A flight instructor reported smoke in the cockpit and return to departure airport.

Narrative

While conducting a local training flight with my student; cruising at 3500 ft.; I observed a smoke smell in the plane; and saw visible smoke coming out of the electrical panel; specifically the light switches. I immediately took control of the aircraft from my student; and had him ready the fire extinguisher and read the electrical fire in flight checklist out loud. We were on flight following with ZZZ Approach at the time; and I advised the controller of the situation; that it was not yet an emergency; but we would be immediately returning to ZZZ. I advised ATC that we would momentarily shutoff our master switch; causing a loss of radio comms and transponder; to attempt to extinguish the fire/smoke. We also closed all air vents per the checklist. After this; we stopped seeing smoke; but still smelled it. When we were switched to ZZZ Tower; I advised the controller of our situation; and that it was not yet an emergency because I didn't see smoke anymore. The controller gave us priority handling on our behalf. We were given a priority landing; and safely taxied to parking without incident. The aircraft's mechanic and my boss (flight school owner) both believe this issue was caused by the aircraft owner changing the navigation light on his own earlier that day; without any supervision; and may have caused an issue in the wiring.