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Sample size determination for risk‐based tax auditing

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  • Petros Dellaportas
  • Evangelos Ioannidis
  • Christos Kotsogiannis

Abstract

A modern system of Revenue Administration requires an effective and efficient management of compliance which in turn requires a well‐designed taxpayers audit strategy. The selection of taxpayers to be audited by Revenue Authorities is a non‐standard sample size determination problem, involving an initial random sample from the population and, based on the statistical information derived from it, a risk‐based auditing scheme whose sole objective is to select for auditing the taxpayers with the highest estimated risk in the population. This paper provides a methodological approach that estimates the initial optimal random sample size such that the Revenue Administration Authority maximises their expected tax revenues. The methodology is illustrated using administrative data from the UK’s Revenue Authority, Her Majesty’s Revenue and Customs (HMRC).

Suggested Citation

  • Petros Dellaportas & Evangelos Ioannidis & Christos Kotsogiannis, 2021. "Sample size determination for risk‐based tax auditing," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 184(2), pages 479-493, April.
    • Handle: RePEc:bla:jorssa:v:184:y:2021:i:2:p:479-493
    DOI: 10.1111/rssa.12618
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    References listed on IDEAS

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    1. Hunter, William J. & Nelson, Michael A., 1996. "An IRS Production Function," National Tax Journal, National Tax Association;National Tax Journal, vol. 49(1), pages 105-115, March.
    2. Petros Dellaportas & Dimitris Karlis, 2001. "A Simulation Approach to Nonparametric Empirical Bayes Analysis," International Statistical Review, International Statistical Institute, vol. 69(1), pages 63-79, April.
    3. Hunter, William J. & Nelson, Michael A., 1996. "An IRS Production Function," National Tax Journal, National Tax Association, vol. 49(1), pages 105-15, March.
    4. Munawer Sultan Khwaja & Rajul Awasthi & Jan Loeprick, 2011. "Risk-Based Tax Audits : Approaches and Country Experiences," World Bank Publications - Books, The World Bank Group, number 2314.
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