Thursday, August 17, 2006

Internal Revenue Service To Privatize Debt Collection Despite Congressional Opposition

Effective August 31st, 2006, the Internal Revenue Service (IRS) will begin turning over the first of 40,000 taxpayer files (including personal and sensitive information) to three private sector debt collection companies despite language in the FY2007 Transportation-Treasury appropriations bill preventing the use of public money to implement the program. A total of 2.6 million taxpayers are expected to be affected. Full story originated at the National Treasury Employees Union (NTEU) website, cross-posted on the site, and also posted on Dvorak's Blog, where I first learned of it.

Taxpayers whose cases are turned over to private collection companies will be informed of their adjusted status via a letter from the IRS. Affected taxpayers who attempt to contact the IRS about their delinquent accounts will simply be told by IRS employees that their accounts have been turned over to a private debt collector and directed to discuss additional questions or concerns with the collector. Collectors could receive a bounty of up to 24% of the money they collect.

Reaction from several sources was immediate - and sharp. “The arrogance of the IRS in pushing forward with this misguided and costly program in the face of congressional efforts to halt it is beyond belief. As more details are uncovered, it is increasingly apparent that this will be disastrous for taxpayers”, said NTEU President Colleen M. Kelley.

Kelley continued, “Along with NTEU, opposition to this foolish endeavor has been apparent and vocal from dozens of members of Congress, from the National Taxpayer Advocate, from the Treasury Inspector General for Tax Administration and from a variety of public interest groups. Clearly, all these parties see things wrong with this program that the IRS either fails to see or chooses to ignore—putting taxpayer information and rights at serious risk. It is outrageous that IRS employees are being told to refuse to answer any questions posed by an American taxpayer about his or her taxes owed”.

Further, she said, the IRS told employees that any taxpayer who doesn’t want his or her account to be handled by a private collector must so inform the private company in writing—with a copy to the IRS at a particular location, either Philadelphia or Kansas City. “Just as NTEU predicted, this is going to be a confusing situation for impacted taxpayers, and a very costly mistake for the agency,” Kelley added.

Congress also weighed in. Rep. Steve Rothman (D-NJ), author of the anti-debt collector amendment, called on the IRS Commissioner to delay the program. That was followed by 27 House members signing a bipartisan letter generated by Reps. Rob Simmons (R-CN) and Chris Van Hollen (D-MD) calling on the IRS to halt the program.

NTEU is the largest independent federal union, representing some 150,000 federal workers in 30 agencies and departments, including 94,000 in the IRS.

IRS Response

To be fair, I visited the IRS website to elicit their response. The IRS issued a press release, IR-2006-42, dated March 9th, 2006, in which they delivered a short overview of this program. They disclosed that in the first phase of this program, a total of 33 firms participated in the competitive bidding process, with contracts awarded to the following three firms:

The CBE Group Inc., Waterloo, Iowa.
Linebarger Goggan Blair & Sampson, LLP, Austin, Texas.
Pioneer Credit Recovery, Inc., Arcade, N.Y.

In the second phase of the private debt collection project, scheduled for 2008, the IRS intends to contract with up to 10 firms. Over the course of 10 years, the IRS expects the private firms to help it collect an additional $1.4 billion in outstanding taxes.

In the press release, IRS Commissioner Mark W. Everson was quoted as follows, “The vast majority of states use private firms to help collect delinquent taxes. The new authority that Congress gave to the federal government allows us to use private firms as well. We have carefully considered all of the concerns expressed about this project, which involves work traditionally done by the government. As a result, we are putting tough safeguards in place to protect taxpayer rights and privacy. We will be closely monitoring contractor performance to make sure they’re following the law as well as our own internal standards.”

The IRS cited the 2004 American Jobs Creation Act as authority to hire private firms to collect federal tax debts. This particular portion of the law was carefully crafted and includes several limitations to ensure the private firms will be subject to the same stringent taxpayer protection and privacy rules that IRS employees work under. In addition, private firms cannot subcontract the work. The IRS expects to assign uncollected liabilities to the firms beginning this summer.

The IRS has also developed its own guidelines for the private firms, including background checks on all private firm personnel associated with the project as well as a mandatory, IRS-directed training program for company personnel.

Private firms will not be authorized to take enforcement actions such as liens, levies or seizures. In addition, private firms will not be authorized to work on technical issues such as offers in compromise, bankruptcies, hardship issues or litigation. Rather, the IRS will assign to the private firms cases in which the taxpayer has not disputed the liability. The private firms will contact taxpayers to make payment arrangements. “Redirecting relatively simple cases to private firms will permit the IRS to focus its existing collection and enforcement personnel on more complex tax issues,” Everson said.

Analysis: Issues to consider:

1). Who takes responsibility for a jurisdictional dispute? I can envision a taxpayer being bounced back and forth like a pingpong ball between the IRS and a contractor.

2). Spreading personal and sensitive taxpayer information beyond the IRS to a private contractor increases the risk of compromise and unauthorized disclosure. A cardinal COMSEC principle is to restrict confidential information only to those who need it.

3). Awarding a contractor a "bounty" of up to 24% stirs mixed emotions. On the one hand, everyone deserves to be compensated fairly for their work. On the other hand, this creates an incentive for abuse. Several years ago, we Alaskans chased photo radar out of Anchorage in part because the Arizona-based contractor took, if my memory serves me well, 70% of the resultant traffic fines as a "bounty".

4). The contractor guidelines developed by the IRS look stringent on paper, but how do we know they'll be enforced? The IRS itself has been an abusive agency in the past.

5). How can the IRS get away with implementing this in the face of Congressional opposition? If Congress refuses to allocate the funds, where will the IRS get the money? By ratcheting up collection efforts further? This is also ripe for abuse.

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  1. Just a quick hello from the Catskill Mountains of New York!

    Lookin' GOOD! Keep up the good wotk!


  2. More aggravating news....

    I may be in Anchorage soon to do some shopping. Want to have a beer? Is there any place where I can still smoke? Grrrr....

  3. Yankee Jim - Thanks for stopping by! Saw your latest over at THVF - the Kingston mayor's got his head up where it doesn't belong.

  4. Jack - Sounds good. The new smoking ban doesn't go into effect until next July, so the places that permit it don't have to shut it down right away.

  5. Anchorage Activist,

    I'm in Anchorage right now. If you want to get a beer, leave me a comment on my blog with a way to get ahold of you (I'll delete it).

  6. Anchorage Activist,

    I'm not in Anchorage anymore. I'll try to give more notice next time.