Despite Complaints, Past Failures & Opportunities For Fraud, Congress Pushes Private Tax Collection

Those who fail to learn from history are doomed to repeat it.
- Winston Churchill

Sometimes it feels like the government does this best. Failed policies are often recycled - often many times - in some sort of desperate attempt to make them work. Or to spend taxpayer dollars to promote self-serving agendas. Sometimes it's hard to tell the two apart.

The latest attempt to recycle failed policies is the outsourcing of tax debts to private collectors, an item which has re-appeared as part of the Highway Trust Fund Bill. Yes, you read that right. And no, the two really have nothing to do with each other. But this is, as you know, something that Congress loves to do (Remember those credit card reporting requirements that found their way into the Housing and Economic Recovery Act? Or last year's Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 that changed tax return due dates?). So, as Congress moves to slap another band-aid on the wounded Highway Trust Fund (we technically ran out of highway money on October 29), they decided to toss in a handful of other provisions in an effort to sneak them by taxpayers make it look like they were getting something done move things forward.

One of the provisions buried inside the Highway Trust Fund is a requirement that IRS use private collectors to collect existing tax debts. Brilliant, right? Only not so much. It's been tried and failed before (more on that in a bit) so it's perplexing that Congress would re-introduce the policy except for well, politics. The House is not a big fan of the Internal Revenue Service right now - a cynic might view this as a move to systemically take down the IRS.

I know, big cheers, right? Nobody is a fan of IRS. But here's the thing. You might not be a fan of the IRS but I'm guessing you're likewise not a fan of government waste. And empirically, when it comes to collections, the IRS is surprisingly very good at what it does.

The tax gap in the United States is estimated to be $385 billion. The tax gap is the difference between what IRS expects to collect in taxes and what they actually collect. This takes into consideration not only uncollected tax debts but also includes non-filers and those who underreport. The latter, according to IRS, is the biggest contributing factor to the tax gap. So while that number represents a lot of uncollected tax dollars, don't be fooled into thinking it's a big pile of IOUs sitting in a corner: it's not.

Those folks that aren't paying the right amount on time may do so for a variety of reasons. Yes, there are cheaters and evaders but there are also those that don't have the resources to pay or that may not understand their tax burden. As a tax attorney, I've seen more than my share of taxpayers who fall into a hole and just can't figure out how to climb out. The use of private debt collectors won't change that - and could make it worse. In fact, an analysis found that 79% of the cases which would be required to be outsourced to private debt collectors under this new provision "involve taxpayers with incomes below 250 percent of the federal poverty level." In other words, those debts are attached to folks who wouldn't be able to pay up anyway (downloads as a pdf).

But let's assume that those private debt collectors just attack - with vigor - the 21% that might be able to pay. That's something, right?

Not really. About 20 years ago, the IRS tried their hand at using private debt collectors. That lasted a year and was canned amid complaints about unfair practices and harassment. Congress made another go at private tax debt collectors during the George W. Bush administration as part of the American Jobs Creation Act. It didn’t end happily. That program "resulted in a number of complaints, including one case in which a private debt collector made 150 calls to the elderly parents of a taxpayer" even after the collection agency discovered the taxpayer was no longer at the address. That's right, 150 calls to the elderly parents of a taxpayer when they knew the taxpayer wasn't there. On your dime. Three of the companies that won bids to chase your tax dollars were eventually dropped due to complaints about collections practices and thousands of dollars in penalties were paid out for violations of taxpayer rights.

But that's all good if they are successful, right? The whole "end justifies the means" bit?

Only those private debt collectors weren't successful. The 1996-1997 program resulted in a $17 million net loss to the government. That second go in the mid-2000s? Another loss of $4.5 million. Those aren't costs. They're losses. In terms of costs, the government paid out $16 million in commissions to private collectors in the mid-2000s. An additional $86 million was paid out simply to administer the program – in other words, the cost of producing the result. That result was a net loss.

