Using The Chi-Square Method

The chi-square test has the following steps:

• determine the expected frequency of the first digit;
• determine the observed frequency of the first digit;
• calculate the difference between the observed and expected frequencies;
• square the difference (to eliminate distortion from negative numbers);
• divide the result by the number of expected frequencies.

When the value computed by the chi-square test exceeds a predetermined critical value, it is appropriate to accept the hypothesis of tax fraud.