The IRS and Private Collection Agencies

The American Jobs Creation Act of 2004 authorized the Internal Revenue Service (IRS) to contract with private collection agencies (PCAs) to collect against an estimated $290 billion in delinquent taxes.

The IRS faces a rapidly widening "tax gap" between what is owed and what is collected. As the backlog of work continues to grow, 60 percent of identified tax debt cases go untouched. This includes 75 percent of taxpayers who neglect to file a tax return and 56 percent of taxpayers with income of $100,000 or more who underreport their tax obligation. (Source: Senate Finance Committee Hearing on the Nomination of Samuel W. Bodman as Deputy Secretary of the Treasury, Feb. 10, 2004, p.15.)

In 2003 alone, the IRS opted not to pursue 2.25 million cases, costing the government $14.1 billion in individual income tax revenue and $2.3 billion in corporate tax revenue. (Source: "IRS Opting Not to Go After Many Scofflaws," Washington Post, March 20, 2004.)

The amount of money the IRS left on the table in 2003 could have fully covered NASA's 2004 budget, the government's international aid programs or the budgets of the Commerce and Interior Departments combined. (Source: "IRS Opting Not to Go After Many Scofflaws," Washington Post, March 20, 2004.)

AN ISSUE OF TAXPAYER FAIRNESS

Congress and the IRS have grown concerned that the IRS's inability to collect known unpaid taxes might be affecting taxpayers' confidence in the fairness of our tax system and voluntary compliance. Because of potential revenue loss and the threat to future voluntary compliance by taxpayers, the General Accounting Office designated collection of unpaid taxes as a "high–risk area" for the federal government. (Source: U.S. General Accounting Office, Financial Audit: IRS's Fiscal Years 2003 and 2002 Financial Statements, GAO–04–216, Nov. 13, 2003.)

Former Deputy Treasury Secretary Samuel W. Bodman has stated, "Fundamental fairness requires that… we [the United States] have an effective program to collect outstanding tax liabilities. We owe that much to the millions of Americans who do their best to pay their fair share. (Source: Bodman's written testimony to the Senate Finance Committee, March 1, 2004.)

PARTNERING WITH THE PROFESSIONAL COLLECTION INDUSTRY: A GOOD DEAL FOR TAXPAYERS AND THE IRS

Many taxpayers with outstanding tax liabilities would make payment if simply contacted by telephone, and if necessary, offered the ability to pay the full amount in installments. By allowing private collections agencies (PCAs) to perform these ancillary tasks, the IRS can focus its resources on more complex cases. (Source: Department of the Treasury report, "General Explanations of the Administration's Fiscal Year 2004 Revenue Proposals," p. 98, February 2003.)

For decades, PCAs have partnered with government agencies at the local, state and federal level to professionally and efficiently recover past due government debts. In 2004 alone, PCAs under contract with the Department of Education, Department of Health and Human Services and the Treasury had referrals of $18.3 billion. The PCA program has worked so well for these federal agencies that IRS officials proposed they be allowed the same opportunity to utilize the private debt collection sector. The IRS estimates that PCAs would generate $4.60 in revenue for every dollar in cost (net after fees paid to PCAs). The use of PCAs reflects greater cost efficiency on the selected accounts referred and improves the efficiency of the IRS on the accounts it retains by allowing the agency to focus resources where they are needed most. (Source: U.S. General Accounting Office, Tax Debt Collection, GAO–04–492, May 2004, p. 16–17.)

PRIVACY AND TAXPAYER RIGHTS PROTECTED

PCAs collecting federal tax debt will follow IRS rules as well as the Fair Debt Collection Practices Act, Fair Credit Reporting Act and all other applicable federal and state collection and privacy regulations. Taxpayers contacted by PCAs will retain all the rights established by the Internal Revenue Code, including access to the IRS Taxpayer Advocate Service. (Source: IRS Request for Quotation #TIRNO–05–Q–00187, p. I–26.)

If taxpayers object to working with a private collection agency for any reason, they need only request that their case be referred back to the IRS. (Source: National Taxpayer Advocate 2005 Annual Report to Congress, p. 80.)

The IRS expects the PCA initiative will increase taxpayer satisfaction by 12.5 percent. (Source: U.S. General Accounting Office, Tax Debt Collection, GAO–04–492, May 2004, p. 25.)

The privacy of taxpayers' returns will be protected, with only a taxpayer's name, phone number, address, the tax year and the amount of taxes due provided to the private collection agencies. (Source: Department of the Treasury report, "General Explanations of the Administration's Fiscal Year 2004 Revenue Proposals," p. 98–99, February 2003.)

All contractor employees who have access to the IRS taxpayer information shall be required to undergo a federal government–conducted background investigation prior to beginning work on the project. (Source: IRS Request for Quotation #TIRNO–05–Q–00187, p. I–17.)

The IRS will conduct a competitive biding process in the selection of private collection agencies. Each contractor's work will be evaluated not only on the amount of debt recovered, but also on their sensitivity and responsiveness to taxpayers. (Source: IRS Request for Quotation #TIRNO–05–Q–00187, Attachment 1.)

All work under the private collection initiative will be performed within the United States. (Source: IRS Request for Quotation #TIRNO–05–Q–00187, p. I–2.)

PCAs shall not base employee compensation in whole or in part on dollars collected. IRS compliance reviews will include review of employee compensation methodologies to ensure dollars collected are not being used as a factor for determining PCA employee compensation. (Source: IRS Request for Quotation #TIRNO–05–Q–00187, p. I–45.)