When the owners of a local retail company decided to quit paying taxes a couple years ago, they simply stopped filing their tax returns. At the time, the auditing mechanisms used by tax authorities were unable to detect this irregularity, and the company could get away it. Not anymore.  

“Our Tax Administration was not equipped to address the issue of taxpayers who stopped filing their taxes,” said Midhat Arifhodzic, director of the Federation of Bosnia and Herzegovina (FBiH) Tax Administration.

But in 2011, USAID introduced a high-tech information system in the FBiH Tax Administration that unified registration, collection and reporting of "social contributions," or tax payments, for all government offices. It was part of USAID’s effort to create an efficient tax system and improve the business environment in BiH.

USAID used the same system as a foundation to create software that identifies irregularities and flags those who stop filing their taxes. This highly advanced system is able to detect all kinds of irregularities, including underpayments and habitual non-filers.

“Addressing this issue was time consuming, frustrating and costly—but it was well worth it,” said Arifhodzic.

Immediately upon installation, the system identified about 6,200 so-called "stop filers." After audits were conducted by the Tax Administration, more than 1,400 stop filers were found in violation of tax laws and forced to pay their outstanding debts.

The revenues collected exceeded expectations: An additional $18 million (27 million Bosnian marks) was collected in 2012, the first full year of implementation, due to the improved IT system. The aforementioned retail company ended up paying over $20,000 (30,000 Bosnian marks) in back taxes and fees accrued over the previous two years. USAID expects tax revenues to increase even more once the system is fully functioning.

The software also updated the existing database of taxpayers, since it detected subjects that went out of business or had gone bankrupt. More than 1,000 businesses were removed from the database.

Reforms like this help bring BiH fiscal policy regulations in line with European Union standards, which is increasingly important as the country prepares for EU accession.

USAID/BiH's Tax and Fiscal Project to improve the collection of taxes and reduce the compliance burden on BiH taxpayers closed in 2013.