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  • Definitions

    Top-down approaches

    Top-down approaches use externally-provided aggregated data sources to estimate the size of the tax base, from which we estimate theoretical tax liability. The difference between the theoretical tax liability and the amount we receive is the estimated tax gap. A top-down approach is typically used for transaction-based taxes.

    Bottom-up approaches

    Bottom-up approaches involve a detailed examination of data sources, such as tax returns, audit results, risk registers or third-party data-matching information. We then extrapolate the results to establish the extent of non-compliance across the whole population, from which we estimate the tax gap. This approach generally involves applying statistical techniques to estimate the incidence and value of non-compliance. A bottom-up approach is typically used for income-based taxes.

    Random enquiry programs

    Random enquiry programs (REPS) are a bottom-up approach. They are considered to be international best practice, resulting in a higher degree of credibility and improvements in confidence intervals. The REPs select claims for evaluation so that they all have the same likelihood of being chosen. The REPs are structured to minimise selection bias, maximise accuracy, account for non-detection error and account for the outcomes of compliance work conducted in parallel to the REP.

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      Last modified: 17 Oct 2019QC 57176