Tax Administration Reform And Taxpayers Compliance Accounting Essay

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Tax administration reform in Indonesia, as one form of bureaucratic reforms in Indonesia, was commenced in mid-2002 and still continues until now. There are two phases of the implementation of tax administration reform in Indonesia. The first phase of tax administration reform took place from 2002 until 2008. The focus of this phase is on the modernization of tax administration, such as the overhaul of the organizational structure of the DGT, e-filing, e-SPT, e-registration, and the establishment of call centers for information and complaints service. The second phase of tax administration reform in Indonesia which has taken place since 2009 and will end in 2014, focuses on improving the management systems and human resources, and improving the information technology systems of taxation by building a Project for Indonesian Tax Administration Reform (PINTAR). One of the objectives of this reform is to improve taxpayers' compliance in Indonesia.

Taxpayers' compliance related to how taxpayers comply with tax regulation in terms of reporting their tax return on time. Based on KOMPAS.com, March 7, 2011 written by Djumena, there are still 5,899,624 taxpayers (individual and corporate) who did not report their tax return for tax year 2010. The total number of taxpayers in 2010 is 20,412,709. It means that about 71% of taxpayers have already reported their tax return for tax year 2010. However, it is necessary to know the number of taxpayers who report their tax return on time to get the percentage number of taxpayers' compliance in Indonesia. According to the taxpayers' compliance data from the Directorate General of Taxes (DGT), actually there is an increasing percentage number of taxpayers' compliance in Indonesia. In 2010, taxpayers' compliance is 58.9%. The previous year from 2002 until 2009, the percentage numbers of taxpayers' compliances respectively are 33.45%, 35.02%, 34.18%, 33.96%, 32.04%, 30.21%, 33.08%, and 54.15%.

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Figure 1.1. Taxpayers' Compliance 2002-2010

Source: the Directorate General of Taxes

Years of 2002 until 2010 were the years when the DGT implemented tax administration reform in Indonesia. Thus, it becomes an interesting research to know whether the improving of taxpayers' compliance is caused by tax administration reform implemented in Indonesia. This research tries to cover the aspect of organization performance of the DGT in improving taxpayers' compliance in Indonesia. A problem discussed in this paper is about the implementation of tax administration reform in Indonesia and how tax administration reform is affecting the performance of tax offices in improving taxpayers' compliance in Indonesia.

I.1. State of Knowledge

There were some previous researches related to tax administration reform. Bird (2004) discussed some important aspects in implementing tax administration reform. He began with the importance of human resources, infrastructure, and structural organization. Next, he mentioned the need of tax information system. Then, he also explained about law enforcement, related to tax audit and penalties for taxpayers who did not obey tax regulation. Furthermore, organizational strategy is also an important aspect according to Bird (2004). Finally, he discussed the need of provision about internal control to avoid violations involving tax officials, such as corruption and collusion.

In other research, Bird and de Jantscher (1992) described three important aspects for a successful of tax administration reform. First, they explained the need of simplifying tax structure for ease of compliance and administration. Next, they mentioned that each country should develop suitable reform strategy based on the specific reform strategy suitable to the specific conditions of each country. As a final point, they stated about a strong political commitment regarding the improvement of tax administration.

Another research from Silvani and Baer (1997) explained that the country firstly should know the problem faced by the country before designing and implementing tax administration. For example, they mentioned that it could be related to the size of tax gap which is the number of tax that is not paid on time by the taxpayers. Next, Silvani and Baer described that the country needs to design the strategy in tax administration reform. This strategy could be related to taxpayers' registration, tax payment processing, system information, tax collection, and internal management and organization. Moreover, they mentioned "ten guiding principles" in designing the reform strategy, such as: "political commitment, simplify the tax system, encourage voluntary compliance, formulate the clear strategy, identify tax law that are need to be changed, integrated approach of tax collection process, differentiate the treatment of taxpayers, effective management in reform process, set priorities and establish time table, and begin the reform with pilot projects." (p. 31)

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Furthermore, the reason why need to implement tax administration reform is explained by Gill (2003). Gill (2003) discussed four main reasons why the reform should be done. First, Gill (2003) explained when there are tax policies that could potentially increase tax revenue, thus, the efficiency and effectiveness of tax administration is needed. Next, he explained tax administration could influence investment climate and the development of private sector. Moreover, he pointed out that tax administration remains in the top rank of corruption. Finally, he explained that the reform is important for tax system in following the development of business activity including the increase of the complex tax avoidance.

Associated with taxpayers' compliance, there are also some literatures about the factors that can influence taxpayers' compliance. Allingham and Sandmo (1972) explained compliance by the concept of expected utility. They pointed out that the income and tax that will be reported by taxpayers will depend on the way they can produce the maximum expected utility. Allingham and Sandmo (1972) stated that there are some factors that can be taken into considerations of taxpayers in reporting their tax, such as tax rates, the opportunities to be audited, and the amount of penalty.

