This lesson examines the various methodologies used by tax administrations to select taxpayers for audit. It covers the evolution from manual screening to sophisticated risk-based approaches, and the role of random selection in calibrating the system.

• Evolution of Selection Methods: Modern tax administrations have moved away from manual screening towards risk-based audit selection. The separation of audit case selection from audit implementation is a key principle, bringing crucial benefits: it helps to fight conflicts of interest and corruption, prevents strategic targeting of taxpayers, and brings economies of scale through specialization .

• Manual Screening: This traditional method involves auditors selecting cases based on their knowledge of taxpayers’ behavior and environment. Benefits include use of local and informal knowledge. Challenges include increased risk of corruption, lack of systematic data analysis, and missing patterns of non-compliance .

• Random Selection: Taxpayers are selected randomly, using either simple random selection or stratified sampling. Benefits include: unbiased information about compliance behavior, statistically robust results that can be extrapolated to the whole population, and perception of fairness. Major drawback: high opportunity cost, as random cases raise lower revenue than high-risk cases. Used for system calibration purposes .

• Risk-Based Audit Selection: This is the preferred method in most developed countries. A score is given to each taxpayer based on attributes (size, industry, compliance history) and knowledge from previous audit campaigns. Benefits: intelligence building, statistically robust approach, high effectiveness. Requires significant quality data and IT systems .

• Risk Scoring and Profiling: Risk scoring techniques identify taxpayers most likely to be non-compliant, with the highest likelihood of yielding large audit adjustments. Tax administrations build profiles of taxpayers by combining data from multiple sources, including internal and external data .

• Comparison of Selection Methods:

  • Low IT Capabilities: Work with limited data, use risk criteria for select groups, manual verification .

  • Medium IT Capabilities: Largely use past taxpayer data, supplemented with external data, custom-built software for risk scores .

  • High IT Capabilities: Sophisticated IT models, detailed 360-degree profiles, data from banks, customs, and foreign sources .