by Mohd Azrul Bagdad*, Rohaya Md Noor, Nadiah Abdul Hamid, Rozainun Abd Aziz

Universiti Teknologi MARA (UiTM) Puncak Alam, Malaysia

Abstract  Full Text:  Tax non-compliance activities occur around the globe and lead to the tax gap that is continuously regarded as an unsolved issue. There is a critical need to investigate the root cause which contributes to the tax gap so as to execute an effective plan to solve the problem. This study investigated factors that affect the tax gap such as frequency of audit, business size, role of tax agent, and strategies used to underreport income. The samples of the study were collected from the tax audit cases.  The results of this study provided evidence of a significant tax gap between the reported taxable income and audited taxable income. The finding showed that taxpayers who had prior audit experience were more compliant compared to those who were audited for the first time. Thus findings found that frequent audit activities will reduce the tax gap effectively. Further, larger businesses were more tax compliant compared to small businesses. This finding also disclosed positive effect of tax agent who is also proven to reduce tax gap. The regression analysis indicated that typical strategies used by tax defaulters in committing tax fraud, namely underreporting of sales, overclaim purchases, overclaim expenses, ineligible capital allowance and other strategies, had significantly influenced and contributed to the tax gap. Thus, this study provided valuable information for the tax authority to identify the profiles of potential tax defaulter so as to formulate effective strategies to deter tax non-compliance activities and reduce the tax gap.

Keywords: Tax compliance, tax gap and tax audit

Updated:: 22/02/2022 [syazmer]