Errard (1997) pointed out another factor that can influence taxpayers' compliance. He explained about the economic scale of taxpayers that can influence taxpayers' compliance. He mentioned that this is related to cost that taxpayers should pay when they report their tax correctly comparing the amount of tax including penalties that they should pay if the DGT can detect the unreported tax.

The other factor that can influence taxpayers' compliance is explained by Krause (2000). Krause (2000) stated non-economic factor that can also influence taxpayers' compliance. He explained that the lack of tax knowledge of the taxpayers can make them not to comply and disobey tax regulation. However, he also mentioned that taxpayers who have better understanding about tax regulation may not comply in case they know how to exploit the weaknesses of tax regulation.

The relationship between tax administration reform and taxpayers' compliance is explained by Andreonni et al. (1998). Andreonni et al. (1998) pointed out that taxpayers' compliance could be affected by tax administration. According to this, Andreonni et al. (1998) added that sufficient guidance to taxpayers should be provided by government in order to make them more comply to tax regulation. Moreover, the research of tax compliance in Jamaica by Alm, Bahl, and Murray (1990) proposed that comprehensive improvement of tax administration, which can be determined as tax administration reform, will raise voluntary compliance. Furthermore, Bergman (2003) pointed out that tax reform may improve better compliance in case the authority could understand taxpayer's behavior and characteristics.

I.2. Purpose of Study

This research tries to find correlation between tax administration reform and performance of tax offices in improving taxpayers' compliance in Indonesia. Taxpayers' compliance is one of the objectives of tax administration reform in Indonesia. Thus, there should be a relation between tax administration and taxpayers' compliance in Indonesia.

First of all, the research will explain the overview of tax administration reform in Indonesia including the aspects of the reform. The research tries to explain it clearly, so that this study can be understood not only by Indonesian people but also people from other countries. This overview includes a brief explanation about tax administration in Indonesia during the tax administration reform that could be different compared to other countries. The research also explains the performance of tax offices regarding their taxpayers' compliance rate.

Next, this research tries to analyze aspects in tax administration reform that can be close-related or may affect taxpayers' compliance. The changes in tax administration in Indonesia during tax administration reform are about the changes in main aspects, such as structural organization, information technology and communication, and human resources. Moreover, there are the changes in tax regulation and law enforcement that could be related to taxpayers' compliance in Indonesia.

For the preliminary hypotheses, the research suggests that an organizational restructuring will bring positive effects to the organization performance in improving taxpayers' compliance in Indonesia. Regarding organizational restructuring, the research will explain reorganization in tax administration in Indonesia including the creation of new divisions or offices to deal with certain taxpayers. The fact that the percentage numbers of taxpayers' compliance which continuously increased could be a parameter to the relationship between the organizational restructuring and taxpayers' compliance. Therefore, the research tries to find whether the improvement of taxpayers' compliance really has a relation with the organizational restructuring or not.

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Next, the research will discuss the improvement of tax information system in Indonesia, including the implementation of e-system in tax administration in Indonesia. The improvement of tax information system may have a positive relation with performance of tax offices in improving taxpayers' compliance. The implementation of e-system brings benefits not only to tax officials but also taxpayers. Using e-system and improvement in information system mean simplifying tax administration. It makes tax officials easier in monitor taxpayers, and for taxpayers, it means they can report and pay their taxes easily.

Furthermore, the research also tries to discuss human resource aspect in tax administration reform. Human resource is one important aspect of tax administration. Therefore, good capability of tax officials is needed. In Indonesia, there is a new position in tax administration reform called account representatives. Account representative's duty is like a tax consultant for taxpayers that is provided free by the DGT. An account representative will help taxpayers in giving information about taxation. To be an account representative, tax officials have to join some training to get special skills in this job. Thus, it might also be a positive relation in terms of improving taxpayers' compliance in Indonesia.

1.3. Significance of Study

Many previous researches discuss tax administration reform explaining how to design reform in tax administration, the key aspects of tax administration reform, and how to improve tax administration. Many previous researches also explain about taxpayers' compliance, the determinant of taxpayers' compliance and factors that can influence taxpayers' compliance.

This research tries to find a relation between tax administration reform and taxpayers' compliance in Indonesia. This research tries to make a link between tax administration reform and performance of tax officials in improving taxpayers' compliance in Indonesia. This research will focus on organizational performance in improving taxpayers' compliance. Therefore, the aspect of tax administration reform that can influence taxpayers' compliance will be connected with the performance of tax officials in every regional tax office in Indonesia that can improve taxpayers' compliance.

There are some researches about the implementation of tax administration reform in certain countries and the affect to taxpayers' compliance. The significance of this research is the consideration of the research to the performance of regional tax offices in Indonesia. This research will show the performance of each regional office in Indonesia including tax revenue for each regional office, the percentage of taxpayers' compliance, and the factors in tax administration reform than can influence taxpayers' compliance.

It is important to analyze the performance of each regional tax office especially in Indonesia that has large region to be covered and many potential of taxpayers. Knowing the performance of each regional tax office in improving tax payers' compliance would be better to make comparisons about the effectiveness of implementation of tax administration reform in Indonesia. It is also important to see the problem faced by each regional tax office in implementing tax administration reform.

