Agents Of Change Is the IRS shedding its image as the agency entrepreneurs love to hate?

Almost two years have passed since the IRS promised to providekinder, gentler service. Now, with several changes in place,entrepreneurs can expect to deal with a friendlier tax agency thisfiling season. But a good deal of restructuring still needs to bedone before the IRS is transformed into a taxpayer serviceagency, say experts who closely follow the agency's dailyoperations.

The IRS is still busy reorganizing and nursing its wounds, saysDon Alexander, an attorney with Washington, DC, law firm Akin,Gump, Strauss, Hauer & Feld LLP and IRS commissioner during theFord, Nixon and Carter administrations. The agency took a beatingduring Senate Finance Committee hearings in 1997, when varioustaxpayer abuses were uncovered. Since then, the IRS has committeditself to a major self-improvement program.

Joan Szabo is a writer in Great Falls, Virginia, who hasreported on tax issues for more than 13 years.

Change is in the Air

Immediately after the hearings, the IRS took a series of stepsto demonstrate its seriousness, including establishing taxpayerproblem-solving days and doing away with ranking the 33 IRSdistrict offices and 10 service centers based on revenue andenforcement results. (For more details, see "Tax Talk,"July 1998.) Although deep-rooted problems can't be undone in amatter of months, especially when a huge bureaucracy is involved,the IRS' new attitude is bound to prove beneficial forbusinesses, says Robert Webb, director of tax services for theDenver-based accounting firm Gelfond Hochstadt Pangburn & Co."The service is much less combative, and it's gotten themessage not to be quite as abrasive,' he says.

Alexander agrees, but worries the redirection will mean lessattention to taxpayer compliance and may eventually result in anincreasing tax gap between federal expenditures and receipts. Thatkind of outcome could cause lawmakers to push for the IRS to shiftmore of its attention back to collection and compliance and less toservice. But Alexander says such a twist isn't likely to happenfor several years.

In the meantime, Commissioner Charles O. Rossotti is putting anew management structure in place by creating and filling severalnew positions, including Deputy Commissioner for Operations andDeputy Commissioner for Modernization.

An Office of Taxpayer Advocate has also been established, asrequired by the 1996 Taxpayer Bill of Rights II. Under that law,the taxpayer advocate reports directly to the IRS commissioner. Theadvocate will help entrepreneurs and individual taxpayers withproblems that can't be resolved through ordinary channels. W.Val Oveson, former chair of the Utah State Tax Commission, willhead that post and select a cadre of taxpayer advocatesnationwide.

Rossotti must still fill slots in the new IRS operatingdivisions. Four separate units are planned, each designed to servethe needs of a specific group of taxpayers, includingsmall-business owners. The new divisions are still very much intheir infancy, says Mark Luscombe, principal federal tax analystwith CCH Inc., a Riverwoods, Illinois-based provider of tax andbusiness law information. The small-business unit's leadershipprobably won't be named until the end of this year, and thedivision is unlikely to be up and running before 2000.

Out With the Old

The commissioner has also started the ball rolling onmodernizing the service's outdated computer system. High-techfirm Computer Sciences Corp. will lead a consortium of contractorsin the formidable task.

"To improve service, the IRS needs to break out of itstechnological time warp from the 1950s and 1960s," saidRossotti when announcing the contract. "This new partnershipwill help us replace archaic technology with the modern tools weneed to deliver top-quality service to taxpayers." However,Rossotti acknowledged that technological modernization of the IRScould take as long as 15 years.

Projects scheduled for this year and next include: improvingservice for people contacting the IRS by phone or via the Internetand expanding electronic tax-filing capabilities. The IRS alreadyhas information for entrepreneurs available under "Tax InfoFor Businesses" at its Web site, http://www.irs.ustreas.gov

In many areas, improved services hinge directly on replacingoutdated technology, according to Rossotti. For example, IRSrepresentatives' ability to give taxpayers current, accurateaccount information is limited because taxpayer accounts arecurrently stored on tape files that are only updated weekly andcan'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 improvementsfor now. "Rossotti is talking about a long-term process ofchanging around the organization," says Luscombe. Perhaps bythe turn of the century, taxpayers will begin to enjoy the fruitsof this labor.

Spring Cleaning

The tax advantages of giving away inventory overflow.

Are your storage shelves filled with excess or obsoleteinventory? If so, you could be sitting on some valuable taxdeductions. Donate those goods to charitable organizations, andyou'll create a win-win situation for your business as well asfor the charities.

The deduction you can take is based on the type of structureyou've selected for your business. If you're organized asan S corporation, a partnership or a sole proprietorship and youdonate inventory to a charity that uses the goods to assist thesick, the poor or children, you're generally able to take a taxdeduction for the cost of producing the inventory.

For companies organized as C corporations, the deduction risesto the cost of the inventory plus half the difference between thatcost and the inventory's fair market value. In this case, thededuction can't be more than twice the cost of the goods.

When looking for an organization that can use your goods, startwith local churches and charities. Many of them set up reliefefforts to help victims of natural disasters.

Another option is to contact larger organizations that wereestablished solely to distribute donated inventory. Two well-knownones are Alexandria, Virginia-based Gifts In Kind International andthe National Association for the Exchange of Industrial Resources(NAEIR) in Galesburg, Illinois.

Gifts In Kind helps channel donated inventory to approximately50,000 domestic and international charities. Most of the inventoryis new, but Gifts In Kind works with charities in need of slightlyused computers and other similar equipment. Business donors oftenpay the cost of the shipping and take a tax deduction for thisexpense, says Sandy Lynch, Gifts In Kind's director ofdevelopment and external relations.

NAEIR distributes new goods nationally to some 5,550 schools andnonprofit organizations such as churches, rescue missions andhomeless shelters. The nonprofit organizations that receive theinventory pay NAEIR an annual fee, which ranges from $375 to $575 ayear. The type of inventory in greatest demand by NAEIR membersincludes office supplies, such as pens, file folders and computerdiskettes; 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 excessinventory, you're not only helping your business; you'rehelping those in need. And sometimes that's all the reason youneed.

Next Step

For more information about inventory donation programs, contactGifts In Kind International at (703) 836-2121 or http://www.giftsinkind.org orNAEIR at (800) 289-4551 or http://www.freegoods.com

Contact Source

Gelfond, Hochstadt, Pangburn & Co., (303) 831-5038,bwebb@ghpcpa.com