2012 International Conference on Management Science & Engineering (19th)

September 20-22, 2012 Dallas, USA

Research on Sampling Method of Tax-checking

Based on Neural Network
WANG Guang-liang
School of Management, Harbin Institute of Technology, P.R.China, 150001

Abstract: It is a core component of the Golden Tax
Project that the application of information technology
supports the tax-checking. According to some problems
of inefficiency and poor accuracy in tax-checking
sampling practices, learning from the current
tax-checking sampling study, selects financial indicators
of tax-checking sample of the value-added tax (VAT)
based on gradually discriminant analysis (GDA), has a
better solution to discriminant classifier of the "honest
tax group" and "dishonest tax group", and then using the
technology of self-organizing map neural network
(SOM), builds a intelligent analysis model on VAT
sampling; Finally, uses the real data of 43 enterprises as
an example to test, Finally, the use of 43 actual business
data as an example the test, and the results of
discriminant analysis were compared with that of
statistical analysis, and the results show that the sampling
effect of BP nets is remarkable.
Keywords: data mining (DM) sampling, gradually
discriminant analysis (GDA), self-organizing mapping
(SOM), tax check
1 Introduction
Traditional sampling of tax-checking is determined
by personal experience, the higher authority’s informants
to provide materials, and other artificial means, human
factors on sampling of tax-checking are more, greater
uncertainty, and can not guarantee the fairness and
transparency of the tax authorities. At the same time,
facing the techniques that have emerged increasingly
sophisticated tax evasion in the market economy, the tax
authorities are more and more powerless. Therefore, it is
increasingly a subject concerned by the tax-checking
department that the tax inspectors based on their
knowledge of all kinds of tax information, taxation
materials, use the methods of artificial and computer
artificial intelligence to classify, analyze, filter out the
most possible tax evasion from a large number of
taxpayers and withholding agents to complete the work
of sampling of tax-checking, in order to improve the
[1]
scientific and accuracy of sampling work .
2 The main problems in sampling practices
of tax-checking
2.1 Asymmetric information
(1) The information asymmetry of collection,
management, tax-checking within the tax authorities. A
direct result is, sampling in tax-checking link based on
the data which quality is not high, inaccurate and can not
reflect the basic status of taxpayers, low utilization of
data, the sampling based on inaccurate information will
result in low accuracy.
(2) Asymmetric information between tax authorities
and taxpayers. The enterprise information the
tax-checking department have is not complete, and the
taxpayer tends to conceal the true financial information
to the tax authorities, so that the source of information is
not accurate, it influences that the tax authorities takes
samples correctly.
2.2 Inadequate sharing of information resources
First, information sharing is not enough, due to
historical reasons, the tax authorities, customs, local
taxes, banks, industrial and commercial bureau, and
other departments, etc, their application systems are for
their respective development. Second, from within the
tax authorities, the information access is not convenient.
Again, IT is less assisted to decisions by tax department.
2.3 Sampling approach inefficient, poor
Tax-checking management is low-tech, and
electronic applications is relatively weak in consistency
of internal data, large amounts of data management and
processing, statistical analysis, etc, it does not give full
play to the role of IT in the statistical analysis and
decision support [2]. Most samplings are through artificial
selection [3], mainly by the subjective desire of the
inspectors to determine the inspection object, the lack of
a scientific, rational procedures and strict, effective
supervision and restraint mechanisms, the lack of a
comprehensive analysis of tax data to checking object,
making the object that should not be investigated be
check, the leak of the investigation, law enforcement
unjust, inefficient.

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978-1-4673-3014-5/12/$31.00 ©2012 IEEE
3 The present situation of researching on
tax-checking sampling
The tax-checking is certain means that the tax
authorities takes according to the laws, regulations, etc, it
is enforcement actions that the tax authorities conducts to
check, audit and inspect if the taxpayers or citizens fulfill
its obligations to pay taxes within the scope of report for
a certain period. The tax inspectors must obtain the best
checking results with minimal manpower, material
consumption. At present, the sampling is an important
part of tax-checking [4], generally refers to the method of
inspection that the tax inspectors draws some may be
dishonest tax business according to the data which
companies regularly reported to tax department, and
using various technologies for financial data, tax data
that enterprises report to process and judge. The
sampling technique of tax-checking generally includes the
choice of the index system, the choice of techniques.