As one of the objectives of tax administration reform, taxpayers' compliance is one indicator whether the implementation of tax administration reform in Indonesia is successful or not. This research is expected to give benefits for internal organization in making evaluation of tax administration reform in Indonesia in order to continuously improve taxpayers' compliance in Indonesia. Since the tax administration reform in Indonesia is still running until now, the research might give suggestions in order to improve taxpayers' compliance.

However, there are still limitations in this research. For example the research could not cover the variable with unclear measurement such as work motivation of tax officials and leadership aspect. In this limitation condition, the research will try to give the clear relationship between tax administration reform and performance of tax officials in improving taxpayers' compliance in Indonesia.

CHAPTER II

LITERATURE REVIEW

Researchers have their own opinion about taxpayers' compliance and factors which can influence taxpayers' compliance. This chapter will discuss several literatures about taxpayers' compliance, administration reform, factors which are affecting taxpayers' compliance, and the relationship between tax administration reform and taxpayers' compliance. Literatures about the relationship between tax administration reform and taxpayers' compliance will focus on three main changes in the reform: organizational restructuring, implementation of e-system, and human resources.

II.1. Taxpayers' Compliance

Palil and Mustafa (2011) explained several the definition of taxpayers' compliance from researchers, which can be summarized in table below:

Table 2.1. Definitions of taxpayers' compliance

Definition of taxpayers' compliance

Researcher

Reporting an actual income by which the behavior is influenced by the situation under uncertainty.

Alingham and Sandmo (1972)

Taxpayers' ability and willingness to comply with tax laws which are determined by ethics, legal environment, and other situational factors at a particular time and place.

Song and Yarbrough (1978)

"Reporting all income and paying all taxes in accordance with applicable laws, regulations, and court decision."

Alm (1991) p.577

Willingness to pay and report tax obligation

Andreoni et al. (1998)

Willingness to pay taxes

Kirchler et al. (2007)

Source : Palil and Mustafa (2011, p.557)

Alm et al. (1992) found that income, audit rates, and tax rates are factors which can affect taxpayers' compliance. They collected data of laboratory experiments including Internal Revenue Service (IRS) data. They argued that income and audit rates [1] have a positive impact on taxpayers' compliance while tax rates have a negative impact on taxpayers' compliance. This argument can be accepted because when individuals or companies have higher income, usually they tend to have more willing in paying more taxes. Higher audit rates will make taxpayers have to think more when they evade taxes because they have to pay more for penalties if the audit found that there are unreported incomes of their tax returns. This finding supports Allingham and Sandmo (1972) who found that the higher the possibility of taxpayers to be audited, taxpayers will be willing to report their all income. However, higher tax rates tend to decrease taxpayers' compliance (Alm et al., 1992). This makes sense because basically, people will be hard to sacrifice a part of their income for taxes, and it will be more difficult for people to sacrifice more in case of higher tax rates. This argument is contradicted with Allingham and Sandmo (1972) who pointed out that higher tax rates will not necessarily decrease taxpayers' compliance because even in the condition of high tax rates, taxpayers still have the possibility to report all of their income. Next, Alm et al. also found that fine rates only have little effect on taxpayers' compliance. This argument can be supported by the concept of expected utility in analysis taxpayers' compliance (Allingham and Sandmo 1972). Allingham and Sandmo argue that taxpayers will do underreporting if the expected utility of fine or penalty is still lower than the expected utility of income which is underreported. Therefore, to increase taxpayers' compliance, the fine needs to be given in such way that the expected value is greater than the expected value of unreported income.

Barbuta-Misu (2011) reviewed the factors of taxpayers' compliance by dividing the factors into two factors: Economic and non-economic factors. Barbuta-Misu pointed out that economic factors of taxpayers' compliance consist of the level of actual income, tax rate, tax audit, fines and penalties. These are similar to factors of taxpayers' compliance according Alm et al. (1992). Furthermore, Barbuta-Misu stated that non-economic factors of taxpayers' compliance consist of: Attitude toward taxes; personal, social, and national norms; and perceived fairness of the tax system. Barbuta-Misu discussed attitude toward taxes in relation with positive or negative perception about tax evasion. Barbuta-Misu stated that positive attitude toward tax evasion will decrease voluntary tax compliance. In contrary, negative attitude toward tax evasion will lead to increase voluntary tax compliance (Barbuta-Misu, 2011). This argument can be true because when taxpayers support tax evasion, they will tend to do tax evasion by do not report all of their income. Regarding personal, social, and national norms, Barbuta-Misu argued that taxpayers' compliance could be influenced by norms in society. Barbuta-Misu gives examples of behavior of a reference group of taxpayers that can influence taxpayers' compliance. If taxpayers believe that non-compliance behavior is already widespread, they will also tend to be non-compliant (Barbuta-Misu, 2011). Barbuta-Misu also mentioned perceived fairness of the tax system as non-economic factor that can influence taxpayers' compliance. Barbuta-Misu argued that the fairness tax system could increase taxpayers' compliance. This argument can be accepted because tax system should cover all taxpayers without exception. Thus, if the tax system is perceived as fair, tax payers will trust the tax system and will likely have voluntary compliance.

