LMSB realigns key management personnel for greater efficiency.

Several stakeholders, practitioners and business leaders have asked the IRS about recent organizational changes made to its Large and Mid-Size Business Division (LMSB), which administers taxes for businesses, partnerships and corporations with over $10 million in assets.

Most of the changes have been limited to structural modifications that will improve management efficiency and operational effectiveness. Such changes have adjusted the managerial "span of control" by correcting a long-standing imbalance in the number of employees reporting to managers; eliminated management redundancy and overlap in some field offices; and adjusted the geographic "footprints" of its Industry areas to become more compact and cohesive. Throughout this process, the IRS has sought to preserve the working relationships between revenue agents and the taxpayers assigned to them.

LMSB at Startup

LMSB first emerged as an IRS division in June 2000 following a Congressionally-mandated restructuring. The change was comprehensive and focused heavily on expanding taxpayers' rights and improving customer service. It altered the IRS in profound ways, and LMSB's formation was just one of many significant outcomes.

The designers of LMSB wanted the division to deliver high-quality services to taxpayers, vigorously promote corporate tax compliance, quickly respond to emerging compliance risks and treat taxpayers fairly and consistently. They sought to create an organization that would foster a strong sense of community within and enable employees to develop the specialized skills and knowledge they needed to perform their jobs effectively.

As a result, a unique organization emerged. Its core would consist of five industry-specific groups, more commonly known as "Industries," under the premise that certain services, enforcement issues and trends tended to be industry-specific and such an alignment would promote consistency, which is important to fair tax administration.

LMSB's original Industries included Communications, Technology and Media; Financial Services and Healthcare; Heavy Manufacturing, Construction and Transportation; Natural Resources; and Retailers, Food and Pharmaceuticals. This lineup changed slightly in 2002 when Healthcare merged with Retail, Food and Pharmaceuticals, and Construction merged with Natural Resources, but the five-Industry model remains central to LMSB's operations today.

When LMSB first emerged, just as today, its revenue agents worked individually or in teams, assisting taxpayers with pre-filing activities, inspecting corporate and related tax returns, and conducting examinations. Agents reported up through one of LMSB's five Industries, depending on the industry segment of taxpayers they served. On an as-needed basis, agents would involve other LMSB personnel in examinations (e.g., international examiners specializing in multinational tax issues; field specialists providing in-depth technical expertise on many complex subjects; and pre-filing and technical guidance staff overseeing various examination processes and providing guidance on sub-industry tax issues).

Agents and managers from LMSB's various Industries tended to be located together in cities where corresponding taxpayers had a strong presence; decisions on where to situate agents were heavily influenced by taxpayers' geographic distributions. For example, a large number of Financial Services agents reported to IRS offices in New York City, the headquarters for many banks, finance service firms and insurance companies. Similarly, many Communication, Technology and Media agents worked from offices in San Jose, California, the heart of the Silicon Valley.

While the five-Industry structure proved highly successful in bringing an industry-specific focus to taxpayer services and compliance programs, it also produced certain challenges. Most of these involved workload imbalances across teams, and management duplications and overlaps in some posts.

Workload imbalances were unpredictable and required ongoing vigilance. Duplications and overlaps in management tended to occur when revenue agents from several different Industries were resident in a single post-of-duty. Because each Industry had its own separate management structure (up to and including an Industry Director), it was conceivable to have multiple lines of Industry management "touching" a single office. This resulted sometimes in conflicts in how issues were approached and in the directives given to employees. Workload imbalances and management overlap were cited by LMSB team members as major frustrations.

Early Adjustments

In early 2002, the IRS revisited its organizational structure, and the unnecessary complexity the arrangement was creating for LMSB managers and employees. In addition to team member frustrations, it found directors and territory managers spending too much time traveling, which was using valuable time that could otherwise be spent meeting with taxpayers and examination teams. Overall, instead of having a strong sense of community, LMSB seemed divided along Industry lines.

In mid-2002, adjustments were made to correct the problems. The IRS realigned its Industries and territories to improve geographic congruency and increased the use of cross-Industry tax examinations as a way of balancing the workload across the various Industries and posts-of-duty. It coupled these actions with internal governance, which addressed cross-Industry decision-making. The adjustments reduced the number of LMSB posts-of-duty with multiple Industry overlaps from 58 to 16. These changes and others helped foster a greater sense of teamwork within LMSB and markedly improved employee satisfaction.

Recent Modifications

In mid-2005, LMSB conducted a study of managerial span of control as part of a broader IRS initiative. The study pointed out inconsistencies, particularly within the ranks of the frontline managers. It also identified opportunities to reduce further multiple Industry crossovers within LMSB posts-of-duty. Over the course of several months, LMSB realigned the geographic footprints of its five Industries and further consolidated territories. Within these new boundaries, it realigned work teams to ensure greater consistency in managerial span of control. Ultimately LMSB reduced the total number of territories by seven, and teams by 35.

Throughout the realignment, LMSB sought to preserve existing revenue agent/taxpayer relationships. These efforts were largely successful: most revenue agents were able to retain their existing taxpayers without any disruption. In the few instances in which changes were necessary, steps were taken to ensure smooth transitions.

LMSB sought also to minimize leadership disruptions, although a geographically influenced realignment would inevitability cause some areas of responsibility to change. In particular, directors of field operations and territory managers (LMSB leaders who possess line authority over revenue agents in tax cases) were affected, some of whom ended up being responsible for different LMSB teams and taxpayers. LMSB'S executive team worked closely to ensure that the territory, team and taxpayer transitions went smoothly.

The Future

Through its realignment, the IRS has sought to retain the benefits of focusing on taxpayers and consistency, which the industry-aligned structure has provided, while at the same time achieving the efficiencies that can be realized through geographic alignment.

Maintaining a Strong Industry focus remains a top priority, and in the coming months LMSB will continue to provide leadership and guidance on complex industry and sub-industry tax issues. It will continue to build and expand the resources available to managers and teams, and take steps to ensure their access to the latest industry-specific technical guidance and policies. It will continue to provide continuing professional education that focuses on industry and sub-industry issues, to ensure employees' specialized skills and knowledge. Its leaders will work collaboratively to identify and address procedural and technical issues affecting taxpayers, including procedures for cross-Industry management involvement. One of LMSB's guiding principles is to be responsive to taxpayers' compliance needs in a fair and efficient manner. Maintaining strong industry focus is one way to accomplish that end.

The IRS will continue to evaluate its structure, products and processes to enhance its ability to respond to taxpayers' needs, improve services and deliver fair, consistent and effective tax administration.

Editor:

John L. Miller, CPA 

Faculty Instructor

Metropolitan Community College

Omaha, NE

Mr. Miller is a member of the AICPA Tax Division's IRS Practice & Procedures Committee. Messrs. Keenan and Bloom are members of that Committee. For further information about this column, contact Mr. Miller at [e-mail].

FROM DEBORAH M. NOLAN, COMMISSIONER OF LARGE AND MID-SIZE BUSINESS DIVISION, IRS