3.1 Index system
Index selection rely mostly on the experience of
inspectors, academics do not have a unified view. It was
also devoted index selection problem on tax-checking
sample, but the basis of selection is highly subjective.
Wang Shu-ling, Wu Zhen (1997) discussed index
selection problem on tax-checking sample, and
established a set of index system [5]. WANG Li-pin
(2005）thought that the assessment criteria as the tax
inspecting aim should follow its adaptability, regulation,
importance, complexity, simplicity and stability. The
structure pattern is an effective way to choose inspection
indicator. For building up the indicator system as the tax
inspecting aim, defending the legality of the tax behavior
of business should be based on the different features of
the soft and hard indicate [6]. And others used the theories
and methods of systems engineering to research and
investigate synthetically various factors related to
tax-checking, and their and mutual connection,
respectively implemented qualitative and quantitative
analysis, put forward a more complete check index
system [7-10]. It means that the enterprise may very well
have problems when these indicators cause abnormal
changes.
3.2 The choice of methods
In the current research, more used discriminant
analysis method in mathematical statistics to solve this
problem, discriminant analysis of statistical methods, the
Tobit model, and the logistic regression method. Li
Xuan-ju (1998) put forward the difference analysis to
identify tax evasion, the basic idea of using the Tobit
model to estimate tax evasion that developed the
discriminant model and the estimation model of tax
evasion [11]. However, due to its linear structure of the
discriminant function, it is difficult to adapt to the highly
nonlinear relationship between financial data and tax
evasion. Therefore, there are greater limitations in
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discrimination accuracy.
Mang Qing-guo, Wang Wei-hong (2002) classified
honest Taxpaying Enterprise tax and non-honest
Taxpaying Enterprise classification based on BP network
model [12]. Due to the nonlinearity of the BP network in
the neural network, it has an obvious advantage in
dealing with such nonlinear problems. Its discrimination
effect is significantly better to compare with that of
discriminant analysis in the statistical analysis. The study
selected 19 indicators of financial ratios [13] to construct
three-tier network architecture. However, the BP network
simulation based on simulation of history samples, if the
sample is not complete or deviation will lead to the
training effect which is not satisfactory, and predicting
effect is naturally bad.
Gao Yong, Geng Xin-wei (2001) provided the
solution that established model on sampling of
tax-checking, using the arithmetic relationship error in
financial report, between reports, and the logic
relationship errors in financial report, between reports,
fluctuations in the financial indicators more than a
specific alert range, severity over a specific average
fluctuations and follower in the associated financial
indicators [14]. However, part of the model can only deal
with simple balance in the statement, among tables.
Some indicators is designed to settings, therefore, the
model is less flexible and may be caused low accuracy
rate for sampling due to improper parameter.
4 Theoretical bases of the artificial
intelligence methods on sampling
4.1 Classification discriminant on self-organizing
feature map
The classification discriminant is based on a certain
number of samples, select the appropriate financial
indicators as the input of neural network, select the
appropriate output node, the application of
self-organizing feature map network, competitively learn
each sample, automatically form a different class. For
these categories, the corresponding analysis determine
the overall status of each category, classification
according to the different levels of tax evasion, and the
rational allocation of checking resources, and thus a
definite purpose.
4.2 Network model establishment process
Network structure, learning algorithm and the input
node of self-organizing feature maps, which should be
set based on the results of GDA,. The number of output
nodes is determined based on the number of samples. Let
X ∈ R is the input pattern vector, W is the weight
matrix, Y ∈ R is matching response of the output node.
And are: Y = W ⊕ X, ⊕ is an operator; it is the
ordinary dot product operation or the Euclid distance
computing. The specific algorithm is as follows:
(1) Weights initialization
Let Wj (j = 1,2, ..., p ) for the connected input node
to the weight vector of the j-th output node, and assign a
random decimal, set the start number of cycles t = 1.
(2) For each input mode X k （k=1,2,...,m）
① To solve connection weights vector Wt in the
minimum distance of W j and X k : are:
p documents require [18]: (1) rate of the tax burden and
X k − W=
g minX k − W j
j =1
Here distance is Euclidean distance; p is one of output
nodes.