Almost similar with Barbuta-Misu (2011), Palil and Mustapha (2011) divided determinants of taxpayers' compliance into four major factors: Economic factors, Institutional factors, Social factors, and Individual factors. Economic factors consist of tax rates, tax audits, and perceptions of government spending. Palil and Mustapha argued that decreasing tax rates does not necessarily increase compliance and increasing tax rate does not necessarily decrease taxpayers' compliance because regardless tax rate, taxpayers may decide to report all of their income or only report less of their income. Regarding tax audits, Palil and Mustapha support Alm et al. (1992) that tax audits are important in increasing taxpayers' compliance because audit rates and process of audits which are implemented thoroughly could encourage taxpayers to be more judicious in reporting their taxes. Furthermore, Palil and Mustapha also consider about the taxpayers' perception of government spending that can affect taxpayers' compliance. They explained that if government can wisely spend tax money, for example to improve public facility, it will increase voluntary compliance. In contrary, if taxpayers identify that government spend too much money for unnecessary spending, it will decrease taxpayers' compliance (Palil and Mustapha, 2011).

Next, Palil and Mustapha (2011) explained about institutional factors which include Role (efficiency) of tax authority, simplicity of tax return and administration, and probability of detection. Palil and Mustapha stated that tax authority or government has important roles in minimizing tax gap [2] and increasing voluntary compliance. They mention that designing tax system, implementing specific law enforcement, and collection mechanism as examples of government roles in improving taxpayers' compliance. Furthermore, they argue that simplicity of tax return and the administration can encourage taxpayers in completing their tax returns, thus can increase voluntary compliance. Moreover, they state that different levels

of detection rate [3] provide different degrees of taxpayers' compliance, which means that a high probability of detection could potentially increase voluntary compliance.

In addition, Palil and Mustapha (2011) also explain social factors which include ethics and attitude toward tax compliance, perception of equity or fairness, changes to current government policies, and referent group (Family and friends). They found that these factors are important in determining compliance and evasion behavior. Negative attitude toward taxes could influence tax evasion (Palil and Mustapha, 2011) because the negative attitude toward taxes will encourage taxpayers to be non-compliant. Regarding the perception of equity or fairness, Palil and Mustapha agree with Barbuta-Misu (2011) that tax system which perceived as fair will increase taxpayers' compliance. Regarding referent group, Palil and Mustapha argued that family members and friends are important in making decisions regarding voluntary compliance of taxpayers because taxpayers can be influenced by perceptions of the referent group in comply with tax laws and regulations.

Palil and Mustapha (2011) also enlighten individual factors in taxpayers' compliance which includes personal financial constraints and awareness of offenses and penalties. These factors are important in increasing taxpayers' compliance. They argue that if taxpayers aware of the offenses when they are evading tax and the consequences of being not complied with tax laws, they might reduce the possibility to evade taxes.

The literatures above have explained about many factors that can influence taxpayers' compliance. Tax institution that has responsibility in tax administration need to think about how to improve, encourage or maintain the factors that can increase taxpayers' compliance. One way is by implementing tax administration reform. By doing tax administration reform, tax institution makes several changes in tax administration which is expected to increase taxpayers' compliance. Next subchapters will discuss about tax administration reform, the relationship with taxpayers' compliance, and the main changes of tax administration reform that can influence the performance of tax offices in improving taxpayers' compliance.

II.2. Tax Administration Reform

Nasucha (2004) defines tax administration reform as the improvement of administrative performance of individuals, groups, or institution to be faster, economical, and more efficient. Nasucha pointed out that the success of tax administration reform requires three things: the proper reform strategy which should be developed, simplification of the tax structure of administration and convenience for taxpayers, and strong political commitment in order to improve tax administration. Furthermore, Nasucha stated four dimensions of tax administration reform such as: organization structure including relationship between roles, separate activities in each subunit, and administration position and formal communication in network; organization procedure including decision making, communication process, career, and socialization; organizational strategy including attitude, factors, and resources to achieve organizational goals; and organizational culture including values and behavior of organization's members.

Bird (2004) discussed five key aspects of tax administration. First, Bird stated that a tax administration must have adequate resources including manpower, infrastructure, and proper organizational structure. Second, Bird pointed out that a tax administration needs a good information system. Third, Bird contended that a tax administration need law enforcement including a system of tax audit and penalty system for non-complying taxpayers and also rewards for compliant taxpayers. Fourth, Bird mentioned that a tax administration must have strategies and regulations in countering non-compliance condition. And finally, provision needs to be made in dealing with problems which will be faced in tax administration including how to handle complaints of taxpayers and make internal review and evaluation regarding the implementation of tax administration.

Gill (2003) used the term "revenue administration reform" in explaining about tax administration reform. Gill pointed out several reasons why a country needs revenue administration reform:

When tax policies create potential increase in tax revenues, the actual amount of taxes collected depends on the efficiency and the effectiveness of revenues administration.

