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 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:
Definition of taxpayers' compliance
Reporting an actual income by which the behavior is influenced by 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)
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"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
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  have positive impact on taxpayers' compliance while tax rates have negative impact on taxpayers' compliance. This argument can be accepted because when individuals or companies have higher income, usually they tend 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 is make 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 condition of high tax rate, taxpayers still have 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 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 expected value of unreported income.
Barbuta-Misu (2011) reviewed the factors of taxpayers' compliance by dividing the factors in to 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 with 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 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 example of behavior of 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 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 tax system is perceived as fair, tax payers will trust the tax system and will likely to have voluntary compliance.
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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 argue 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 taxpayers' perception of government spending that can effect taxpayers' compliance. They explain 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) explain about institutional factors which include Role (efficiency) of tax authority, simplicity of tax return and administration, and probability of detection. Palil and Mustapha state that tax authority or government has important roles in minimizing tax gap  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 administration can encourage taxpayers in completing their tax returns, thus can increase voluntary compliance. Moreover, they state that different levels of detection rate  provide different degree of taxpayers' compliance, which means that 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 referents 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 negative attitude toward taxes will encourage taxpayers to be non-compliant. Regarding 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 referents group, Palil and Mustapha argued that family members and friends are important in making decision regarding voluntary compliance of taxpayers because taxpayers can be influenced by perception of referents 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 offences and penalties. These factors are important in increasing taxpayers' compliance. They argue that if taxpayers aware of the offences when they are evading tax and the consequences of being not comply 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 do 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 performance of tax offices in improving taxpayers' compliance.
II.2. Tax Administration Reform
Nasucha (2004) define 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: simplification of tax structure for administration and convenience for taxpayers, the proper reform strategy which should be developed, 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 sub unit, 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.
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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 complains 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.
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, conclusion 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 need 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 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 happened after the expansion of employees towards all tax units, not only focus on special units that handle high income taxpayers. The widespread of employees make the workloads are not significantly different among 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 assess 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 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 improve 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 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 succeed 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.