A 2013 study by the National Taxpayer Advocate (NTA) found that "the IRS was significantly more effective than the PCAs [private collection agencies] in collecting tax liabilities in all but the first six months after case receipt, collecting about twice as much as a percent of the dollars available for collection." Those first six months? The NTA attributes that statistic to the fact that private collectors worked the easy cases first - the ones where IRS employees had already done all of the legwork. After that time, the NTA found, the amount collected by those debt collectors "falls precipitously." Cases that were more than one and a half years old, for example, resulted in a ratio of about 1:5 in favor of IRS for collections.

You can read the study here (downloads as a pdf).

When Nina Olson, the Taxpayer Advocate, reached out to Congress about the program last year, she wrote:

Based on what I saw, I concluded the program undermined effective tax administration, jeopardized taxpayer rights protections, and did not accomplish its intended objective of raising revenue. Indeed, despite projections by the Treasury Department and the Joint Committee on Taxation that the program would raise more than $1 billion in revenue, the program ended up losing money. We have no reason to believe the result would be any different this time.

Let's assume for a second, however, that it might be different. What else is there to consider? Your privacy. Remember those costs dedicated to the 2006 program? Some of those costs were an effort to make sure that private data stayed private. That’s right. Your data. Your address. Your Social Security number. Your date of birth. Your banking information. Your retirement accounts. Where your kids go to daycare. How much you spend on medical care. Your tax preparer. Your employer. Your income. The IRS has strict protections in place to safeguard taxpayer data - even though clearly it needs work. But third party debt collectors? Not so much.

You may not completely trust the IRS but do you trust debt collectors more? Year after year, the Federal Trade Commission receives more complaints about debt collectors than any other industry. In 2013 alone, there were over 200,000 complaints filed with respect to collection practices (you can see a list of collectors banned from the industry here). Likewise, the Consumer Financial Protection Bureau (CFPB) reports that over the past two years, the top complaint in the financial product or service industry is attributable to debt collection, constituting nearly one-third of all complaints. Included in that number? Numerous complaints against The CBE Group, one of the private collectors used as part of the last program to outsource the collection of IRS debts, including one man who testified in front of Congress that the company's attempts to collect a tax debt were "incredibly annoying and frightening."

And what about efforts to resolve cases that might not be legitimate tax debts? That's not even in the purview of private debt collectors. Their job is simply to collect, not to resolve cases or mitigate damages. The IRS will work with you to fix those mistakes while a private collector has no incentive to help you resolve your issue. A 2014 Government Accountability Office (GAO) report noted that "private collectors gave inaccurate or misleading information about borrowers’ rights and options." In fact, sometimes they brazenly look the other way. That was clear to me in my own practice when a private collection agency for the City of Philadelphia (and one which had been retained by IRS in 2006 and released shortly thereafter) informed my client, who had written evidence that the debt was not owed, "That’s not my problem."

There's one more giant elephant in the room: fraud. Over the past two years, nearly 4,550 victims have collectively paid over $23 million to scammers posing as IRS officials. Since October 2013, the Treasury Inspector General for Tax Administration (TIGTA) has received reports of roughly 736,000 contacts made to taxpayers demanding that they send them cash via prepaid debit cards. Last year, J. Russell George, the Inspector General called it "the largest scam of its kind that we have ever seen" - and new variations on the scheme are popping up all of the time.

TIGTA, IRS and Treasury have all warned taxpayers to be on guard against scammers, reminding them that "It’s worth noting that the IRS doesn’t generally initiate contact by phone." But private debt collectors do. Can you imagine the confusion that will be had by taxpayers when you add in one more collections opportunity?  If you think taxpayers, especially older and vulnerable taxpayers, are being cheated now, just think of the opportunity this now creates for scammers.

The reality is that outsourcing tax debt collections is filled with potential traps for taxpayers with very little in the way of reward. It's been tried and failed not once, but twice, in the past twenty years. Yet, Congress keeps pushing forward.

There's another chance for sanity later today: the House Rules Committee will review the bill and amendments today.

You can read the entire Highway Funding Bill here (downloads as a pdf).