Investment climate and private sector development are affected by the quality of revenue administration.

Tax administration is usually shown as a problem of public-sector organizations with the high rate of corruption.

Tax reform is needed to allow the tax system to follow developments of business activity and the pattern of increasingly sophisticated tax avoidance.

(Gill, 2003)

Regarding the reasons of tax administration reform, Abimanyu (2003) stated that the implementation of tax administration reform has three important objectives: the achievement of a high level of voluntary compliance, the achievement of a high trust level to tax administration, and the achievement of a high productivity of tax officials. Nasucha (2004) argue that tax administration reform has two important tasks: effectiveness in achieving high level of compliance and efficiency in reducing administration cost per unit of tax revenue. From those arguments, conclusions can be made that tax administration reform is implemented in order to make tax administration become more effective and efficient in improving voluntary compliance and creating high productivity of tax officials.

Bird (2004) contended that effective tax administration reform requires the condition of environment in which people or citizens are encouraged to voluntarily comply with tax laws while efficient tax administration requires the condition that activity in tax administration can be implemented at minimum cost to the society. This argument implies that many things are needed to be done in tax administration reform because creating effective and efficient tax administration reform is not an easy task, but need hard work of tax institution in making important changes in the administration to give best services to taxpayers.

II.3. Tax administration reform and taxpayers' compliance

In previous subchapter about tax administration reform, actually already give a little explanation that tax administration reform have relationship with taxpayers' compliance. For example, Abimanyu (2003) pointed out that one objective of tax administration reform is to achieve a high level of voluntary compliance. Moreover, Nasucha (2004) also stated achieving high voluntary compliance as one important task of tax administration reform. Those arguments imply that there is a causal relationship between tax administration reform and taxpayers' compliance.

Several researchers conduct research about the relationship between tax administration reform and taxpayers' compliance in many countries. Das-Gupta et al. (2004) discussed tax administration reform and taxpayers' compliance in India. Das-Gupta et al. explained that before the reform, taxpayers with higher income are assigned to special units. This condition requires more employees that should be assigned in those special units, thus the workloads of that units will be increased (Das-Gupta et al., 2004). India implemented a simply reform regarding personnel policy in tax administration (Das-Gupta et al., 2004). Das-Gupta et al. found that significant compliance was happening after the expansion of employees towards all tax units, not only focus on special units that handle high income taxpayers. The wide spread of employees makes the workloads are not significantly different between all tax units, thus will solve problems of tax units in supervising taxpayers (Das-Gupta et al., 2004). Das-Gupta et al. explained that previously, tax units that are not handle high income taxpayers only have less scrutiny assessments for taxpayers, thus it makes taxpayers in those units felt that they will have less possibility to be assessed by tax offices and tend to do tax evasion. After the reform, all tax units can supervise all taxpayers, not only high income taxpayers, but also low income taxpayers, thus will avoid tax evasion and may increase voluntary compliance (Das-Gupta et al., 2004). This research shows that implementation of tax administration reform has a positive impact on taxpayers' compliance.

Bergman (2003) compared about tax reforms and tax compliance in Chile and Argentina. Bergman found that tax reforms implemented by Chile are more effective than those implemented in Argentina. Bergman found that Chile successfully improves tax compliance by implementing tax reforms while Argentina fail to improve tax compliance. Bergman explained that both Chile and Argentina implemented tax reforms related to tax policies in reducing potential loopholes, implementation of a single Value-added tax rate, and information technology. One major problem that makes a difference in the result of tax reforms is higher inflation faced by Argentina rather than Chile (Bergman, 2003). Furthermore, the condition that Chile implemented tax reforms earlier than Argentina did, may also explain why Chile succeeds in implementing tax reforms compared to Argentina. This research implies that tax reforms can be successfully implemented if they are implemented thoroughly covering all aspects of tax administration including environmental aspects such as politic and economy.

In previous subchapter, Bird (2004) explained about several aspects of tax administration such as: organizational structure, human resource, and information system. These aspects are important in tax administration. Reforming tax administration reform can be implemented by considering these aspects. Next subchapters will present literatures of three main aspects of tax administration reforms such as: organizational restructuring, implementation of e-system, and capability of tax officials including the relationship between each aspects and organization performance and taxpayers' compliance.

II.4. Organizational restructuring

Hirsch and De Soucey (2006) pointed out organizational restructuring as an effective and efficient reorganization in term of reducing costs, improving productivity, enhancing service quality, and maximizing profits. They explained that the concept of restructuring which was introduced in 1970s, has a negative connotation which is related to economic suffering. In 1980s, terminology restructuring has a more positive connotation which providing possibility of organization to increase profits by making structural changes in the organization (Hirsch and Saucey, 2006).

