When are Enhanced Relationship Tax Compliance Programs Mutually Beneficial?

Abstract

This study investigates the circumstances under which "enhanced relationship" tax compliance programs are mutually beneficial to taxpayers and tax authorities, as well as how these benefits are shared. We develop a model of tax authority and taxpayer behavior inside and outside of an enhanced relationship program. Our model suggests that, despite the adversarial nature of the relationship, an enhanced relationship program is mutually beneficial in many settings. The benefits are due to lower audit costs and the effect of taxpayer disclosures on the tax authority's audit strategy. We also identify settings in which the program is socially beneficial, but these benefits are not achieved because one party is unwilling to enter the program. Finally, we show that an increase in the ability of the tax authority to identify uncertain tax positions makes an enhanced relationship tax compliance program more attractive to both the taxpayer and the tax authority.