Data-driven selection of tax returns by the Dutch Tax and Customs Administration
The Dutch Tax and Customs Administration cannot check every return it receives. It is therefore using electronic data to identify the tax returns with the highest risk of error so that a tax inspector can correct them. Our audit found that the Administration has successfully developed risk models and is putting them to good use in its checks of tax returns.
Tax and Customs Administration making good progress with risk models to check tax returns
The Netherlands Court of Audit has investigate two risk models in practice. Most errors were detected by a relatively simple model to check VAT refunds. It increased the proportion of returns detected with errors from 17% to 34%, good for additional tax receipts of approximately €60 million a year. A risk model developed to detect errors in personal income tax returns was not as effective because it was unable to generate concrete indications of where errors were made and tax inspectors still had to check the returns in detail by hand.
Data-driven initial checks of tax returns
The risk models identify the returns with the highest risk of errors so that they can be checked by hand. How many returns are checked, however, depends on the available capacity. The Administration is investing heavily in a data-driven initial check of tax returns using risk models. On an annual basis, the Administration finds about one million potential errors in the returns; 350,000 of them are then checked by tax inspectors. The available staff capacity determines how many are actually checked. The deployment of additional staff is not weighed up against the extra revenue that more checks would generate. In the models we audited the Administration treats personal privacy with respect. Senior management, however, should play a stronger role to protect the red lines, particularly as there are no government standards on the use of data analysis models.
What are our recommendations?
We recommend that the State Secretary for Finance clearly explain staff deployment decisions and the risk of errors in tax returns to the House of Representatives. He does not do so at present.
We further recommend that both positive and negative corrections should be made to tax returns, in keeping with the Tax and Customs Administration’s current monitoring strategy for risk models. In response, the State Secretary for Finance said the risk models would be adapted in this respect.
To protect personal and corporate data, we recommend that senior management be more closely involved in monitoring the red lines. The Court of Audit also recommends that a set of standards be developed on the use of models and data analysis. The standards should in any event apply to the Tax and Customs Administration and perhaps even to all of central government.
Why did we audit the Tax and Customs Administration’s selection of tax returns?
Our audit looked at the functioning of data analysis as part of the Tax and Customs Administration’s enforcement policy. It matches the Court of Audit’s strategy of paying more attention to the revenue side of the budget. Given the sensitivity of the data and our unique audit powers, we are the only organisation in the Netherlands that can audit the Tax and Customs Administration.
The audit was published and submitted to the House of Representatives on Tuesday 11 June 2019.