Employing A Tax Practitioner: A Different Perspective

Abstract

In this paper, we analyze the value of services rendered by tax practitioners, demonstrating that the conventional single-period solution may be inconsistent with their role. We contend that the value of these services stems from tax practitioners' knowledge of the tax code and not from the signal they convey to tax authorities when they sign the returns. We take the position that taxpayers' actions may not convey a signal to the tax enforcement agent, thereby enabling the latter to set different detection rates for different taxpayers. If taxpayers' actions were to convey a signal, the solution would not be sustainable, since it would eventually lead to a self-revealing “corner solution,” in which all taxpayers would take the same action.

In a single-period framework, the taxpayer’s decision to hire a practitioner is dependent upon two variables: the practitioners’ fee, which is known to the tax enforcement agent, and taxpayers' risk attitude. The tax enforcement agent can infer the latter if the taxpayers use practitioners who sign the tax returns. If taxpayers use practitioners’ services, we are able to derive the same exact solution irrespective of whether or not practitioners sign the returns. Thus, we suspect that the value of these services does not stem from the fact that the returns are signed.