The law of tax administration encompasses an enormous number of issues. There is little theoretical controversy concerning most of them, however, so this discussion limits itself to the most basic principles.

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Taxpayer services are a crucial element in the function of any tax administration. Individuals must be able to get answers from the tax administration about what their duty is and how they should comply with the law. This is especially important if the taxes are complex. There is considerable evidence that taxpayer service programs increase compliance levels, improve taxpayer confidence and ease the burden of compliance. This evidence is compelling enough, even without any bottom line on revenue-raising capacity, to dictate that every tax administration actively pursue a program of assistance, information and education.

The type of taxpayer services a tax administration provides depends on political realities and budgetary constraints. Some countries, such as India, provide printed pamphlets in all indigenous languages, explaining how to compute taxable income and how to file a return. This effort has reduced computational errors in a substantial way, although no precise estimate of the reduction is available.

In addition to printing and pamphlet production, many tax administrators make extensive use of video cassettes and television to provide taxpayer assistance. The IRS, for example, produces videos on various topics and distributes them to local tax offices for viewing by taxpayers. This has increased the availability of tax information in a very cost-effective manner.

Whether the taxpayer services are provided by a single, central tax office or spread over various levels of government will have some technical implications, but it is primarily a matter of political realities and budgetary constraints. However, it is very important that the tax administration have clear lines of authority so that tax staff in local offices understand that they must follow rules and regulations established in the center. This can help to ensure that the different types of tax are collected uniformly throughout a country and that the records with respect to each are consolidated into one master file so that stop-filers and delinquent accounts can be dealt with in a systematic manner.

Collection

Taxation is a major source of revenue for governments worldwide. Most of this funding comes from taxes on income and purchases of goods and services, but it also includes excise duties and taxes on natural resources and social security contributions. Tax administrations work to ensure that taxpayers pay their fair share and receive the benefits of government services. They may be centralized or decentralized, and they must deal with complex tax laws that vary across countries. The structure of tax administration influences the efficiency and effectiveness of tax collection.

The choice of whether tax administration is centralized or decentralized is based as much on political considerations as on technical ones. However, there are technical implications of the various models. For example, a central taxation agency may be better equipped to handle the large number of taxpayers and complex transactions in a country, while a decentralized system is more flexible in terms of organizational structure and personnel practices.

If a country chooses to establish multilevel taxation, the authority to collect specific taxes should be allocated to levels of government that can function with the lowest collection and enforcement costs. This is especially true for highly mobile tax bases, such as VAT (especially on a destination basis), customs duties and taxes on natural resources. In addition, the Federation of Tax Administrators has found that tax administration costs can be reduced by combining administrative functions such as auditing, customer service and collection.

Local taxes such as property taxes may be a good candidate for local administration, because of the close connection between local residents and their property. Moreover, subnational officials are likely to have a more intimate knowledge of the trends in their geographical areas than national tax officials. This can help them to make responsible decisions when deciding how to spend local taxes.

Audit

As the collection of taxes helps finance public spending, tax administrations must maintain a high level of professionalism and efficiency. They must be able to verify the accuracy of taxpayer returns and conduct investigations, assessments, determinations, litigation and collection activities as required by tax laws. The tax administration may also be responsible for preparing and disseminating tax publications and educating taxpayers on their obligations under the law. In the United States, for example, state tax administrations have formed a Federation of Tax Administrators that performs a variety of coordination and information-dissemination functions. This arrangement can be especially helpful in ensuring that taxpayers receive uniform treatment in assessment, audit, penalties and appeals regardless of where they live or work.

For example, an IRS audit of a taxpayer’s return is likely to be shared with state tax authorities. Similarly, when a federal agency finds that an individual has violated the law with regard to his or her state income tax obligation, this information is automatically transmitted to the state, which can then use it to collect outstanding taxes. The public and policymakers expect the IRS to administer the tax code fairly, but some audit selection criteria and methods could have different implications for certain demographic groups. For example, one study found that the risk scores used by the IRS to select returns for audit varies by sex, which could skew results.

The challenges faced by modern tax administrations are complex and diverse. They include the need to adapt to new economic models, changing relationships with taxpayers and growing digitalization. They must also be able to assess their performance, which is often difficult to quantify. The OECD has developed a Tax Administration Diagnostic Assessment Tool that can help administrations evaluate their strengths and weaknesses.

Penalties

A well-designed tax penalty regime is an important tool to promote compliance and deter non-compliance. It should contain a range of both monetary and non-monetary penalties to address the various motivations for taxpayers to commit tax offences. As a general rule, penalties should be commensurate with the level of culpability. However, a penalty regime should also avoid over-reactions, which may result in corrupt practices by tax authorities and unfairness to taxpayers.

Penalties can be fixed monetary amounts, such as when non-compliance is due to a failure to file an income tax return (the so-called “admin penalty”). This type of penalty typically applies to a broad category of non-compliant taxpayers and therefore should be carefully designed to ensure that it is not excessive and does not infringe on any fundamental rights of taxpayers.

Other types of administrative penalties are available to target more specific types of taxpayers or more egregious cases of non-compliance. Examples include penalties for promoting abusive tax shelters, aiding and abetting tax fraud or evasion and filing frivolous income tax returns. These penalties should be carefully designed to avoid infringing on any fundamental rights of taxpayers and should also be subject to rigorous internal and external oversight and audit.

In addition to monetary penalties, an effective tax penalty regime should also contain a variety of non-monetary sanctions that are designed to encourage compliance by depriving non-compliant taxpayers of rights and benefits that they cherish or value more highly than money. These can include restrictions on freedom of movement, prohibitions on engaging in a particular business activity or profession, or the naming and shaming of businesses that fail to pay their taxes. The design of non-monetary sanctions is often complicated by the need to take into account the values, beliefs and social norms of different populations.

Appeals

Whenever a taxpayer, withholding agent, tax guarantor, or other counterpart of the tax administration believes that tax administrative acts infringe upon his legal rights and interests, he is entitled to apply for an appeal. The People’s Court will examine whether or not the act in question is lawful. The appeals process can also help a taxpayer or the IRS resolve disputes in a way that is mutually beneficial.

If a case goes to an appeals hearing, the judge will decide whether to uphold or reverse the original decision. The judge will usually make this decision by ruling on the facts of the case. Depending on the type of case, the judge may also order a refund or other relief from tax liability.

The Appeals process is designed to improve taxpayers’ understanding of and voluntary compliance with the tax laws. In addition, the process helps ensure consistency in interpretation and application of the tax law.

In the 2009-2010 fiscal year, Appeals sustained deficiency determinations in 71.7 percent of cases, cancelled deficiency determinations in 13.0 percent of cases, and modified determinations in 8.7 percent of cases. In other words, Appeals helped the government get back more money than it lost.

However, there are some cases that Appeals cannot consider. For example, a case that has been referred to the Department of Justice for defense or initiation of litigation is not eligible for Appeals consideration. Also, a judicial decision regarding the validity of a regulation is not appropriate for Appeals consideration because it weighs litigation risks against the public interest in communicating and applying the law consistently to all taxpayers. However, these exceptions are rare. The Treasury Department and IRS publish limitations on access to the Appeals resolution process in tax regulations, revenue procedures, and IRMs.