ON THE INTERNAL REVENUE SERVICE'S SERVICE AND ENFORCEMENT

Built on the seminal work of Graetz et al. (1986), this study considers a model of tax compliance in which the Internal Revenue Service (IRS) services as well as audits taxpayers as in the real world. Taxpayers are uncertain about whether their incomes are eligible for deduction/exemption, and may seek advice from the taxpayer service provided by the IRS to mitigate the uncertainty. We show: (1) while the society's preferred quality of taxpayer service is likely to be sufficiently high, the IRS's preferred quality of taxpayer service is only at an intermediate level; and (2) the conflict between the society and the IRS tends to be intensified as the cost of tax audits becomes lower. Evidence in support of our results is addressed. We also extend our model to addressing the issue of corruption in tax administration and to considering a dynamic model. (JEL D82, H26, K42)