② Defining the element g is the winner, the
definition of N (t) is the winner' neighborhood. The
connection weight vector to which each unit of the
neighborhood is corresponds and moves closer to X k ,
the learning equation is:
Wij = a(t) éëêX ik - W ij ùûú W ij = W ij ) W ij (2)
Among them: a (t) for the learning rate of t times,
with the increase of the number of training diminishes. Is
defined as:
= a (t ) 0.2 (1 − t ) 10000  (3)
Of which: t = 1, 2, 3... z (500 <z <10000)
x is the input of the i-th input node of the k-th
sample data. w is the connection weights between the i-th
input node and the j-th output node. Among them,
j ∈ N (t ) .
(3) For different training times t, repeat step 2.
Regarded as convergence when the network weights
stable
(4) Network convergence, according to the response
of the output node, the sample is normalized to the
respective category.
For all samples, one by one calculates the Euclidean
distance of the connection weights between the output
node and input node. If the distance is the minimum by
the j-th output node, the sample will be attributed to the
class with the j-th output node points [15]. Accordingly,
the constructed neural network model on SOM, see Fig.
1.
Output layer
……
j=1,2,……p
Input layer
……
Fig.1 The network diagram of self-organizing feature map
5 Data mining in sampling of tax-checking
5.1 Choice of basic indicators of checking sample on
VAT
VAT is one of the main taxes in China's tax system,
the revenues accounted for a large proportion, the tax
authority checks in tax categories, and the evasion
behavior of VAT is still the focus of the inspection by tax
authorities [16]. Therefore, the sampling of VAT checking
is as an example as research sampling.
Indicator selection principles on VAT checking
sample: (1) times. (2). comprehensiveness. (3) Simplicity.
(4) Availability. (5) Stability [17].
According to checking practical experiences of tax
inspectors for years and related indicators which internal
(1) gross profit to sales; (2) The effective tax rate; (3) rate of
inventory turnover; (4) inventory rate; (5) the relevant
indicators of reflecting the financial situation, such as
asset-liability ratio, quick ratio;(6) indicators reflecting
the business results, such as return on total assets.
In summary, based on research result related to
literature, selects following indicators as the analysis
basis of part of, the basic indicators of checking sample
on the VAT as shown in Tab.1
Tab.1 Basic indicators of checking sample on the VAT
Names of index The formula
rate of the tax burden payable VAT / sales
gross profit to sales gross profit from sales / sales
rate of inventory selling cost /average inventory balance
turnover
effective tax rate output VAT/main, other operating
income
inventory rate final inventory/ cost of goods sold
asset-liability ratio total liabilities/ total assets
quick ratio quick assets / current liabilities
return on total assets net profit / average total assets
ratio of sales to cost selling cost / sales
Sales rate selling expenses/ sales
ratio of sales to financial expense / sales
financial expense
ratio of sales to overhead / sales
overhead
Of course, the analysis using the above index
derived object to be examined, the unknown object
selected only explain that the taxpayer may be a problem
in some ways and some links, but not have a problem.
This is because in the analysis of indicators, the problem
obtained after large number of artificial investigations,
and has the limitations. These reference data will change
over time. Thus according to these indicators, elected the
checking object, we need to do further analysis to select
the most effective indicators for the sampling of
tax-checking.
5.2 Choice of sampling indicators on VAT checking
based on GDA
The sampling is judged through composite indicator
analysis of corporate tax situation; it is essentially pattern
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recognition of the overall corporate tax situation [19].
Pattern recognition identifies the classification in
accordance with their common characteristics or
attributes of the object of study. Each category of
pattern recognition is a collection of elements of certain
types of common property elements.
When the measured data are real numbers, can be
the vector of a model as a point of the n dimensional
Euclidean space. Elements belonging to the same kind of
pattern set are spread in a range of the measurement
space. Effective computing needs to retain all the
characteristics of those most important to distinguish
between different categories of features, that is feature
selection or feature compression. For a model category
feature, selection is good or bad; it is difficult to predict
in advance completely, but only to give their assessment
of the classification results from the classification and
recognition systems. Best discrimination process based
on the observed pattern samples, results separate
discriminated interface in various pattern classes, and
Function rule indicates the inner structure of data in
order to achieve efficient discrimination of the new data
[20]
. In particular should be noted that the correctness of
classification depends on the proximity of the training
model and the actual data.
