Audit Selection under Weak Fiscal Capacity
Well-targeted tax audits are critical to deter tax evasion. In many advanced economies, the selection of which firm to audit is based on risk-based analysis systems. This require high levels of fiscal capacity to obtain the data, manage and operate, which can be beyond the current capacity of tax administrations in many developing countries. As a result, tax administration often relies on the manual screenings of tax returns on the part of tax inspectors, who are knowledgeable about past taxpayers’ behavior and common strategies for evasion. The individual perspectives of these officials can help leverage local expertise, but also may subject taxpayers to discrimination.
- Should developing countries leave discretion to tax inspectors to select firms for audit or should selection be determined by risk-scoring analysis?
- Which selection method is most effective in detecting firm non-compliance and increasing audit yield, while minimizing reported corruption?
- Does the optimal amount of discretion depend on the quantity of third-party information available and its ease of access for tax inspectors?
Should low-income countries leave discretion to auditors to select firms to audit or should selection be rule based? In a context with weak fiscal capacity, auditors’ private information could be valuable due to limited access to third party information, however biases in selection could also be large. In partnership with the tax administration of Sénégal, this project aims at understanding how auditors’ select cases under discretion and test which selection method is most effective in detecting firm non-compliance and increasing audit yield. The pilot study plans to understand how selection currently occurs, while the full study will experimentally test which audit selection method is most effective in detecting firm non-compliance and increasing audit yield, while minimizing reported corruption.