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Copyright ©2021 International Monetary Fund
Fiscal Affairs Department
The Revenue Administration Gap Analysis Program: An Analytical Framework for Personal Income Tax Gap Estimation
Prepared by Mick Thackray (Fiscal Affairs Department), Sarah Jennings (HM Revenue & Customs), and Martin B. Knudsen (Danish Tax Agency)1
Authorized for distribution by Victoria Perry and Ruud De Mooij2
DISCLAIMER: This Technical Guidance Note should not be reported as representing the views of the IMF. The views expressed in this paper are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
JEL Classification Numbers: H20, H21, H24, H26, H30
Keywords: Tax Administration; Tax Compliance; Personal Income Tax; Tax Gap; Tax Avoidance; Tax Evasion;
Random Audit Program; Shadow Economy; Non-Observed Economy
Authors’ E-Mail Addresses: MThackray@imf.org, sarah.jennings2@hmrc.gov.uk, and Martin.Knudsen@sktst.dk
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Contents
I. How Do Countries Measure Noncompliance in Personal Income Tax (PIT)?
A What Estimation Approaches Are Applied?
B Why Measure the PIT Gap?
C The Additional Benefits of Conducting Random Audits
D Structure of This Note
II. What Is a PIT Gap?
A The PIT Policy Gap
III. How Can the PIT Gap Be Measured?
A An Overview of Approaches
B What Is in Scope of the PIT Gap?
C What Can We Say about Precision?
D How Should the PIT Gap be Reported?
IV. What Are the Steps for Estimating the PIT Gap from Random Audits?
A Sample Size and Design
B Selecting the Sample
C Data Requirements and Recording
D Scaling Results to the Total Taxpayer Population
V. Final Remarks
Appendices
Appendix 1 Random Sample Designs
Appendix 2 Nondetection Multipliers
Appendix 3 Sample Size Example Table
Appendix 4 Project Management Checklist for a Random Audit Program (RAP)
Glossary
References
Tables
Table 1 Costs and Benefits of Random Audit Programs
Table 2 Sample Sizes by Margin of Error for Different Noncompliance Rates
Figures
Figure 1 Estimating the PIT Gap from Random Audits
Figure 2 Illustration of the Components of the Tax Gap
Figure 3 Summary Process Flow of a Random Audit Program
Figure 4 Summary Tax Gap Calculation, Estimating from Random Audits
Sarah Jennings and Martin B. Knudsen are members of the Fiscal Affairs Department’s roster of fiscal experts.
This note has benefitted from information and comments kindly provided by Debra Adams, Katherine Baer, Juan Toro, Elena D’Agosto, Stefano Pisani, Eric Hutton, Margaret Cotton, and Miguel Pecho (all IMF); and Rastislav Gábik, Søren Pedersen, Mary-Helen Pisler, Anthony Burke, and Neghat Khan.