Risk-Based Audits in a Behavioural Model

Hashimzade, N.; Myles, G.

Abstract

The tools of predictive analytics are widely used in the analysis of large data sets to predict future patterns in the system. In particular, predictive analytics is used to estimate risk of engaging in certain behavior. Risk-based audits are used by revenue services to target potentially noncompliant taxpayers, but the results of predictive analytics serve predominantly only as a guide rather than a rule. “Auditor judgment” retains an important role in selecting audit targets. This article assesses the effectiveness of using predictive analytics in a model of the compliance decision that incorporates several components from behavioral economics: subjective beliefs about audit probabilities, a social custom reward from honest tax payment, and a degree of risk aversion that increases with age. Simulation analysis shows that predictive analytics are successful in raising compliance and that the resulting pattern of audits is very close to being a cutoff rule.

Citation

Hashimzade, N., & Myles, G. (2017). Risk-Based Audits in a Behavioural Model. Public Finance Review, 45(1), 140-165. https://doi.org/10.1177/1091142115602062

• Journal Article Type: Article
• Acceptance Date: Jul 9, 2015
• Online Publication Date: Sep 1, 2015
• Publication Date: Jan 1, 2017
• Deposit Date: Jul 13, 2015
• Publicly Available Date: Jul 20, 2015
• Journal: Public Finance Review
• Print ISSN: 1091-1421
• Electronic ISSN: 1552-7530
• Publisher: SAGE Publications
• Peer Reviewed: Peer Reviewed
• Volume: 45
• Issue: 1
• Pages: 140-165
• DOI: https://doi.org/10.1177/1091142115602062
• Keywords: Tax compliance, Audits, Behavioral.
• Public URL: https://durham-repository.worktribe.com/output/1425385