IRS Sees Tax Relief Coming, With One Collector, Not Two

WASHINGTON _ Relief is coming soon for small businesses that fall behind in turning over income, Social Security and other taxes withheld from their employees' paychecks.

Small businesses owing such taxes must typically contend with the competing claims of federal and state tax collectors, either of whom can file a lien. That can cause an enterprise that is temporarily cash-starved to collapse.

The Internal Revenue Service now believes, however, that it can increase tax collections and reduce collection costs by coordinating efforts with state tax agencies. Within two years small businesses would need to deal with only one tax collector, who would have authority to negotiate on behalf of both the federal and state governments.

To induce states to cooperate, the IRS would forgo its supremacy in collecting the back taxes, and it would split any collections with the states.

Beverly P. Monaco, the IRS official in charge of relations with state tax agencies, told the IRS Commissioner's Advisory Group at its quarterly meeting Wednesday in Washington, that a pilot program in San Jose, Calif., involving 200 businesses that were chronically late in submitting federal and state unemployment insurance taxes had produced dramatic results.

Businesses default on 50 percent to 75 percent of such agreements, she said, but there have been no defaults in San Jose.

"The business people involved are very happy," Monaco said in an interview. "Business people who had been running from us, and from the state of California, are now coming in, saying they understand they can work out an agreement with both of us."

The agreements require the businesses to keep all taxes current and to make agreed-upon payments to reduce the back taxes, she said. The payment schedules are tailored to fit the cash flow of each business, she said.

Monaco said that "easily within two years" she expected the IRS to authorize its regional and district offices to sign contracts with state tax agencies to coordinate collection of overdue payroll taxes.

"We expect tax collections to increase, even though we will split the money with the states, and we expect the expense of collection to go down," Monaco said.

Mary Craig, a former Montana state revenue commissioner who serves on the advisory group, said the IRS was also exploring joint training of federal and state tax auditors, examiners and collectors. She said the first such training would begin soon in Montana, probably to be followed by joint training in Indiana.

In another development, a document from an advisory group committee disclosed that the IRS is considering increased record-keeping requirements for all small businesses, even part-time enterprises run from a kitchen table, to reduce the need for tax audits.

Among the options being discussed, the document showed, are requiring small businesses to keep separate business and family checking accounts and requiring that an annual cash flow statement be submitted to the IRS.

Monaco said that she was surprised to find the disclosure in the document, adding the IRS had not intended to make the proposals public yet.

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