A0319
Title: The potential of Benford's law for detecting tax fraud at the firm level in Italy
Authors: Luisa Scaccia - University of Macerata (Italy) [presenting]
Raffaella Coppier - University of Macerata (Italy)
Elisabetta Michetti - University of Macerata (Italy)
Abstract: The purpose is to explore the potential of Benford's Law (BL) to detect corporate tax evasion, focusing on Italy, where tax non-compliance remains a major economic issue. BL describes the expected frequency of leading digits in naturally occurring numerical data, and significant deviations may signal irregularities such as tax evasion. BL is applied to financial statement data from the AIDA database (2018-2022). A firm is considered potentially non-compliant if its data deviates from BL in at least one year. This offers a firm-level indicator that can guide audits and act as a proxy for tax evasion in empirical research. Such a proxy helps address the lack of firm-level data, enabling studies on how tax evasion affects firm growth or market distortions. To assess its validity, the distribution of non-compliant firms (as flagged by BL) is compared across regions, sectors, and firm sizes with official 2022 data from the Italian Ministry of Economy and Finance and the Revenue Agency, based on Synthetic Tax Reliability Indices (ISA). Results show a strong alignment between BL-based detection and official indicators, highlighting the usefulness of BL as a low-cost, data-driven tool for identifying and studying tax evasion at the firm level.
