Risk-Based Tax Audits

DIRECTIONS IN DEVELOPMENT
Finance
Risk-Based Tax Audits
Approaches and Country Experiences
Editors Munawer Sultan Khwaja, Rajul Awasthi, and Jan LoeprickRisk-Based Tax AuditsRisk-Based Tax Audits
Approaches and Country Experiences
Munawer Sultan Khwaja, Rajul Awasthi, and Jan Loeprick
Editors© 2011 The International Bank for Reconstruction and Development / The World Bank
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ISBN: 978-0-8213-8754-2
eISBN: 978-0-8213-8755-9
DOI: 10.1596/978-0-8213-8754-2
Library of Congress Cataloging-in-Publication Data
Risk-based tax audits : approaches and country experiences / Munawer Sultan Khwaja,
Rajul Awasthi, and Jan Loeprick, editors.
p. cm. — (Directions in development)
Includes bibliographical references.
ISBN 978-0-8213-8754-2 (alk. paper) — ISBN 978-0-8213-8755-9
1. Revenue. 2. Tax auditing—Case studies. 3. Auditing—Computer programs. 4. Risk
management. I. Khwaja, Munawer Sultan. II. Awasthi, Rajul. III. Loeprick, Jan.
HJ2305.R57 2011
352.4’4—dc22
2011009825
Cover design: Quantum Think Contents
Foreword ix
Acknowledgments xi
Contributors xiii
Abbreviations xvii
Overview 1
Munawer Sultan Khwaja
PART I Fundamentals of Risk-Based Audits 11
Chapter 1 Key Principles of Risk-Based Audits 13
Charles Vellutini
Chapter 2 Risk-Based Audits: Assessing the Risks 23
Charles Vellutini
PART II Approaches to Audits for Different
Taxpayer Segments 37
Chapter 3 A Risk-Based Approach to Large Businesses 39
Simon York
v vi Contents
Chapter 4 Simplified Risk Scoring for SMEs 45
Jan Loeprick and Michael Engelschalk
PART III Infrastructure for Risk Analysis 55
Chapter 5 Database and IT Framework for Risk Analysis 57
Charles Vellutini
Chapter 6 Building and Integrating Databases for
Risk Profiles in the United Kingdom 65
Michael Hainey
Chapter 7 Data Warehouse and Data-Mining Tools
for Risk Management: The Case of Turkey 71
Ugur Dogan
PART IV Country Experiences in Risk-Based Tax Audits 77
Chapter 8 Sweden 79
Lennart Wittberg
Chapter 9 The Netherlands 83
Jon Hornstra
Chapter 10 Bulgaria 91
Vesela Gencheva
Chapter 11 India 97
Rajul Awasthi
Chapter 12 Ukraine 101
Inna Lytvyn and Iryna Udachyna
Chapter 13 Kazakhstan 107
Aidar Mekebekov and Yerzhan Birzhanov
Chapter 14 Which Audit Selection Strategy? A Review 111
Charles Vellutini
Chapter 15 Conclusion: Lessons for Reforms 119
Rajul Awasthi
Glossary 127 Contents vii
Boxes
2.1 Parametric Methods in Risk Assessment 26
2.2 List of Possible Variables in an Audit Selection Strategy 30
2.3 Heckman Procedure for Correcting Selection Bias 32
4.1 Taxation of SMEs in the United Kingdom 48
Figures
0.1 Key Concepts of Modern Revenue Administrations 3
1.1 Separating Audit Case Selection and
Audit Implementation 16
1.2 A Model of Tax Compliance 17
2.1 Examples of Data Mining Techniques 28
3.1 Typical Segmentation of Taxpayers and
Revenue Collections 40
4.1 Additional Audit Revenue in Germany in 2008 46
4.2 Percentage of Firms Inspected by Tax Officials
in the Europe and Central Asia Region, by Size, 2009 47
4.3 Example of a Simplified Risk Classification
Table for Small Manufacturers in the
Republic of Yemen 53
5.1 Data Flows in Risk-Based Audit Models 59
5.2 Tanzania’s ITAX 62
9.1 Diagram of Risk Management Process 85
14.1 Risk Assessment Cycle 113
Tables
1.1 Factors of Tax Compliance 15
2.1 Confusion Matrix 29
2.2 Audit Selection Strategy for VAT in Delhi, India 31
4.1 Audit Frequency in Relation to Business Size in Germany 46
4.2 Key Risk Sectors Identified in Select OECD Countries 50
4.3 Performance Benchmarks for Bakeries in Australia,
by Annual Sales Range 51
4.4 Prevalence of Presumptive Regimes for SMEs 52
14.1 Country Experiences in Risk-Based Tax Audits 115
15.1 Risk Assessment Strategy and IT Sophistication 125