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Tax administrators in developing and developed countries face the challenge of modernizing tax administration so it can operate effectively in an increasingly global economy characterized by difficult-to-tax sectors and by sophisticated computer and communications technology. However, to significantly increase the effectiveness of the tax administration.s operations, experience has shown that a reform strategy is required. To design an appropriate tax administration reform strategy, the paper suggests that countries may be divided into four groups according to the tax administration's effectiveness, the level of taxpayers' noncompliance or the .tax gap.. As a rule, the larger the tax gap, the more radical are the changes needed. Countries with a smaller tax gap would need to adapt to changes in the tax system and the taxpayer population in order to maintain high compliance levels and lower the costs of collection and compliance. Considering the size of a country.s tax gap and the tax administration.s particular circumstances, the paper discusses several guiding principles, based on country experiences, which have provided the basis for successful reforms. These include reducing the complexity of the tax system, encouraging taxpayers' voluntary compliance, differentiating the treatment of taxpayers by their revenue potential, and ensuring the effective management of the reform. Crucial to designing a tax administration reform strategy is the identification of bottlenecks that hinder tax administration operations. The paper discusses bottlenecks in the following areas observed while assisting IMF member countries: taxpayer registration, returns and payment processing, computer operations, stopfiler detection and arrears collection, delinquent taxpayers, audit sanctions and penalties, taxpayer services and publicity, management and organization, and personnel.

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