Can Predictive Analytics Prevent Tax Evasion? Posted on : Aug 18 - 2018

It's possible that predictive analytics may prevent tax evasion more than many other methods. Here's how the IRS and other organizations have used them.

Tax evasion is a growing concern in the United States. As politicians like Bernie Sanders and Alexandria Ocasio-Cortez try to encourage more people to demand scaling the size of the government, therisk of tax evasion could rise as more people try to abstain from paying higher taxes. The IRS is already under pressure to deal with tax cheats.

The IRS has started investing in predictive analytics tools to minimize the risk of tax fraud. They obviously haven’t provided details on the approaches they take to identify tax cheats, but independent auditors, accountants and data scientists have made some very astute educated guesses.

Is Predictive Analytics the Solution to Fighting Tax Evasion?

There are a lot of factors that the IRS uses in its fraud detection algorithms. Sometimes, they can identify fraud beyond an affirmative doubt. In other instances, they must analyze risk profiles of likely offenders and conduct audits.

A lot of the research on the use of predictive analytics to combat tax evasion has been conducted overseas. S.Kishore Babu of the Andhra Loyola Institute of Engineering & Technology College in India published a white paper on this topic last year. The paper pointed out that the Gaussian Regression Process is an effective solution to fight tax evasion.

Babu said that a number of factors are built into these algorithms. The first and most important variable is the estimated taxes the government should be collecting. They must use historical accounting records as a basis for future tax revenue. While this wasn’t directly discussed in Babu’s paper, they probably also also use GDP growth multipliers to make predictions of the revenue governments should bring in the future. View More