One tax news item getting recent attention from the news media is the IRS program of contracting with private debt collection agencies to address delinquent taxpayer accounts. The Jobs Act of 2004 authorized this program, in an effort to fill the “tax gap” – the difference between amounts owed and collected. By some estimates, the tax gap is in the hundreds of billions of dollars each year – possibly enough to erase the deficit. You will never completely close it, but making some progress is a good thing.
Folks of all political stripes have been raising questions about this program. Some have questioned the fees paid to the private firms – which are over 20% of debt collected – as expenses that could otherwise be avoided if this work were done “in house”. However, that presupposes that we have enough human resources in the IRS to do that work. If it means adding more government employees, who knows if the 20% figure might be a competitive result.
Some might also be worried that the private debt collection firms will engage in practices that are unbecoming the government. This is admittedly possible, but then sometimes even the government engages in unbecoming conduct. To be sure that “the family” doesn’t end up collecting debt, the IRS has come up with some fairly strict guidelines for background checks on participants, the kind of cases involved, and also the tactics for collection. These are discussed in a forthcoming announcement (2006-63) released in yesterday’s BNA Daily Tax Report.
According to the Announcement, the collection agencies can only be assigned relatively simple cases where taxpayers admit liability. The private firms will apparently free up government employees for other cases where this may not be true. Taxpayers working with these agencies must agree pay the entire amount, or the case is returned for government collection efforts. Installment payments of up to five years can be allowed, but no offers in compromise (i.e., requests to reduce the amount owed) will be negotiated by the private firms.
Other than freeing up IRS personnel for other work, how is this supposed to help? Are these people who just need a reminder to pay up? Are we getting something different by having a private firm ask for payment? Will private firms have personnel with more persuasive powers than a government person? One wonders about that, especially since there are lots of constraints on these firms. They are not allowed to indicate to the debtor that they may file liens or seize property, as the government might do. They are not allowed to contact third parties about the debtor’s financial condition, though they may access the Internet and other database sources. (Who needs a neighbor when there is so much about us that is already available online!) They are not allowed to hassle you by contacting you before 8 or after 9:00 p.m. They also receive only limited taxpayer information from the Government, though who knows what they will find from other sources. Privacy concerns lurk here, even though only little is disclosed by the Government, but those concerns would seem to exist apart from this program.
One other area, addressed in an IRS News Release (IR 2006-132), merits attention. If you are contacted by a private firm seeking to collect money for the government, you might want to do some checking first. Scam artists will no doubt take advantage of this situation. Those assigned to private collection firms will first be notified by letter. But if you moved (and that’s part of the reason your case is being assigned for collection), you may not get the letter. In that case, you can call the IRS to see if this is legitimate. (800-829-1040). Also, when it comes time to write a check, don’t make it out to any private firm – the check should go to the U.S. Treasury. Be especially careful here. Although the IRS is supposed to provide payment information to the debtor for mailing, you might check that address to see that it is legitimate – or if you are really worried hand deliver it to an IRS office.
Ultimately, I favor closing the tax gap, but I’m not so sure this is going to help all that much. The cautionary advice about scam artists also deserves attention in this context.