Tax Underreporting Detection Using an Unsupervised Learning Approach

Abstract

Governmental adminstrative domains can potentially benefit from a wide variety of currently available big data analysis methods. The tax administration is such an area that requires massive data processing to identify hidden patterns and trends of possible tax evasion. The use of supervised methods can be effective in these cases, but the lack of available labeled data limits their practical application in real-world scenarios. An alternative is the use of unsupervised methods, which have potential benefits in certain cases. In this sense, unsupervised methods are considered to be feasible as a decision support tool in tax evasion risk management systems. This paper proposes an unsupervised approach to identify signs of tax evasion by detecting, possible, tax underreporting. The proposed strategy is evaluated on a data set associated with individual income tax statistics of the United States. The results achieved are considered to be useful in decision-making and preventive actions on cases reported as suspicious.