Seeing from the above analysis, more sampling
indicators of VAT audit, and the tax situation that each
indicator within the index system reflects an enterprise is
good or bad in a particular aspect. The evaluation that
these indicators to corporate tax have differences, and
there may be statistical relativity among many of the
indicators. Excessive indicators increase work intensity
and sampling complexity, affect operational efficiency in
tax investigation, but using at the same time has a higher
correlation and the indicators of weak evaluation also
reduces accuracy. Excessive indicators increase work
intensity and sampling complexity, affect operational
efficiency in tax investigation, but using at the same time
has a higher correlation and the indicators of weak
evaluation also reduces accuracy. So variable selection is
an important issue in the analysis of the sampling in tax
audit, the appropriateness in choosing indicators is the
key to distinguish the pros and cons of the effect. As the
indicators in tax audit, the most important indicators are
ignored; corresponding choice effect must be bad. On the
other hand, if the number of sampling indicators is
excessive, the data mining must be very great to cause
decline in analytical accuracy. Especially when the
introduction of some indicators that is not strong in
discrimination capability, but also seriously interfere
with and impact of discrimination effect. Therefore, in
the actual checking work, we should be based on the
discrimination ability of the sampling index to filter.
Variable screening methods includes forward
method, backward method, and stepwise discriminant
method, etc. Forward method is selected in based on with
the variable function, single out the strongest
discriminant ability of all variables one by one, while
backward method is followed by removing the lowest
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variable of discrimination efficiency based on the
discriminant function to all variables. Selected variables
in the above two methods, has always belonged to the
collection of the discriminated variable, the variable that
is deleted will always be ruled out in addition to the set
of variables. There are interactions between the variables,
the information that the elected variables provide
becomes negligible in the case of new variables selected,
naturally proposed gradual discriminant analysis (GDA).
GDA is used of the algorithm which is in and out,
that is, every step needs to be inspected. Strongest
discriminant variables selected into the discriminant
equation, the variables that early elected to the
discriminant function, with the entry of other variables,
its significant may change, if its discriminant ability is
not strong, you should promptly be removed the
variables from the discriminant function. By calculation
steps of GDA (slightly), calculated and selected the
factors of GDA.
5.3 SOM in the application of tax-checking sample
SOM model is used to distinguish tax loophole
degree. For a single tax enterprise, you can use SOM
neural network memory to discriminate its class. When
SOM neural network is in retrospect, it is in the
following way to classify the input samples. For new
samples, we must identify the nearest unit g with which
the connection weights vector is in the output layer. The
unit g has 1 of largest activation value, while the other
unit is 0 of the smallest activation value, which said input
sample belongs to the category corresponding to g unit.
In terms of Υ represents a new input sample, b represents
the response of the output layer nodes. The
above-mentioned process using the formula expressed
as:
ìï1 Y - W = min p Y - W
ï
bg = ïí
g j =1 j
(4)
ïï0 Y - W ¹ min p Y - W
ïî g j = 1 j
6 Case analyses
This study used data from an Inland Revenue
Department, a total of 43 financial statements and tax
returns in commercial enterprises. Of which 10
enterprises is dishonest tax behavior, the other is the
normal tax-paying enterprises. According to the analysis
of the previous indicators, before using neural network
model to deal with the data, we need deal with the ratio
in standardized processing and discriminant analysis and
selection work of indicators. The data is based on a
matrix with 43×12.
