Eleonora Patacchini - Cornell University

Title:  Tax Professionals and Tax Evasion

To study the role of tax professionals, we merge tax records of the entire population of sole proprietorship taxpayers in Italy for seven fiscal years with the respective audit files from the tax revenue agency. Exploiting a peculiar feature of the Italian tax administration system, we identify quasi-random variation in enforcement interventions. We document that tax professionals generate informational externalities that affect their clients' tax compliance; and that taxpayers sort themselves into tax professionals of heterogeneous tolerance for tax evasion. We also find that being audited increases the probability to change accountant in the following year whereas having at least another clients of the same accountant audited decreases this probability. The results have important policy implications. We show that the indirect effect on reported income of tax audits mediated by tax professionals is about 11 percent of the direct effect, but while the direct effect of tax audits is decreasing over time the indirect effect is increasing over time. The dynamic spillover generated by tax professionals is therefore an important effect that should be considered in the design of auditing schemes.