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Congress to Give Private Debt Collection Another Try

If at first you don’t succeed, try, try again.

That mindset is on display in Congress right now as both chambers are considering bills that would require the Internal Revenue Service (IRS) to hire private contractors to help collect millions of dollars in delinquent federal taxes. With the IRS forced to cut its in-house collection staff over the last few years due to budget constraints, the delinquent tax total is growing and so is pressure on the IRS to turn to the private sector for help.

But we’ve been down this road before, and the results were less than encouraging. The Project On Government Oversight documented the recent history of private debt collection in our Bad Business report. While tax collection is considered an inherently governmental function (see “Appendix A. Examples of inherently governmental functions….20. The collection, control, and disbursement of fees, royalties, duties, fines, taxes and other public funds….” Emphasis added), staffing shortages in the 1990s compelled the IRS to hire private companies to assist the agency in recovering unpaid taxes in relatively simple collection cases.

The IRS conducted a pilot private debt collection program in 1996 but canceled it after one year due to disappointing recovery totals by the contractors and larger than expected costs (see page 6). Ten years later, a second experiment with private collection of delinquent taxes was also scrapped after a brief run. In addition to cost-ineffectiveness—the cost per delinquent tax dollar collected was more than three times greater for contractor employees than for IRS employees—there were also complaints of threats, misinformation, and other underhanded tactics by the collection companies.

Nonetheless, private debt collection forges ahead in Congress. The Senate Finance Committee recently approved an amendment requiring the IRS to revive the program. The Senate estimates that it will raise $2.4 billion over 10 years. The proposal’s sponsors do not provide an estimate of how much this program will cost. The House introduced similar legislation (see section 6304, “Reform of rules related to qualified tax collection contracts,” on page 176). But it will be an uphill battle. Several Members of Congress, most notably House Minority Whip Steny Hoyer (D-MD), are longstanding opponents of private debt collection.

In our opinion, private debt collection will never work. Government tax collectors have an inherent advantage over private collectors. As government employees, IRS collectors can exercise discretion when working with delinquent taxpayers. They can postpone collection, establish payment schedules, settle debts for less than the full amount owed, and waive penalties. Private collection agencies, on the other hand, are not allowed to exercise discretion (by definition, an inherently governmental function is one that involves discretion). They can only demand payment. If the case develops an unexpected complication, the contractor must refer it to an IRS employee. That one critical difference—discretion—is the reason private debt collection programs have failed in the past.

By: Neil Gordon
Investigator, POGO

Neil Gordon, Investigator Neil Gordon is an investigator for the Project On Government Oversight. Neil investigates and maintains POGO's Federal Contractor Misconduct Database.

Topics: Contract Oversight

Related Content: Government Privatization

Authors: Neil Gordon

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