The IRS Targets Small Biz

S corps and partnerships among those to receive new scrutiny.

Companies with less than $10 million in assets paid an astounding $915 billion in taxes for 2001, but that turns out to be not nearly enough. The Internal Revenue Service estimates the total "tax gap" -- the difference between what all taxpayer groups pay and what they owe -- to be at least $278 billion. Small businesses, with more room to maneuver than many other taxpayers, account for a big chunk of the uncollected revenue, and thus can expect special attention from the agency in the future. Some 34,000 small business owners will get face-to-face audits over the next two years as part of a new research program. The IRS is also scrutinizing K-1 forms filed by flow-through entities like S corporations and partnerships. In the past, the agency found it difficult to match the profits reported on those forms with the personal returns of business owners. Thanks to new software, they're getting much better at it. "We want small business taxpayers to feel that if they're doing what they're supposed to do, then everybody else is, too," says James Kehoe, the new head of the division that deals with companies with less than $10 million in revenue. "And that if they're not," he adds, "the IRS will deal with that -- abruptly, quickly, efficiently, and fairly." --Kenneth Klee

How Resilient was My Valley

The epicenter of the dot-com bubble has taken one hell of a beating, several new reports confirm. Silicon Valley has shed 127,000 jobs since the first quarter of 2001 -- about 9% of the work force -- and annual salaries tumbled 6%. Still, Valley veterans say boom-bust cycles are merely a way of life: Since the '60s, when defense contracting collapsed and the semiconductor industry replaced it, every decade has seen one. They note that the number of new jobs created over the last decade still tops 300,000, and capital investments increased 11% in the last quarter of 2002. Plus, the environment is perfect for start-ups: Office vacancies are high, rents have fallen 67% to a six-year low, and the talent pool remains top-notch. "The sentiment here is one of perpetual hopefulness," says venture capitalist Steve Jurvetson, who is now funding companies that mix science and information technology. --Matthew Fogel

The Tax Man Eyes Web Sales

With states struggling to close yawning budget shortfalls, supporters of Internet sales taxes are again making their case. Members of the Streamlined Sales Tax Project (SSTP) -- a group currently pursuing e-commerce sales tax legislation in 30 states -- met in January at the Hyatt Regency in Tampa to coordinate strategy. Diane Hardt, co-chair of the SSTP, argues that an Internet sales tax will "level the playing field for small business." She cites anecdotal evidence that brick-and-mortar retailers from musical-instrument sellers to hardware outfitters routinely witness customers finding what they want by browsing in stores, and then ordering online to avoid paying sales tax. Though there's much haggling to be done, the SSTP would like the sales tax on Internet businesses (and mail-order companies, too) to be collected via certified software or service providers. "Our goal is to reduce the compliance burden," says R. Bruce Johnson, a Utah state tax commissioner and an active SSTP member. --Patrick J. Sauer

Search Industry Shaken, and Sued

It has been a rough two years for executives, but it's been even worse for the people who recruit them. In the past 18 months, total revenue in the recruiting industry has shrunk by an estimated $1.5 billion, says Joseph Daniel McCool, editor of Executive Recruiter News. He also reports that 500 firms -- 10% of the industry -- have gone out of business recently. That's a far cry from the go-go '90s, when it was common for recruiters to achieve revenue growth of 15% annually. "It's been an unprecedented reversal of fortunes," McCool says. A pending lawsuit in Florida also clouds the industry's future. Mount Sinai Medical Center, a Miami-based teaching hospital, is suing blue-chip search firm Heidrick & Struggles International, claiming it hired a CEO that the firm characterized as a "financial success" -- even though he reportedly presided over tens of millions in losses at two previous jobs. Mount Sinai claims it lost $64 million during this executive's tenure, and that Heidrick & Struggles is liable. While many in the industry argue that customers should take greater, rather than less, responsibility for their searches, "the industry has never been comfortable talking about accountability," admits Mark Jaffe, president of Wyatt & Jaffe, a search firm in Minneapolis. --M.F.

10% of search firms have gone under in the last 18 months.

Are You Mogul Material?

That's the question historian Maury Klein set out to answer in researching The Change Makers: From Carnegie to Gates, How the Great Entrepreneurs Transformed Ideas Into Industries. The author -- whose biography of Jay Gould was a Pulitzer finalist in 1986 -- tells staff writer Nadine Heintz about his latest book, due out this month.

