Audit Selection Strategy for Improving Tax Compliance – Application of Data Mining Techniques

The tax administration is required to audit some or all its taxpayers to check the evasion of tax and ensure compliance. Conducting of audits involves costs to the tax department as well as to the taxpayer. Thus, audit is not a very welcome procedure both for the taxpayers as well as the economy. Tax administration agencies must therefore use their limited resources very judiciously to achieve maximal taxpayer compliance, minimum intrusion and minimum costs. This paper analyzes the use of data mining algorithms as the best cost effective option to make audit selection more efficient and effective.