax compliance. The model focuses exclusively on the service aspects of third-party assistance. We characterize four types of equilibria, depending on whether taxpayers prefer to use tax practitioners and whether the tax agency prefers them to use tax practitioners. In the empirically relevant case, which occurs when tax practitioner penalties for noncompliance are sufficiently low and the efficiency gains from using practitioners are sufficiently high, the tax agency prefers taxpayers to prepare their own returns, but taxpayers prefer to use a tax practitioner. In this case, the use of a tax practitioner is associated with lower compliance and higher audit rates.