What characteristics did the great entrepreneurs have in common? Above all, persistence. They focused on ideas and figured out how to make them work. Wal-Mart founder Sam Walton put it most succinctly. When people asked the discounter how he had become so successful, he'd reply, "Friend, we just got after it and stayed after it."

Some great moguls were brilliant inventors but decidedly bad businessmen. That's true. They all knew how to take an idea and turn it into a small business. But once their companies started growing, only a handful had good organizational and management skills. The worst businessman was Edison. As he got older, he just couldn't keep up with his large, complicated company.

So who were great organization-builders, and how did they do it? John D. Rockefeller and Bill Gates. Rockefeller created the blueprint for organizing a large corporation by using a committee system to delegate authority. And Bill Gates was one of the first executives to use stock options as a way of rewarding employees.

Were the personalities of the entrepreneurs you studied similar? Actually, they ran the gamut from an amazing guy like Warren Buffett to Cornelius Vanderbilt, who deserves the term "bastard." He terrorized his wife and children. When his shipping company started growing, he wanted to move from the Staten Island countryside to a Manhattan mansion. His wife refused, so he put her in an asylum until she acquiesced.

SBA Fattened, Loan Program Starved

Long ignored by lawmakers as a policy black hole, the Small Business Administration suddenly finds itself in the political spotlight. First, President Bush made small-business tax relief a priority. Then, the White House proposed boosting the SBA's budget to $797.9 million next year -- up 8.1% over 2003. But Democrats like John Kerry charge Bush is no true ally of small business. The Massachusetts senator points out that Bush would fund the SBA's most widely used financing program -- guaranteeing section 7(a) business loans -- at $9.3 billion -- $3 billion lower than in 2002. Along with Rep. Nydia M. Velzquez (D-N.Y.), who serves on the House Small Business Committee, Kerry also criticizes Bush's plans to raise borrower fees for Small Business Investment Corp. (SBIC) venture capital funding, and to eliminate a microlending program. The White House would instead fund SBA staff training and Internet initiatives. "The President says small businesses are the engine of economic growth," says Kerry, former chair of the Senate Small Business Committee, "but he won't put any gas in the tank." --Elizabeth Wasserman

Investing in a Better Rush Hour

The government wants companies to help out commuting workers by paying their mass-transit fares or their gas money for carpools. Company subsidies typically can save a worker up to $800 a year. The feds, hoping to ease traffic, let businesses set aside $100 tax-free per employee to fund such benefits. Seven states also offer credits. Through local publicity, an Environmental Protection Agency initiative ( also supports businesses that defray commuting costs. One of the program's 1,350 participants is Idyll Ltd., a tourism business in suburban Philadelphia that offers its 24 employees an array of perks that include transit checks, free bike tune-ups, and even a stipend for walking shoes. "It's good for the environment, and our employees are happier," says office manager Ellen Peters. --M.F.

Yes, Women Can Golf in Augusta

Forget Playstation 2. The gaming industry's true star is the golf game Golden Tee, an old-fashioned standup (pictured at right) that four people can play at a time. The game costs $3 per person for a round of 18 and grossed $400 million last year. Manufacturer Incredible Technologies Inc. (known as IT) boasts that the game also drove an astonishing $750 million in food and beverage sales at the bars where duffers lie. Golden Tee has gotten so popular that some bars offer lunch-hour reservations, and fans clamor when the company begins updating course designs each year on its 100,000 machines nationwide. But the key dates on the Golden Tee calendar are April 12 and 13, when the privately held gamemaker hosts an $85,000 tournament in Las Vegas. In 1996, Golden Tee's sales trajectory began to mimic a John Daly drive, and since then it has produced steady revenue for IT, its network of distributors, and local route operators who split the cashbox with bar owners. IT CEO Elaine Hodgson reports the company rolled out a buck-hunting game last year and also hopes to draw more women to its version of golf -- in contrast, say, to a certain club where the Masters will be held this month. Memo to those rebuffed by Augusta National: A nearby bar called Squeaky's Tip Top welcomes your business. Says owner Linda Rhodes: "People come in to play Golden Tee every day, and they're usually drinking beer and eating something." --P.J.S.

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