Almost two years have passed since the IRS promised to provide kinder, gentler service. Now, with several changes in place, entrepreneurs can expect to deal with a friendlier tax agency this filing season. But a good deal of restructuring still needs to be done before the IRS is transformed into a taxpayer service agency, say experts who closely follow the agency's daily operations.
The IRS is still busy reorganizing and nursing its wounds, says Don Alexander, an attorney with Washington, DC, law firm Akin, Gump, Strauss, Hauer & Feld LLP and IRS commissioner during the Ford, Nixon and Carter administrations. The agency took a beating during Senate Finance Committee hearings in 1997, when various taxpayer abuses were uncovered. Since then, the IRS has committed itself to a major self-improvement program.
Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.
Change is in the Air
Immediately after the hearings, the IRS took a series of steps to demonstrate its seriousness, including establishing taxpayer problem-solving days and doing away with ranking the 33 IRS district offices and 10 service centers based on revenue and enforcement results. (For more details, see "Tax Talk," July 1998.) Although deep-rooted problems can't be undone in a matter of months, especially when a huge bureaucracy is involved, the IRS' new attitude is bound to prove beneficial for businesses, says Robert Webb, director of tax services for the Denver-based accounting firm Gelfond Hochstadt Pangburn & Co. "The service is much less combative, and it's gotten the message not to be quite as abrasive,' he says.
Alexander agrees, but worries the redirection will mean less attention to taxpayer compliance and may eventually result in an increasing tax gap between federal expenditures and receipts. That kind of outcome could cause lawmakers to push for the IRS to shift more of its attention back to collection and compliance and less to service. But Alexander says such a twist isn't likely to happen for several years.
In the meantime, Commissioner Charles O. Rossotti is putting a new management structure in place by creating and filling several new positions, including Deputy Commissioner for Operations and Deputy Commissioner for Modernization.
An Office of Taxpayer Advocate has also been established, as required by the 1996 Taxpayer Bill of Rights II. Under that law, the taxpayer advocate reports directly to the IRS commissioner. The advocate will help entrepreneurs and individual taxpayers with problems that can't be resolved through ordinary channels. W. Val Oveson, former chair of the Utah State Tax Commission, will head that post and select a cadre of taxpayer advocates nationwide.
Rossotti must still fill slots in the new IRS operating divisions. Four separate units are planned, each designed to serve the needs of a specific group of taxpayers, including small-business owners. The new divisions are still very much in their infancy, says Mark Luscombe, principal federal tax analyst with CCH Inc., a Riverwoods, Illinois-based provider of tax and business law information. The small-business unit's leadership probably won't be named until the end of this year, and the division is unlikely to be up and running before 2000.
Out With the Old
The commissioner has also started the ball rolling on modernizing the service's outdated computer system. High-tech firm Computer Sciences Corp. will lead a consortium of contractors in the formidable task.
"To improve service, the IRS needs to break out of its technological time warp from the 1950s and 1960s," said Rossotti when announcing the contract. "This new partnership will help us replace archaic technology with the modern tools we need to deliver top-quality service to taxpayers." However, Rossotti acknowledged that technological modernization of the IRS could take as long as 15 years.
Projects scheduled for this year and next include: improving service for people contacting the IRS by phone or via the Internet and expanding electronic tax-filing capabilities. The IRS already has information for entrepreneurs available under "Tax Info For Businesses" at its Web site, http://www.irs.ustreas.gov
In many areas, improved services hinge directly on replacing outdated technology, according to Rossotti. For example, IRS representatives' ability to give taxpayers current, accurate account information is limited because taxpayer accounts are currently stored on tape files that are only updated weekly and can't be accessed directly from computer terminals.
Needless to say, the IRS overhaul isn't happening overnight. Businesses will have to be content with small, gradual improvements for now. "Rossotti is talking about a long-term process of changing around the organization," says Luscombe. Perhaps by the turn of the century, taxpayers will begin to enjoy the fruits of this labor.
The tax advantages of giving away inventory overflow.
Are your storage shelves filled with excess or obsolete inventory? If so, you could be sitting on some valuable tax deductions. Donate those goods to charitable organizations, and you'll create a win-win situation for your business as well as for the charities.
The deduction you can take is based on the type of structure you've selected for your business. If you're organized as an S corporation, a partnership or a sole proprietorship and you donate inventory to a charity that uses the goods to assist the sick, the poor or children, you're generally able to take a tax deduction for the cost of producing the inventory.
For companies organized as C corporations, the deduction rises to the cost of the inventory plus half the difference between that cost and the inventory's fair market value. In this case, the deduction can't be more than twice the cost of the goods.
When looking for an organization that can use your goods, start with local churches and charities. Many of them set up relief efforts to help victims of natural disasters.
Another option is to contact larger organizations that were established solely to distribute donated inventory. Two well-known ones are Alexandria, Virginia-based Gifts In Kind International and the National Association for the Exchange of Industrial Resources (NAEIR) in Galesburg, Illinois.
Gifts In Kind helps channel donated inventory to approximately 50,000 domestic and international charities. Most of the inventory is new, but Gifts In Kind works with charities in need of slightly used computers and other similar equipment. Business donors often pay the cost of the shipping and take a tax deduction for this expense, says Sandy Lynch, Gifts In Kind's director of development and external relations.
NAEIR distributes new goods nationally to some 5,550 schools and nonprofit organizations such as churches, rescue missions and homeless shelters. The nonprofit organizations that receive the inventory pay NAEIR an annual fee, which ranges from $375 to $575 a year. The type of inventory in greatest demand by NAEIR members includes office supplies, such as pens, file folders and computer diskettes; toys; hand tools; janitorial supplies; and clothing.
Although deductions may not be as advantageous as tax credits (see last month's "Tax Talk"), when you donate excess inventory, you're not only helping your business; you're helping those in need. And sometimes that's all the reason you need.