Tuesday, May 27, 2014

Private Debt Collectors to Chase Delinquent Taxes?

As Washington DC legislators in the U.S. Congress consider the provisions of what would become part of the EXPIRE Act of 2014, they are mulling over the institution of a twice failed program to collect past due tax debts – the use of private debt collection agencies.  In each of the last two decades the attempts to use private debt collectors to chase tax liabilities have defied projections and lost more money than was collected.  Recently, the National Taxpayer Advocate has written a letter to the senate (found here) to reiterate that problem and to outline the numerous other concerns with any such program.  These are:
  1.  The private debt collection initiative is premised on the mistaken belief that the IRS does not collect taxes on cases that are inactive or awaiting assignment.
  2. The private debt collection program will require the IRS to incur significant start-up costs, jeopardizing taxpayer service and other IRS operations that are already suffering from budget cuts. 
  3. The government’s objective of maximizing long-term compliance without causing financial hardship for taxpayers is fundamentally different from the profit-maximizing objective of a private collection agency.
  4. The provision appears to target low income taxpayers.
  5. Providing taxpayer identifying information to private companies creates risks that taxpayer data will be misused.
  6. Strict penalties on IRS collection employees who are abusive to taxpayers do not apply to private collection agency employees who are abusive to taxpayers.
  7. IRS employees are openly instructed to be straightforward in dealing with taxpayers, while employees of private collection agencies confidentially instruct their employees to use “psychological” techniques to pressure taxpayers to agree to payments.
  8. Use of “psychological” tactics often results in financially struggling taxpayers feeling pressured into making commitments they ultimately cannot keep.
  9. The proposal would require IRS to send taxpayer cases to private collection agencies where the sole or primary reason for the liability is the Patient Protection and Affordable Care Act (ACA) (either the penalty for not getting coverage or owning back an advance premium credit), which, in turn, could make it more difficult for the IRS to administer the ACA.
  10. The private debt collection program will raise little revenue and is more likely to be another revenue loser.
  11. The proposal would require the IRS to continue the program even if it loses money and does not give the IRS sufficient discretion to make modifications.
  12. The National Taxpayer Advocate is uncertain about what the proposal is intended to accomplish.
It is my hope that this potential program does not make its way into any form of final legislation.  A program that has previously proven to cost more than it makes is simply a bad idea.  Moreover, the Taxpayer Advocate outlines the clear problems that are likely to arise.  The targeted low income taxpayers are less likely to know what their legal options are in contesting asserted liabilities.  Those that do may not be able to afford to hire adequate representation to assist them.  Given the significant budget cuts faced by the IRS, agents are already unable to spend enough time on a file to make sure all rights are protected.  An unrepresented low income taxpayer will be at a greater disadvantage because they may not even know that these rights exist. 

To read the full text of the Taxpayer Advocate’s letter objecting to the use of Private Debt Collectors, click here.