On IRS’s Servicing and Auditing Taxpayers

We consider a model of tax compliance, in which the IRS (Internal Revenue Service) services as well as audits taxpayers as in the real world. Taxpayers are uncertain about whether their incomes are eligible for deduction or exemption and may seek advice from the IRS’s provided taxpayer service to mitigate the uncertainty. It is shown that: (i) depending on the size of taxpayer service, taxpayer service may complement or substitute enforcement; (ii) there exists a conflict between the IRS and the society with regard to the optimal taxpayer service: while the society’s preferred size of taxpayer service is likely to be sufficiently large, the IRS’ preferred size of taxpayer service is always minimal. ∗Corresponding author, C.C. Yang. Mailing address: Institute of Economics, Academia Sinica, Nankang, Taipei 115, Taiwan. Email: [email protected]