Identifying tax evasion in Mexico with tools from network science and machine learning

Abstract

Mexico has kept electronic records of all taxable transactions since 2014. Anonymized data collected by the Mexican federal government comprises more than 80 million contributors (individuals and companies) and almost 7 billion monthly-aggregations of invoices among contributors between January 2015 and December 2018. This data includes a list of almost ten thousand contributors already identified as tax evaders, due to their activities fabricating invoices for non-existing products or services so that recipients can evade taxes. Harnessing this extensive dataset, we build monthly and yearly temporal networks where nodes are contributors and directed links are invoices produced in a given time slice. Exploring the properties of the network neighborhoods around tax evaders, we show that their interaction patterns differ from those of the majority of contributors. In particular, invoicing loops between tax evaders and their clients are over-represented. With this insight, we use two machine-learning methods to classify other contributors as suspects of tax evasion: deep neural networks and random forests. We train each method with a portion of the tax evader list and test it with the rest, obtaining more than 0.9 accuracy with both methods. By using the complete dataset of contributors, each method classifies more than 100 thousand suspects of tax evasion, with more than 40 thousand suspects classified by both methods. We further reduce the number of suspects by focusing on those with a short network distance from known tax evaders. We thus obtain a list of highly suspicious contributors sorted by the amount of evaded tax, valuable information for the authorities to further investigate illegal tax activity in Mexico. With our methods, we estimate previously undetected tax evasion in the order of \$10 billion USD per year by about 10 thousand contributors.