6.1 Choice of index sampling on VAT checking
The choice of sampling indicators on VAT checking
is based on GDA, corporate tax issues (10) enterprises
appear and corporate tax issues does not appear (33),
respectively, as two samples overall, the overall most
effective indicator as an alternative these two samples Tab.4 Discriminant results of BP network of 43 companies
overall with GDA in Tab.2. Discrimination actual Percentage
Number result
category category (%)
Tab.2 Basic indicators of GDA
SN index SN index 30 ρ1 ρ1 Correct 90.9
rate of the tax
1 7 quick ratio 3 ρ2 ρ1 Error 9.1
burden
2 gross profit to sales 8 return on total assets 8 ρ2 ρ2 Correct 80
rate of inventory
3 9 ratio of sales to cost 2 ρ1 ρ2 Error 20
turnover
4 effective tax rate 10 Sales rate
Note: ρ1 honest tax categories, ρ2 dishonest tax categories.
ratio of sales to financial
5 inventory rate 11
expense
6.4 Comparison of discriminant result with SPSS
6 asset-liability ratio 12 ratio of sales to overhead
In order to compare the effect of the neural network
of BP and statistical discriminant analysis in the
6.2 Sampling analysis of VAT checking based on SOM sampling of tax checking, we do discriminant analysis on
Use the neural network components of Matlab6.5 to the same data with SPSS. Discriminant accuracy rate
handle the data. Build following SOM network. It has compared to 43 companies, in Tab.5.
seven input nodes, corresponding to each variable. We
set 32 output nodes, making the sample can be fully Tab.5 Discriminant accuracy rate of 43 enterprises in two
classified. We randomly assign to two groups of initial methods
weights of input layer and competitive layer. After BP results SPSS results
repeated experiments, we take the learning rate is 0.1,
Accuracy Accuracy
200 times of learning. After the data is normalized, we Number Number
rate (%) rate (%)
began to train the network.
ρ1 judged
6.3 Analysis conclusion 30 90.9 26 78.8
as ρ1
It can be seen that most dishonest taxpaying
enterprises are divided in a category 4, and the honest ρ1 judged
3 9.1 7 21.2
taxpaying enterprises almost in a category 32. Seen, this as ρ2
clustering method will be effective to distinguish tax
situation. Two types of enterprises indicator data got ρ2 judged
8 80% 7 70
from clustering were taken average, are shown in Tab.3. as ρ2
ρ2 judged
Tab.3 Index of honest and dishonest taxpaying enterprises 2 20% 3 30
classes as ρ1
4 32
index
rate of the tax burden 0.0286 0.0137 It can be seen from the above results, artificial
effective tax rate 4.306 0.665 neural networks with higher non-linear, adaptive and
inventory rate 5.636 5.260 self-learning, though training samples, it can change
quick ratio -0.588 0.938 according to surrounding environment and deal with the
return on total assets various information changes, itself is also constantly
-1.636 0.117
changed. And its information storage can be distributed,
ratio of sales to cost 1.430 0.780
even if there is local damage or loss, it will not affect the
ratio of sales to overall situation. The statistical analysis does not have
0.076 0.043
financial expense
this advantage. The analysis showed that BP neural
network is greater progress than the statistical
It can be seen that the different characteristics of discriminant analysis.
each index between the categories, we believe that these
features may become a basis for future sampling of tax
checking. Can be learned through trial, the selection of
7 Conclusion
enterprise indicators is appropriate. In other words, seven
indicators reacts the actual situation of honest taxpaying In this paper, the combination of practical
enterprises. We do the statistics about operating result, in experience and theoretical analysis, using GDA to get a
Tab.4. After analysis and calculation, the accuracy of new set of index system, practice has proved that the
sampling has been significantly improved, and greatly indicators system can better reflect the actual situation if
improves the effect about the sampling of tax checking. the corporate tax is honest. At present, there are few to
use self-organizing map network (SOM) to research on

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the sampling of tax audit. But through trying to study on
the sampling of tax checking, explain the effectiveness of
SOM in the tax audit practice, further improve the
efficiency of tax checking, and achieved good results in
the sampling process.
The defects of this study are index selection, the
approach of use and maintenance does not fully consider.
The accuracy and rationality of indicators have yet to
perfect the design and operation of the system. With
raising China's computer application level in tax
collection, enhancing tax information sources and
processing capabilities, the sampling indicators should be
expanded, should be more in-depth analysis. It needs to
be in-depth study by artificial intelligence techniques for
the selection of indicators. The sampling analysis
involves only the VAT on tax checking, not covered by
other taxes. Commercial enterprises data is used in the
sampling choice, the sampling of tax checking can be
further in-depth study on manufacturing and other
industries Inspection Cases in the future.
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