Use of artificial intelligence for tax audits in Mexico

Mon 23 Oct 2023

The Tax Administration Service (SAT) is an administrative authority in Mexico empowered to conduct audits of taxpayers with respect to their tax obligations.

The primary objective of the SAT is to facilitate and encourage payment of the required taxes and to regulate the imposition of infractions and penalties derived from non-compliance.

In the late 1990s, the SAT began to use digital technology as an alternative mechanism for auditing taxpayers. However, the Mexican authorities began investing in technological tax auditing tools and security implementations, and it was in 2017 that auditing using “Artificial intelligence” (AI) began.

Through the use of AI, the tax authority collects information from taxpayers to formulate statistics, trends, and expectations related to collection, subsequently increasing it and identifying taxpayers’ practices.

By using the information collected, the tax authority can detect discrepancies and non-compliance of tax players with their tax obligations, by conducting an electronic surveillance.

With respect to electronic tools that facilitate taxpayers’ compliance with tax obligations, the following are notable:

Identification and contact

a) The electronic signature is an accreditation of a natural or legal person to carry out procedures and services over the Internet, concerning the Mexican tax authorities. It is managed by intelligent software, that utilises a set of data and characters identified through codes and algorithms to access the authorities’ data systems.

b) Electronic mailbox is the communication channel between the tax authority and the taxpayer through electronic means. Its purpose is to simplify the notification of administrative acts and send messages in a smooth and secure manner, including the mailbox taxpayers submit.

Tax data source

Electronic invoicing

The taxpayers in Mexico are required to use “Comprobantes Fiscales Digitales por Internet” (CFDI) to process income and expenses through electronic means, such as CFDI replacing the traditional physical invoices. The CFDI is a control mechanism that provides elements for monitoring compliance with tax obligations.

The purpose of issuing CFDIs is for the tax authority to know the amounts of income and deductions that correspond to particular taxpayers, and in return, these are stored in their database.  It tags the data as either submitted by the taxpayer or issued to them, opening numerous possibilities for auditing processes and helping the exploitation and review of whether the information provided by taxpayers is effective and correct. It also allows the identification of irregularities aimed at tax evasion or tax fraud.

Complements for the receipt of payments

As part of the obligations of the taxpayers related to the CFDI, there is an issuance of a document for the receipt of tax payments. It is a requirement of the CFDI to identify the forms and methods of payment, whether they consist of a single payment or a partial payment.

The payment document is an electronic record that is associated with an account within the CFDI. It also provides information related to any deferred payment or installments of a transaction. This document includes data from the issuer, the receiver, the date of issuance, currency, exchange rate, forms, and methods of payment.

Further, the system also deals with the Value Added Tax (VAT). It is important to note that VAT is determined on a cash flow basis, and the system can check the VAT recoverable by or due on the taxpayer’s operations.

The tax authorities have established IT specifications applicable to the CFDI system, which makes use of algorithms and codes to allow information recorded in the system to interact with the Authority’s databases, permitting the review of compliance with the corresponding tax obligations.  Errors in VAT compliance can therefore be easily detected.

Payroll CFDI

One of the digital receipts for expenditures is the CFDI of payrolls, serving as the main mechanism through which the SAT reviews fiscal obligations regarding salaries. As part of their control measures, there are tools that facilitate the review of salaries paid, tax withholdings, and the detection of differences in contributions, with one of them being the Payroll Viewer.

Payroll CFDIs are payment receipts(vouchers) designed for labor purposes and contain specific information about each worker, including their name, federal taxpayer registry, tax regime, zip code of the employee’s tax domicile, amount of wages and social security benefits received, and tax withholdings (income tax and social security). As part of the voucher, the information of the issuer of the document (employer) is also included for its identification as a taxpayer before the SAT.

The tax authorities have implemented a platform where all the payroll CFDIs issued by each employer are stored. The Payroll Viewer, available for employers and workers on the SAT’s website, shows the summary of salaries, benefits, and tax withholdings contained in the payroll CFDIs. Workers can only see their own information on this platform.

Electronic accounting

One of the most relevant technological tools in recent years has been the mandatory use of electronic accounting and its submission to the authorities.

Under Mexican law, the obligation to keep accounting records electronically applies to all taxpayers, regardless of their size and line of business, including their tax regime. Taxpayers are required to send the SAT monthly digitally copies of the trial balance and the chart of accounts, along with the grouping code that allows its interpretation according to the algorithms designed for this purpose.

The totality of the monthly financial information is known by the authorities so that it can be used as an audit tool. By analysing the submitted electronic accounting information, it is possible to identify operations or atypical behaviours that affect tax calculations.

Technological developments and the use of AI have allowed the SAT to be more efficient in the process of auditing taxpayers in recent years. However, this has also supported taxpayers in obtaining certainty in the determination of contributions and the deadline for the payment of such taxes. With correct control and monitoring of the source tax data, it may be possible to avoid tax audits. At Mazars, we have a series of processes and tools with which we help taxpayers to detect possible errors in advance of the authorities.  Alternatively, we can support taxpayers in implementing the necessary processes to enable them to detect possible errors and allow for correction in a timely manner.