Why Using Private Tax Collectors Is a Losing Strategy for the IRS
Policy + Politics

Why Using Private Tax Collectors Is a Losing Strategy for the IRS


The Internal Revenue Service launched a novel pilot project in 1996 to use private debt collectors to help crack down on taxpayer scofflaws and whittle away a mountain of unpaid taxes.

After 12 months, the effort was scrapped when the firms were found to have repeatedly violated the Fair Debt Collection Practices. The IRS incurred a net loss of $17 million in the debacle, according to the Center for Effective Government.

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There was a similar attempt to employ for-profit debt collectors as part of a major jobs creation law in 2004 during the Bush administration, but that too lost money and was rife with abuses. One of the worst examples was the time debt collectors placed 150 phone calls to the elderly parents of an adult child who hadn’t paid his taxes on time, according to the center report.

These two failed efforts offer a cautionary tale for the Senate, which on Thursday approved a new six-year federal highway bill that would be financed in part by requiring the beleaguered Internal Revenue Service to retain once again private debt collectors.

The long-term legislation approved by the Senate, 65 to 34, is riddled with budget gimmicks designed to offset the $275 billion of cost over the next six years. One of those measures favored by Sen. Chuck Schumer (D-NY) purportedly would raise $2.4 billion over ten years through private debt collection of taxes owed.

Schumer, who is in line to be the next Senate Democratic leader, has his reasons for backing the provision: Two of the four private debt collectors likely to get the Treasury Department’s blessing to bid on the contract operate in New York.

Congressional Republicans, infuriated by IRS policies and practices, have cut the agency’s tax enforcement budget by one-fifth since 2010, when adjusted for inflation. Schumer last year proposed requiring the agency to retain private tax collectors to supplement its depleted enforcement division.

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He said his plan would also generate jobs for his constituents in upstate New York and greatly bolster tax revenue. Schumer also promised to add safeguards to avert a repeat of past abuses. The idea was pulled after critics howled, but now it is very much back in play as part of the long-term highway bill that awaits House action this fall.

Chi Chi Wu, an attorney specializing in tax-related consumer issues for the National Consumer Law Center in Boston told the Gannett News Service last year that Schumer’s plan would simply invite more problems.

She and other opponents said that while IRS officials have discretion to declare some tax debt simply uncollectible because of the taxpayer’s financial or health condition, private debt collector’s main mission is to go “get blood out of a stone.”

Chuck Marr, an analyst with the Center on Budget Policy Priorities, said this week in a blog post that congressional cuts have already badly damaged IRS enforcement efforts, with a 20 percent decrease in the number of IRS enforcement staff and audit rates plummeting to the lowest level in nearly a decade.

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“Some senators point to IRS collection difficulties to justify this misguided privatization proposal — even though Congress itself has undercut the IRS’s ability to collect taxes,” Marr wrote. “And by requiring the IRS to give private collectors the cases it lacks the resources to pursue, the provision only encourages congressional critics of the IRS — and the private debt collection industry — to push for more cuts to tax enforcement.  More IRS enforcement cuts will mean more privatization efforts.”