Jones (2010) discussed restructuring in public organizations. He pointed out that restructuring public organization needs to be done in giving solutions of political and economic problems that result in dissatisfaction of citizens. Jones contended discussed what public managers should do when facing fiscal stress condition. Jones stated that restructuring usually implies that public organization needs to reduce many jobs which make an organization run more effective and efficient. Jones pointed out that in dealing with the reduction, personnel management is needed in improving employees' capacity by giving education and training, especially about how to use new technologies and how to deal with work processes. Jones also explained that personnel management is important in placing or reassigning employees to new positions, especially for those whose jobs have been cut.

Several researches mentioned the relationship between organizational structure and tax administration reform. Birds (2004) pointed out that tax administration should have appropriate organizational structure in order to run tax administration effectively and efficiently. Birds (2004) explained the organizational structure as one of adequate resources that is important in implementing tax administration reform. Therefore, the changes in organizational structure should be considered in tax administration reform. Furthermore, Gill (2003) stated that changes in organizational structure regarding tax administration reform include several aspects such as: design jobs in the structure, system of control and monitoring, function of different departments and offices, and coordination among units in the organization.

Moreover, Leavitt (1964) explained four main changes in organizational restructuring that are mutually connected to each other as follows (cited in Ting 2011, pp. 100-101) :

Task restructuring: related to major tasks in organizations. The restructuring means that organizations need to decide what tasks in the organizations that need to change. For example, regarding services to customers, what changes that need to be implemented. This task restructuring needs attention in organizational restructuring.

Constitutive restructuring: related to communication system and work procedure. This is important because this is related to the performance of the organization.

Personnel restructuring: related to the number of personnel that organizations need. This is also related to technology required for the organization and how every personnel can apply this technology in their work. In this restructuring, it is also important to consider about the attitudes of employees that organizations need.

Technological restructuring; related to technology that organizations need to improve the performance in order to make organization become more effective and efficient.

(Ting 2011, pp. 100-101)

Next, this research will show the supporting theory about organizational restructuring and organizational performance. Ting (2011) conducted a research to prove that organizational restructuring could influence organizational performance. Ting discussed the example case of old folks nursing organizations in Taiwan. Ting argued that organizational restructuring may influence the organizational performance. Ting mentioned that through the restructuring process, there are several advantages that can be achieved with organization: efficient operations, balanced growth, timely, and flexible capability to adapt. Thus, the goals of increasing work efficiency and upgrading organizational efficacy will be achieved (Ting, 2011).

Gill (2003) supported functional organizational structure rather than structure based on tax types. Gill explains that several countries such as Russia, Latvia, and Jamaica have implemented this kind of structure. Gill added that regarding this structure, there are specialized units for taxpayer assistance, tax audits, tax returns and payment processing, financial management, and human resource management. The Directorate General of Taxes (DGT) now also implements a functional organizational structure for all tax offices.

Hutagaol et al. (2007) pointed out organizational structure as one factor to determine the problem of taxpayers' compliance. They explain that when tax organization has a fine organizational structure in order to professionally serve taxpayers, taxpayers tend to comply with tax laws. Moreover, Hutagaol et al. discussed the real case when the DGT established Large Tax Offices in 2002, as a pilot project of tax administration reform in Indonesia. They mentioned that the organizational structure of the office is designed with function oriented to give excellent services and supervising taxpayers' compliance. In 2005, the DGT has successfully increased tax revenue by 40%, thus the reform continues by implementing organization restructuring for all tax offices in Indonesia (Hutagaol et al., 2007). From the discussion above, a hypothesis can be summarized as follows:

Hypothesis 1: Implementation of organizational restructuring may increase performance of tax offices in improving taxpayers' compliance.

II.5. Implementation of e-system

Information technology is important for public organization. Kernaghan and Gunraj (2004) argued that information technology is a vital resource for public organization in achieving its objectives because using information technology, public organization needs certain skills and also investments that may lead to changes in management and organizational structure. These changes will lead to efficiency in public administration and increasing productivity of the organization. Furthermore, Garicano and Heaton (2010) pointed out the importance of information technology for public organization. They argued that many tasks in public organization such as revenue management, education, and police tasks are information processing. Those tasks need information technology for effectiveness and efficiency in order to improve productivity of the organization (Garicano and Heaton, 2010). Garicano and Heaton use a data sample of Police Department for 1987-2003 in study the relationship between information technology and effectiveness of public organization. They found that although information technology could not reduce the number crime, it successfully improves productivity of the police department in dealing with their daily tasks. They found that using computerized system in their daily tasks, police department can do its jobs more effective and efficient.

Regarding tax administration reform, Bird (2004) pointed out that information technology is important in tax administration. Bird summarized ideal information system in tax administration such as: a system to measure the potential tax base; a system to recognize potential taxable entities; a system to categorize potential taxpayers and determine strategies to collect taxes; a system to monitor the taxpayers, especially regarding tax collection; and a system to evaluate the existing procedures and regulations. Gill (2003) also discusses the importance of information technology in revenue administration reform. He stated that information technology is necessary to make revenue administration more effective and efficient. However, he pointed out that information technology requires special skills to operate ad maintain the system, thus professionals in information technology are needed in the organization.

