The Internal Revenue Service (IRS) has launched a major reorganization, one that will have a hefty impact within the next year on how the agency serves small businesses. The good news is that entrepreneurs will have an easier time dealing with the restructured IRS. The bad news is this: The new IRS will be performing substantially more of what it calls "examinations" (that's "audits" to you and me) of small businesses and self-employed individuals.

Currently, the IRS comprises 10 service centers, located throughout the United States. Each of these centers is required to handle all aspects of taxation for every category of taxpayer. This setup is not very practical and it's far from efficient. A small business owner who calls the IRS with a question pertaining to his or her business's tax returns stands a high chance of being "helped" by a representative who knows very little about small business taxes. This is one of the problems the new organization is seeking to alleviate.

The restructured IRS will comprise four divisions:

• Wage and Investment will deal with individual tax returns that do not include self-employment income.
• Large and Mid-Size Businesses will handle corporations that have more than $5 million in assets.
• Tax Exempt and Government Entities will monitor nonprofits, employee plans, and government groups.
• Small Business and Self-Employed will handle unincorporated sole proprietorships, partnerships, and individuals with part-time ventures, specifically partnerships and sole proprietors with more than $100,000 in total gross revenues, and small corporations with less than $5 million in assets.

Staffed by 39,000 employees, Small Business and Self-Employed will be the largest of the four divisions. Roughly 45 million taxpayers, representing about 40 percent of total annual IRS collections, will fall within its jurisdiction.

The goal of the Small Business and Self-Employed division is simple: Increased efficiency in helping entrepreneurs, and greater effectiveness at collecting taxes. Because this division will deal exclusively with small business owners and the self-employed, its advisors will quickly become specialists in small business tax law. As such, they will be able to answer questions and deal with problems more rapidly and accurately than under the current organization.

This focus, however, could be a mixed blessing to entrepreneurs, as it will expose areas where tax information is often reported incorrectly, which the IRS rightly views as potential tax revenue.

Anne-Lee Castlehoff, a CPA and tax professional in the Dallas office of Ernst & Young, characterizes the small business and self-employed market as an abundant source of untapped revenue. "The latest government estimates indicate that approximately half of the people who file a return including a Schedule C - the profit and loss schedule for a sole proprietorship - are, to be blunt, taking advantage of the fact that there have been so few audits performed in recent years. People have gotten very daring. That's all about to change."

Fueling this change is an increase in funding that Congress approved and the IRS is putting toward boosting its audit rate, which for small businesses has indeed decreased dramatically during the past 10 years. For fiscal year 1999, the IRS audited 64,000 small businesses. The agency is ambitiously aiming to audit 114,000 small business returns for year 2000, and 164,000 for 2001.

If your company is selected for an audit, your best defense is to respond proactively. Knowing what an auditor is likely to be searching for and preparing in advance to answer his or her questions will help you turn what could be a very stressful situation into a mere inconvenience.

Go straight to the source for the best information - the IRS Audit Technique Guides will tell you exactly which items in your tax returns and business records an auditor will want to examine in the areas of income, expenses and deductions, loans and interest, employee classifications, and payroll.

You can't prevent the IRS from auditing your company's books. But, if you take advantage of the accurate, timely, and authoritative information the Small Business and Self-Employed division promises to deliver, you should pass an IRS examination with flying colors.