The LMSB Division blazes IRS restructuring trail.

• Author: Ely, Mark H.
• Position: IRS Large and Mid-Sized Business Division

The Large and Mid-Sized Business (LMSB) division emerged in June 2000 with the promise of radically changing the relationships between the IRS and its largest taxpayers--the approximately 250,000 entities with assets in excess of $5 million. As it approaches its first anniversary, LMSB has pushed forward some innovations that have drawn support from its constituency and will likely be adapted for use in the other three divisions. While LMSB's first-year efforts have earned positive reactions from many, huge challenges remain for it and for the Service's overall restructuring. Practitioners will continue to be challenged to interpret the many new signals coming from the IRS and to navigate their clients through its many new processes.

The Small Business/Self-Employed Division (SBSE) faces challenges even more daunting. As heir to most of the field enforcement and a substantial part of customer service personnel, SBSE has to confront some of the most complex transition issues.

IRS Restructuring

The Service spent a massive amount of time and money this past year in moving the human, physical and financial assets from their functional and geographical roots to the four new customer-based divisions. As the one-year mark approached, the old boxes had been replaced by new structures. Nearly 100,000 employees were reassigned to the new organizations. Assistant Commissioners, Regional Commissioners, District Directors, Division Chiefs and District Counsel have given way to Industry Directors, Area Directors, Territory Managers, Industry Counsel, Area Counsel and a variety of other new positions.

On the surface, the new structures appear to have settled in place. However, on close examination, the IRS is still wrestling with hundreds of transition issues. In addition to the gargantuan effort involved in restructuring virtually every facet of the organization, it has also pressed to fulfill the many additional mandates of the Internal Revenue Service Restructuring and Reform Act of 1998, to improve its overall customer service and convince Congress that it possesses the capability to accomplish the long-awaited systems modernization.

PFAs: An Early Success

The LMSB division has advertised its interest in fundamentally altering the relationships between the IRS and taxpayers. One of the guiding principles of the restructuring has been to encourage pre-filing initiatives, which address questions and potential conflicts earlier and less expensively.

During 2000, the LMSB conducted a pilot of a pre-filing agreement (PFA) initiative (see Tax Practice & Procedures, "Update on New IRS Resolution Programs," TTA, January 2001, p. 62). The theory behind the initiative was that both taxpayers and the government would benefit from resolving issues up-front--prior to filing a return--rather than years later when the return is under audit. This theory is most persuasive, when the choice is between solving a problem now or solving it later when key personnel and records may be less available. Not all taxpayers have been persuaded that the new ways are for their benefit. Some, influenced by reports of the decline in the Service's enforcement activity, have concluded they are better off playing the audit lottery--betting that the IRS will not raise the issue on audit or, if it does, it will not have the capacity to see it through. Other taxpayers have welcomed the opportunity to secure certainty on the treatment of an issue before it ever goes on the return.

In a congressionally mandated report made public on April 6, 2001, the Service evaluated its PFA pilot. According to the report, it received 19 applications, spanning all five of the LMSB industry segments. The IRS accepted 12 applications and completed seven PFAs by the end of 2000. Four PFAs were still in process when the report was published and one had been...