Senate Mandates Private Tax Collectors, Despite Past Failures
by Scott Klinger, 4/18/2014
On April 3, the Senate Finance Committee unanimously approved a package of tax breaks, heavily tilted to corporations that will cost the Treasury an estimated $85 billion this year. Most of these tax giveaways were part of a package known as “tax extenders” that expired at the end of last year. These breaks were not required to be “paid for” with other budget cuts or revenue raisers, unlike emergency unemployment benefits and other programs that Congress won’t pass without taking funds from some other program. However, Congress did adopt additional new tax breaks for businesses that required additional offsets/transfers from other program spending.
One new tax break broadened the controversial research and development tax credit. In order to pay for the additional $2 billion tax break, which would allow start-up businesses engaged in research activity to forego paying payroll taxes on their employees earnings, Senator Chuck Schumer (D-NY) introduced an amendment requiring the IRS to hire private debt collectors to pursue monies owed to the IRS.
The Treasury Department currently has four preferred contractors eligible to perform the work outlined in the Schumer amendment. Two of them are in Senator Schumer’s home state of New York and another is located in Iowa, home to Senator Charles Grassley, another leading supporter of outsourcing the IRS’s debt collection work.
The Secretary of the Treasury already has the authority to employ private debt collectors to collect government debts, but has chosen not to use that authority, for one simple reason: it doesn’t work. The IRS has tried using private debt collectors twice in the past, and both experiments failed miserably.
A 1996 pilot program using private debt collectors was cancelled after 12 months when participating firms were repeatedly found to violate the Fair Debt Collection Practices Act. The effort resulted in large profits for the private collection agencies and a $17 million net loss to the government.
Another attempt to use for-profit debt collectors was made after the American Job Creation Act of 2004 was signed into law by President George W. Bush. (This law provided a generous tax holiday for multinational corporations bringing their foreign profits back to the U.S. It was passed under the guise of creating U.S. jobs, even though those that enjoyed the biggest tax windfalls shed more than 60,000 jobs.) Under the terms of the program, the private debt collectors were permitted to keep 21-24 percent of what they recovered as a “bounty payment.” This incentivized the debt collectors to abuse and harass taxpayers. Many cases of such abuse were reported, including one case where debt collectors placed 150 phone calls to the elderly parents of an adult child with unpaid taxes.
By law, tax information collected by the IRS is among the most sacrosanct information held by the government. Privacy rules limit the amount of information that can be shared with private debt collectors, and rightly so. As a result, private debt collectors have fewer tools to assist in the collection of debts than public employees do. IRS employees are able to understand the economic context and constraints a taxpayer may be operating under and offer payment plans, and in some cases, forgive penalties and interest in exchange for payment. Private debt collectors, by contrast, have no such flexibility. Instead, they have an incentive (the 21-24 percent cut of the taxes collected) to demand immediate full payment.
The 2006 effort was projected to bring in $2.2 billion, but an independent review by MITRE Corp., commissioned by the IRS, found that the program had actually lost $4.5 million for the public sector, after accounting for the costs of setting up the program and the $16 million in bounty payments paid to private collection agencies. The program was cancelled in March of 2009.
Last year, Nina Olson, the National Taxpayer Advocate, (an independent taxpayer ombudsman within the IRS), called upon Congress to withdraw IRS authority to hire for-profit debt collection agencies. She cited data showing that IRS agents collect 62 percent more in back taxes than private collection agencies. Private debt collection agencies had the first crack at the $1.6 billion pool of delinquent taxpayer debt and succeeded in collecting just 5.4 percent of these debts ($86 million) mostly from low-hanging fruit, before handing the pool back to the IRS for further collection. Though the easy cases were all settled and all of the debts were older by the time they were returned to public employees for collection, IRS agents were able to collect another 9.2 percent of the remaining pool ($139 million).
Unfortunately, IRS employees are not getting through the backlog of tax debtors because the agency’s budget has been repeatedly cut in recent years. Rather than funding IRS employees to do their jobs, jobs they do far better than their counterparts in the for-profit sector, the Schumer amendment would force tax agency employees to spend their time overseeing the work of private contractors, who have demonstrated they are prone to violating taxpayer rights, and to investigating complaints from taxpaying citizens against the private firms,.
Source: IRS Oversight Board
Each dollar the IRS spends on enforcement, generates $6 in additional revenue to the government, yet Congress has steadily cut the IRS’s budget in recent years, while giving it broad new responsibilities, such as policing eligibility for health care subsidies under the Affordable Care Act. If Senator Schumer and the members of the Senate Finance Committee were serious about raising additional revenue to offset the costs of more corporate tax breaks (rather than simply sending contracts and profits to businesses in their states) they would invest more money in IRS’s enforcement and collection efforts.
Collecting taxes is an inherently governmental function, something that the government is uniquely positioned to do. Existing law makes it clear that inherently governmental functions are not to be outsourced. Given the legacy of failure with past attempts to outsource/privatize IRS debt collections, we should expect similar abuses should this ineffective and wasteful legislation pass.