Regarding implementation of information technology, many researchers found positive impact of information technology on organization performance. Bird (2004) states the essential of information system in tax administration to find out the existing potential of tax base. He mentioned that good internal communication system can be useful in tax collection to produce revenue because through this system, tax officials can monitor the potential of taxpayers.

Bird (2004) pointed out the correlation between tax policy and tax administration. He contends that "tax administration is tax policy" (Bird 2004, p.135). He pointed out that the good tax administration is important in tax policy. He argued that the best tax administration is not only about collecting tax revenue and penalize non-compliance taxpayers, but also about the complex relationship between environmental factors regarding public actions and tax regulations.

Shaukat and Zafarullah (2009) found that information technology has a positive impact on organizational performance. They found that implementing information technology could increase the income of banks and manufacturing companies. The result is in accordance with the reason why company invests in information technology. Information technology needs more money but it can make the operational work of the company become more effective and efficient. They took the sample of Pakistan's banks and manufacturing companies. They use data from 1990-2004. They examined the impact of information technology on performance of foreign banks and local banks in Pakistan. The result was that information technology has a positive impact on income of both foreign and local banks. IT investments made by both local and foreign banks can increase their net income. They also examined the impact of information technology on the performance of local and foreign manufacturing companies. The result shows that information technology has a positive impact on income of all local manufacturing companies, but only has a positive impact on income of some foreign manufacturing companies (Shaukat and Zafarullah, 2009). Shaukat and Zafarullah (2009) argued that for some foreign manufacturing companies, information technology has no impact on income because although income has increased, but information technology is not contributing more for the increase of income. They added that this happens because they expand the company's operation and add employees due to their operational expansion. Shaukat and Zafarullah concluded this as the reason why companies use information technology is to improve organizational performance.

Bozeman (2002 cited in Rainey 2009) explained modernization of tax system implemented by the IRS. Bozeman explained that IRS has new equipment to automatically read and process tax returns. He pointed out that at the first time, the implementation of a new system was failed because the new equipment could not work. This condition makes employees worry that they will be penalized if they cannot finish in processing tax returns (Bozeman 2002, cited in Rainey 2009). Bozeman (2002 cited in Rainey 2009) explained that so many critics were coming up and argue that implementing the new system is only wasting money. However, Bozeman (2002 cited in Rainey 2009) stated that IRS still implemented the new system with the new equipment to process tax returns. Finally, the new system was successfully implemented by the IRS, and the IRS was successfully using new equipment and hardware years later (Bozeman 2002, cited in Rainey 2009). Despite several problem still be faced regarding operating and maintaining the new system, but the IRS has progressed in developing major databases by the new system (Bozeman 2002, cited in Rainey 2009). Based on American Customer Satisfaction Index, 2008 (cited in Rainey 2009), the implementation of e-filling by IRS succeed to bring much higher customer satisfaction score. The higher on customer satisfaction will lead to self-awareness of taxpayers to report and pay their taxes voluntarily.(Rainey, 2009)

In contrary, Powell and Dent-Micallef (1997) argued that information technology can enhance organizational performance only if it is combined with human and business resources. Firms can use the same information technology, but get different results (Powell and Dent-Micallef, 1997). Some firms may get success from the information technology while others have to struggle using same information technology (Powell and Dent-Micallef, 1997). This happens because information technology cannot work alone but needs to integrate with human and business resources such as: supplier relationship, strategic planning, flexible culture (Powell and Dent-Micallef (1997). Emadzade et al. (2012) supported this argument that information technology has no direct impact on organizational performance. Emadzade et al. explained information technology as one of knowledge management capabilities. They conclude that not all aspects of knowledge management capabilities have an impact on organizational performance. Information technology is essential for effective knowledge management, but did not directly impact organizational performance (Emadzade et al.., 2012).

Ling and Fatt (2008) explained the motivation use of e-filing system from a taxpayer's perspective. They found that majority taxpayers use the e-filing system because of its convenience and the speed of filing. They collected data from questionnaire on 682 taxpayers in Kuala Lumpur Malaysia. They pointed out that the implementation of e-filling is important to improve tax administration and compliance efficiency. However, they conclude that e-filing is not yet gain success in Malaysia. They stated that only 79% of taxpayers who successfully e-filed their tax returns. They mentioned that the rest of 21% failed because of server problems. The better and user friendly e-filing system is needed in order to achieve the goal to improve taxpayers' compliance. (Ling and Fatt, 2008)

Ambali (2009) stated that there are three possibilities of public reaction regarding the implementation of e-filing tax system. First, Ambali pointed out that people have positive perception about e-filing and belief that e-filing will be successfully implemented and eventually improve voluntary compliance. Second, Ambali stated that people feel uncomfortable using e-filing because they lack confidence to use new technology. Third, people consider about the insecurity of the e - filing system, thus it may lead to distrust of the technology (Ambali, 2009). Therefore, convincing taxpayers to use e-filing system needs a hard work. The important point is how the organization can establish the appropriate and integrated e-filing system that can bring benefit for taxpayers when they using the system. By doing so, it is expected that taxpayers will have self awareness in using the e - filing system.

