New IRS tactic: private debt collectors

By Marilyn Lewis

You may not like the IRS much but, if you owe money to Uncle Sam, these days it's a case of the devil you know. Starting in September, the IRS began using private debt-collection companies to retrieve back taxes from taxpayers in arrears to the government for $25,000 or less.

In this IRS pilot project, 40,000 delinquent accounts will be assigned to three private debt-collection firms. The private debt collectors will keep up to 25% of what they bring in.

Critics of the program say that, compared with private debt collectors, whose bad apples star in countless horror stories of debtor abuse and intimidation, the IRS's customer-service-based approach may start looking pretty good to taxpayers.

Critics have three chief complaints:

• That the financially motivated collection companies may hound and harass tax debtors illegally.

• That sensitive taxpayer information -- Social Security numbers and other personal details -- may be compromised in private hands, resulting in fraud and identity theft. The Treasury Department's own Taxpayer Advocacy Panel says that "outsourcing (tax collections) … increases the potential for identity theft and gross abuse of taxpayer data without adequate safeguards."

• That although the privatization program could raise about $1.4 billion over 10 years, too big a chunk -- $330 million, or 23.5% -- would go to the private collection agencies. It's more cost-efficient for IRS employees to do the collections, former IRS Commissioner Charles Rossotti has told Congress. The current commissioner, Mark Everson, agreed (read details at OMB Watch, a nonprofit government watchdog) but said Congress hasn't given the IRS enough money to hire the necessary staff.

Objections abound

The Taxpayer Advocacy Panel, a federal advisory body established in 2002 by the Department of Treasury to improve IRS responsiveness to taxpayers, urged the IRS to stop the program. Its Aug. 18, 2006, report recommended: "The IRS should abandon all plans to outsource any taxpayer debts and restrict collection activities to properly trained and proficient IRS personnel."

Nina Olson, the independent National Taxpayer Advocate who represents taxpayers within the IRS, also objects. She told Congress that the IRS "Private Debt Collection" program won't be as cost-efficient as envisioned because the cost of IRS staff for helping and supporting private effort has not been included in agency estimates.

"This approach makes little business sense, and on top of that, the program raises significant concerns about the adequacy of taxpayer rights protections and confidentiality of tax return information," Olson said in April, in testimony to a Senate Appropriations subcommittee.

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