The Taxman Gets Tougher
By Leonard Wiener

(Business 2.0) – Five years ago the Internal Revenue Service launched one of the most improbable brand makeovers in recent memory: It decided to be nice. After watching the agency get pilloried in congressional hearings as an Orwellian bureaucracy, and having some of its peremptory powers reined in by legislation, IRS brass stopped their traditional growling about tax deadbeats and instead began referring to the taxpaying masses as "customers." Then-commissioner Charles Rossotti told reporters that he defined the agency's mission as helping his fellow citizens "figure out the best way to meet whatever obligations they have under the tax law."

Now Uncle Sam wants to take the IRS back to the future.

Problem was, the gentler the agency became, the more people and businesses evaded taxes. Today an estimated $255 billion goes uncollected because of eroding compliance. With the federal budget deficit expected to reach $500 billion this year, the U.S. Treasury can't afford any more Mr. Nice IRS Guy. The Bush administration's 2005 budget proposal seeks to collect some of those missing billions by giving the agency an additional $393 million to hire 2,900 more tax examiners, audit more returns, and outsource debt collection to private-sector firms. Mark Everson, the enforcement-minded commissioner hired last spring, has signaled the return of the old model by, well, growling about tax deadbeats.

The upshot: Individuals and businesses are in for a lot more scrutiny than in recent years, when fewer than 1 percent of returns were audited. One group likely to get the IRS third degree is self-employed entrepreneurs whose deductions conveniently equal or surpass their income year after year. The agency has also announced plans to target public companies that write off too much compensation, often by disguising the excessive salaries of senior execs as "for-performance" pay. (Wages over $1 million are not deductible.) To put the heat on corporate tax shelters, the agency has created a new tax form that requires a company to explain in detail the difference between the income reported to Wall Street and the (inevitably lower) figure reported to the IRS. Finally, any company that failed to forward taxes withheld from employees' paychecks--whether due to negligence, defiance, or a cash crunch during the recession--is almost certain to end up in the IRS's crosshairs.

For those that do fall behind on taxes, the traditional advice still holds: Come clean. In light of the tax collector's tough new stance, shortfalls are far less likely to go unnoticed, and taxpayers stand a better chance of negotiating generous payment schedules by fessing up. At the very least, it's now more likely that confessional calls will be answered promptly by a courteous agent. That customer-focus thing may have been lousy fiscal policy, but it had its virtues. -- LEONARD WIENER