Italian Authorities Threaten Tax Evaders With Big Data

Different types of tax evasion is a chronic problem in Italy. Despite the increasingly stringent measures to control and combat tax evasion, as well as the steady increase in the collection of tax debts and arrears, the scale of tax evasion remains impressive.

According to the Italian Ministry of Finance, the annual tax evasion volume is estimated at 110 bln euros, which means that arrears to the state budget are about 10-12% of GDP. Last year, the Italian government tightened the liability. The term of imprisonment was increased, and the threshold amount of arrears, upon reaching which criminal liability ensues, was reduced. All actions are aimed at forcing tax evaders to reduce the volumes of tax evasion. However, the introduction of criminal liability and long prison sentences for tax evasion of 100 thousand euros was taken skeptical by the judicial community.

According to the judges, criminal cases on evaders will overload the courts, effectively blocking their work in other areas. In addition, Italian prisons are overcrowded: there are 60 thousand prisoners for 47 thousand places in correctional institutions. The EU regularly imposes penalties on Italy for inhumane treatment of prisoners, and they regularly win trials at the ECHR against Italy, receiving compensation for serving their sentences in the overcrowded prison cells.

Given all of the above, the Italian tax office is moving to new, IT-methods of combating tax evasion. A significant event is the use of big data: since January 1, 2020, Italy switched to electronic invoices, and all trade organizations must send a copy of the electronic check to the tax department in real-time mode. To manage the big data flow, a giant database of taxpayers and financial transactions has been created. According to the latest information, this data bank contains credentials for 669 mln financial transactions with cash, credit cards, funds, investments and wealth management of individuals and legal entities.

The current year’s Budget Law removes all restrictions on the use of information and data from the aforementioned database for risk analysis and profiling the categories of taxpayers in terms of their propensity to evade taxes. In fact, this is about data mining: the computer looks for taxpayer profiles that match the identikit of a potential tax evader and then signals the responsible employee about the need for a tax audit of the identified persons.

The term "digital verification" is already known to the Italian tax authorities. This is the preliminary phase preceding the actual physical verification of the taxpayer's trustworthiness. After the computer identifies a person as a potential tax evader with the use of artificial intelligence and analysis of big data flow, the tax authority shall inform him or her of the possible non-compliance with its real income declared.

The purpose of the notification is to convince or force the taxpayer to comply with tax standards, as well as timely correction of inconsistencies in the tax return to avoid penalties, and possibly even criminal liability. The ultimate goal is a voluntary correction of inconsistencies in the taxpayer’s tax return. Сurrent legislation assigns only 90 days from the date of filing to make these changes.

The preliminary contest of the tax authorities' assumptions about the possible unfairness of the taxpayer is an intermediate stage. This procedure takes place in the face-to-face format between a tax inspector and a taxpayer suspected of dishonesty. It is expected that with the use of AI and big data, the preliminary dispute procedure will undergo significant changes, and the number of applied cases will be greatly reduced due to the compelling nature of the evidence extracted from banking operations.

However, the digital sword of Damocles, carried by the Italian tax authority over the head of the taxpayer, has a completely different goal: to make the potential tax evader aware of the idea that it is better to avoid being on the “hit lists” than dispute the findings of the digital audit vainly.