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.

This paper is a revision, extension and substantial re-direction of "Tax Practitioners and Tax Compliance," Social Science Working Paper No. 666, California Institute of Technology, March 1988. We gratefully acknowledge the financial support of National Science Foundation Grants SES-8903157 and SES-8902545 for Reinganum and Wilde, respectively, and thank two referees for helpful comments. Published as Reinganum, Jennifer F., and Louis L. Wilde. "Equilibrium enforcement and compliance in the presence of tax practitioners." Journal of Law, Economics, & Organization 7, no. 1 (1991): 163-181.

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