Public’s Debt, Private Solution

Times Staff Writer

Make no mistake about it, the Internal Revenue Service wants Americans to pay their delinquent tax bills. The trouble is, it doesn’t seem to have the staff to collect from those taxpayers who have been remiss.

So the agency no one likes to hear from is turning to the industry no one likes to hear from: private debt-collection firms.

The government this month began accepting bids from debt-collection agencies that it hoped to begin using as early as next summer to go after billions of dollars in unpaid taxes.


IRS officials insist there will be no muscle involved -- no knocks at the door, no midnight phone calls. The private collectors will have none of the powers of enforcement that IRS workers have, such as the ability to impose tax liens and wage attachments.

They are more likely to send a letter, under the contractor’s letterhead, politely explaining that the government would like what it is owed. A summary of taxpayer rights would also be included as the government attempts to make sure that the public feels more nudged than threatened.

“They are only there to help the IRS to collect these balances due,” said IRS spokesman John Lipold. “The contractor will have to adhere to the same set of taxpayer protection rules that IRS employees do.”

The government decided to turn to the private sector when it became clear that Congress was unlikely to increase the agency’s budget to allow it to hire enough workers to go after all the outstanding debts.

“Given the constraints in hiring staff,” a 2004 Government Accountability Office report concluded, private firms were “the only practical means” of making sure the government would get its due.

And it turns out the government is due a lot. According to the GAO report, Americans owed $120 billion in collectible taxes, including interest and penalties, in 2003. That was up from $112 billion the year before.

Government officials worried that letting such a large debt stand was sending the wrong message -- “not a good signal to taxpayers about the importance of complying with their tax obligations,” the GAO concluded.

Congress passed a law last year allowing the IRS to join the ranks of credit card companies, insurance companies and many other businesses in using contractors instead of hiring more employees.

A small number of companies, probably three, will be chosen to handle “balance due” cases during a trial period. The collectors would be assigned only cases that involved more than $100, and where the taxpayer did not dispute the amount owed. An example might include something such as a taxpayer mailing in a return but forgetting to enclose a check.

The IRS estimates that as much as $7.7 billion in delinquent tax debt is available for recovery in the initial phase.

If all goes well, the program will be fully implemented to include as many as a dozen contractors, who will take on a larger number of cases by early 2008.

“These are cases that the IRS doesn’t have the resources to get to right now in terms of staffing or funding. It’s basically uncollected tax revenue just sitting out there that the IRS cannot get to,” Lipold said.

In soliciting bids, the IRS said private collectors would earn from 21% to 24% of what is collected, depending on the size of the debt.

Critics of the plan have worried that collection agencies would violate taxpayer rights in the effort to collect money. But IRS officials said only debt collectors that were included on a GAO-approved list would be selected.

Use of the private sector is a major turn for the IRS, which tried the strategy a decade ago and abandoned it for lack of revenue. The idea was resurrected as the size of the agency began to shrink and the debt to mount.