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Hoping to pare its aging backlog of audits and raise respect for its competency, the Internal Revenue Service has embarked on an ambitious overhaul of corporate tax collection. At the helm is former Hewlett-Packard Co. tax chief Larry R. Langdon, who has been charged with reorganizing the division along industry lines and selling a new tax philosophy to his 7,300 workers. That philosophy calls for shifting the agency’s emphasis from after-the-fact compliance to a focus on resolving tax questions before they become disputes. It’s a controversial shift and the subject of long-running debate in the tax community. Proponents say that working with taxpayers before they file returns will lead to a less contentious, more productive system. Opponents say they fear that slackening on compliance by shifting workers into pre-filing issues will encourage tax avoidance. “It’s hard to describe how big this change is,” says Frederick T. Goldberg Jr., head of the tax practice at New York’s Skadden, Arps, Slate, Meagher & Flom. Goldberg should know. He was IRS commissioner under President Bush and later headed tax policy at the Treasury Department. He is a key proponent of the shifting emphasis. “The vision is terrific,” Goldberg says. “The question is whether the agency and taxpayers will be able to deliver on it.” Langdon is under no illusions about the difficulties facing him. He took over the IRS’ new large- and midsize-business division late last year and hit the road almost at once, conducting 17 “town hall” meetings across the country with his beleaguered auditing teams. “We want a less contentious relationship, and that involves trust on both sides,” Langdon says. “If that trust doesn’t occur, then we will have to continue to operate in the old school of audits, and they are time-consuming, expensive on both sides and contentious.” In the end, he says, no one feels good about a process that lands in court. The new division is responsible for 210,000 corporations and partnerships that pay $712 billion in taxes. They include the country’s largest corporations and pose some of the thorniest tax issues. It is organized into five industry groupings instead of the old geographical boundaries. They are heavy manufacturing, construction, transportation, financial services, health care, retailing, food, pharmaceuticals, natural resources and communications, technology and media. Langdon has recruited recently retired Alcoa Inc. tax director Linda Burke to be the division’s operating counsel, heading a team of 300 lawyers. Burke, like Langdon, is among a number of executives the IRS has recruited from private practice to team up with career IRS employees. The division is getting ready to roll out a series of initiatives aimed at heading off tax disputes. One of them, a pre-filing program, is being tested in a pilot at a dozen companies, including Cordant Technologies Inc., in Salt Lake City. (Cordant recently was acquired by Alcoa). Cordant signed up for the pilot in March and already has signed two agreements with the IRS affecting its 1999 taxes, one involving a valuation question and the other, a method of accounting. “It is important to have answers sooner rather than later. The interest bill on a 10-year-old issue is enormous,” says Paul Cherecwich, vice president of tax at Cordant. Cherecwich and his peers are eager to accelerate the audit process; it is not unusual for a corporate audit to be 10 years old or older. Resolving potential disputes before filing a return means there is less to contest down the road, when memories have faded and records are hard to find. Results from the pre-filing pilot have been so positive that Langdon hopes to expand the program this fall. CHEERS FROM BUSINESS Corporate tax directors — while skeptical about the success of the new undertaking — are rooting for it. “I think industry is kind of holding its breath,” says Paul Morgan, senior tax manager at National Semiconductor Corp., in Santa Clara, Calif. “The big concern from industry is that it’s not going to change, that this reorganization is not going to change the attitude of people in the field, and those are the people who really need to be sold, and Larry knows that.” Langdon, who is conducting town hall meetings with corporate taxpayers, acknowledges that his toughest sales job will be within the IRS. “The corporate response has been very favorable,” he says. “I knew our people had to buy into the program for it to work.” Reaching the hearts and minds of IRS auditors won’t be easy. Morale is very low, tax lawyers say. They point to a slew of factors, such as inadequate training, antiquated computer systems, low pay compared with industry and continual criticism from Congress. The agency still has not recovered from the beating it took in Sept. 1997 at highly publicized hearings before the Senate Finance Committee. “Morale is terrible across the whole IRS,” says Margaret Richardson, the IRS commissioner during the first half of the Clinton administration. “Those hearings set the stage, and no one defended the service.” REORGANIZATION IS CRITICIZED Richardson, now a partner in the Washington, D.C., office of Ernst & Young, sees the reorganization as largely a waste of time and money that could better be spent addressing specific issues, such as boosting the use of electronic filing. She also worries about compliance. “Basically, as a result of those hearings, the message was, ‘The taxpayer is always right, and we are not going to worry about compliance,’ ” Richardson says. “ Most people in the field don’t understand what this is about and are confused.” “Morale is a concern of mine, too,” Langdon says. He notes that 44 percent of his work force is eligible to retire this year. “We are really working to create a team environment.” In addition to meeting with the auditing teams, Langdon says, the division is going to beef up its technological capabilities and will add training courses in the coming year. By fall, he wants all the field agents who work on-site at companies to have remote access to e-mail and the ability to do tax research on their computers. He is encouraged by small signs of acceptance within his organization. “There are people from the auditing teams who really believe this is the way to go and are postponing retirement,” Langdon says. “We are going to have to work on all these changes, train our people and advertise our successes.”

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