Congress urged to drop private tax collectors

Congress should revoke the Internal Revenue Service’s authority to use private debt collectors because the program doesn’t work and the collection companies may be using unethical methods to “take advantage of taxpayers,” the tax agency’s independent watchdog said.

Nina E. Olson, the national taxpayer advocate, said in her annual report to Congress that the agency struggled to supply contractors with accounts to collect.

Contractors collected only 8 cents on the dollar from 11,500 delinquent accounts that the IRS described as the easiest to pursue, the report said. IRS employees could do better, Olson said.

“The business case for using private collectors over IRS employees appears to be weak,” Olson wrote in the 500-page, two-volume report released Tuesday.

Olson said the IRS program using private contractors to collect debt was among the most serious problems encountered by taxpayers. The first two were the growing reach of the alternative minimum tax, a regular feature of her annual list, and the $290-billion-a-year “tax gap,” or the amount of taxes owed that isn’t collected by the IRS.

Olson’s report raises questions about the efficiency and advisability of the private debt-collection program as the IRS prepares to increase the number of contractors to 12 from three. She also said she suspected private debt collectors of using trickery to “take advantage of taxpayers.”

The program began in March, when the IRS hired three private debt collectors -- Pioneer Credit Recovery Inc. of Arcade, N.Y., CBE Group of Waterloo, Iowa, and Linebarger Goggan Blair & Sampson, an Austin, Texas, law firm. They began pursuing delinquent taxpayers in September and collected $500,000 in the first month. Private agencies collected $6 million in the fourth quarter, IRS Commissioner Mark W. Everson said last year.

The use of private debt-collection agencies, endorsed by Congress, has been criticized by consumer advocates, the National Treasury Employees Union and the Government Accountability Office, which object to for-profit companies collecting taxes. The IRS said private firms could pursue undisputed debt more efficiently, freeing it to pursue contested cases.

“Paying debt collectors a bounty of up to 25% of the money they collect is a waste of taxpayers’ dollars and exposes taxpayers to the risk of identity theft and overly aggressive collection tactics,” said Colleen M. Kelley, president of the union.

Olson said IRS agents could do better because private companies were assigned only accounts that weren’t being disputed by taxpayers. The companies have no enforcement powers such as filing liens, making levies or seizing property.

“As we learned more details of the initiative, it has become clear that much of the rationale underlying the initiative has eroded,” Olson wrote.

In written comments accompanying the report, the IRS said the program “started off well” and exceeded the “conservative” 6% target yield for the first year. Private debt collectors were assigned $90 million in delinquent accounts and collected $8.4 million, the agency said.

Olson criticized the IRS for failing to provide sufficient information about the methods of the private companies. The IRS says it doesn’t disclose the methods used by the private firms because such information is proprietary to the companies.

“We are concerned that the private collectors are using trickery, device and belated Fair Debt Collection Practices Act warnings to take advantage of taxpayers,” she wrote. The act requires debt collectors to inform delinquent payers that they’re calling to try to collect a debt and that any information obtained will be used for that purpose.