Towards a Smart Identification of Tax Default Risk with Machine Learning

The failure to perceive non-payment of the tax due is the main risk of tax inspection. The complex tax legislation and the volume of information available must be overcome for facing tax evasion. There is a gap in studies investigating the analysis of tax default risk and Machine Learning algorithms. This study proposes the use of ML algorithms ordinarily used on credit risk analysis as a risk analysis tool for tax default. The tax data preparation issue was faced by discretizing qualitative and quantitative variables. This work presents a new approach for the classification of companies regarding tax avoidance using Machine Learning. The developed ANN model achieved an AUC = 0.9568 in the classification task. The study gathers more than 300 thousand companies in the city of Brasilia - Brazil, analyzing their socioeconomic and financial characteristics.