Information system and technology may also have impact on taxpayers' compliance. E-filling system as one form of implementation of information systems and technology may also have impact on taxpayers' compliance. Dohrmann and Pinshaw (2009) mentioned e-filing system as one factor that can improve tax compliance. They pointed out the importance of efficient taxpayers' service in improving voluntary compliance. They found that the implementation of e - filing system would bring full benefit if it reaches close to 100 percent e-filing rates. They explained that achieving close to 100 percent e-filing rates means that e-filing could efficiently reduce costs of paper processing. Therefore, the government should try to optimize the implementation of this system to get full benefit. This system not only can reduce cost of papers that can make tax administration become more effective and efficient, but also can give benefit to taxpayers that more easy to report their taxes. This implication will improve taxpayers' compliance. From the discussion above, a hypothesis can be summarized as follows:

Hypothesis 2 : implementation of e-system may enhance performance of tax offices in improving taxpayers' compliance.

II.6. Capability of tax officials

Regarding tax administration reform, Bird (2004) pointed out man power as adequate resource of tax administration. Bird also added that training is needed to improve skills of employees in dealing with changes in tax administration reform. It means that organization needs human resource who have good capability in tax administration. Furthermore, Gill (2003) also argued that the training course is important in revenue administration reform. Gill explained that training is not only related to implementation of new technology, but also in accordance with jobs of several positions of tax officials such as auditors and tax collectors.

Public organizations should focus on how to give the best services to people. Human resource is one important thing for organization to be considered regarding this condition. Therefore, the organization should have officials who have good capability in his position to give the best service to people. The DGT is the public organization that also needs to give the best services regarding taxes to taxpayers in order to increase voluntary compliance. Thus, the capability of tax officials is one element that is needed to be considered especially when the organization wants to improve its performance.

Patterson et al. (1997) summarized the wider agreement among many researchers that "human resource management practices can improve company performance by: increasing employee skills and abilities, promoting positive attitudes and increasing motivation, providing employees with expanded responsibilities so that they can make full use of their skills and abilities" (p.13). Patterson et al. added that company can have skilled employees by providing a valid selection method of hiring employees or through training programs for employees to improve their abilities, especially related to their job. Moreover, Singh and Mohanty (2012) pointed out that training has a significant effect on the employee's performance because it can improve the ability and the quality of current employees. They argue that the organization needs employees with the right qualification and experience in their specific job in order to survive in business competition. Furthermore, training is not only important to improve employees resourcefully, but also gives them a chance to learn more about their certain job and perform well in their work activities, so that it can increase organization's productivity (Sing and Mohanty, 2012). The DGT also has specific training for tax officers who will be an account representative. The training is expected to improve tax officers' capabilities and skills in giving the best tax services to taxpayers.

Bird (2004) contends that the common problem for countries in over the world when they reform their tax policy is the scarcity of tax administration resources including infrastructure, appropriate structure organization, information technology and trained officials. Furthermore, Overholt et al.. (2007) mentioned talents and skills of employees as a factor that can positively influence organizational performance. They stated "if business have to become high-performance organizations, they must have employees who possess the right skills, abilities, and mindsets" (p.8). In contrary, Overholt et al.. mentioned that organizational performance will be suffered if the organization cannot find or train appropriately skilled workers. This shows the importance of an employee's skill to improve organizational performance. Erdil et al. (2010) pointed out the employee's skill as core and important asset which needs continually developed by the organization. They mentioned it as core employee. Thus, he explained that employees should have certain skill regarding their specified activities in the organization. The employee's skill should be maintained and develop internally through training conducted by organization (Erdil et al., 2010). By doing this, Erdil et al. also contended that conducting training for employees will maintain organization capabilities, competitiveness, and performance.

Owen et al.. (2001) explained that employees in the organization should have the capability to respond to customer needs. In order to do that, Owen et al... pointed out that employees need skill, knowledge, capacity to know about consumer problems and have solution about the problems. Well-educated tax officer with knowledge's about regulation and more competent in sphere of fiscal policy will achieve the main objective of the organization which is increasing tax revenue and improving tax compliance.

In order to enhance taxpayers' compliance, tax administration needs to provide various services such as: guidance, consultation, and education for taxpayers (Sarker, 2003). Sarker (2003) also argued that conducting training for tax officials is necessary in order to achieve better tax administration. Not all tax officials can give the excellent services to taxpayers. For example, the DGT need to cooperate with taxpayers in order to achieve the goals. It means that the DGT have to know about the taxpayers' problem especially related to taxes, and should know how to help taxpayers to solve their problems. To help taxpayers in solving their problems requires employees who have the capability and skill to handle the situation. Tax officials, especially account representatives need special training to give counseling to taxpayers regarding tax regulations and to make them satisfied with the information given. The existence of employees who have good capability and skill to meet customer needs will be good for organizations to improve its performance. Thus, it will enhance voluntary compliance. From the discussion above, a hypothesis can be summarized as follows:

Hypothesis 3: The availability of trained account representative in tax offices will increase performance of tax offices in improving taxpayers' compliance.