From the January 2001 issue of Entrepreneur

While the rest of the nation-and much of the world-has joined the computer age, the IRS, which collects $2 trillion each year, still remains critically dependent on the obsolete computer systems it developed over the last 35 years.

But a large-scale computer modernization effort, started two years ago, is beginning to show progress. Once complete (sometime during this decade), the improvements promise to make the IRS more service-oriented and, to the dismay of some taxpayers, better able to track down those who want to avoid paying taxes.

With the new system, the IRS expects not only to identify simple taxpayer mistakes faster but also to be more adept at spotting tax avoidance and evasion, says Mike Dolan, director of IRS policies and dispute resolution for KPMG's tax controversy service in Washington, DC.

The overall goal, however, is to "provide better service across the board and eventually reduce the taxpayer burden," says Paul J. Cosgrave, IRS chief information officer and the person in charge of the modernization efforts.

What's On Tap

While it's slow going, the IRS expects to have enough technological changes in place to provide some improvements by this tax-filing season. Cosgrave says the two major technology-driven changes business taxpayers will soon see are:

Better service when contacting the IRS by phone or via the Internet. Tax-payers will have quicker access to tax topics, tax forms and IRS customer serv-ice representatives. The service aims to bring the level of customer satisfaction above 95 percent, Cosgrave says.

Improved electronic tax administration, including more electronic tax-filing capabilities and more ability to pay taxes electronically. For example, the IRS is making the Electronic Filing Tax Payment System-used for withholding payroll taxes-Internet-based. This should be a big improvement over the current outdated ways of access, such as voice response. Among other improvements, you'll be able to check the status of your payroll payments via the Net.

Also under way are efforts to design a new generation of workstations that enable IRS workers to quickly retrieve tax records electronically while guaranteeing taxpayer privacy.

Tracking Troublemakers

The innovative technology will also greatly increase the IRS' ability to track suspicious patterns of taxpayer conduct. "In the modernized world, we are going to integrate our existing capability with the core tax system, which keeps track of all taxpayer data," explains Cosgrave.

Because the IRS still uses antiquated tape technology, it can't access taxpayer data on "a random basis," Cosgrave says. "That problem means we can't use the core source of data for taxpayer searches."

But that'll soon change, and entrepreneurs beware. "[It'll be] much easier to ferret out the egregious cases and serve them up in a more aggressive enforcement model," says Dolan, "and at the same time look for the people who really just need a little help to get it right."

While much remains to be done, Dolan says that for the first time in many years, the IRS has finally accumulated most of the ingredients needed for modernization. "They have the arrows more lined up now than ever before," he says. "It is very likely that they will do it right this time."