Impact of Tax Advisors and Corrupt Tax Auditors on Taxpayer Compliance

We examine the impact on taxpayer compliance of corrupt auditors seeking bribes in the form of a percentage of taxes payable. The first experiment examines a setting where a taxpayer can choose to report higher income in the presence of a corrupt auditor to reduce the bribe on the under-reported income. The taxpayer can also under-report income since the bribe is always set up to be less than the penalty. Our experimental results show that the presence of a corrupt auditor demanding bribes at levels up to the legally sanctioned penalty for mis-reporting reduces overall taxpayer compliance.The second experiment examines whether the involvement of a professional tax advisor increases or decreases the percentage of income reported compared to the baseline compliance in the presence of a corrupt tax auditor. If the tax advisor serves more as a gatekeeper and moral authority, the percentage of income reported by the taxpayer client could increase. However, if the tax advisor serves to provide legitimacy to the noncompliant behavior of the taxpayer, then the percentage of income reported by the taxpayer client could decrease. Our experimental results show that in the absence of corrupt auditors, tax advisors are better at improving taxpayer compliance