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Privatized Tax Collection Loses Money

(Photo: Shutterstock; Illustration by POGO)

Last year, the Project On Government Oversight expressed concern shortly after the Internal Revenue Service (IRS) rolled out its third attempt at outsourcing federal tax debt collection that past problems would repeat themselves. The two previous attempts at using private collection companies to help the IRS recover nearly a half trillion dollars in unpaid taxes were failures because costs exceeded the revenue collected, and taxpayers complained of abusive and underhanded collection tactics. In addition, several Democratic Senators raised the possibility that the collection companies pressure taxpayers into “extraordinarily dangerous” debt payment options.

It looks like some of those concerns have been validated by the latest annual report of the Taxpayer Advocate Service, an independent office within the IRS that helps taxpayers and reports to Congress on systemic problems at the agency.

The IRS watchdog office considers the IRS’s private debt collection program to be one of the agency’s “most serious problems.” It found the collection contractors cost the agency $20 million in fiscal year 2017—nearly three times more than the $6.7 million they recovered. In addition, it found the contractors sometimes received commissions for work they hadn’t actually performed, such as when debts were paid after the IRS notified the taxpayer their case was being assigned to a collection company but before the company contacted the taxpayer. (The companies are entitled to a commission of up to 25 percent of the amount they collect.) Incredibly, the report states that the IRS “has no plans to change its procedures” in order to stop these erroneous commissions.

The watchdog also found that almost half of the taxpayers assigned to private debt collectors have incomes that “indicate they are at risk of economic hardship.” According to the report, “the most vulnerable taxpayers are making payments and entering into installment agreements they cannot afford,” and they are doing so “with unacceptable frequency.”

The report makes no mention of abusive or unscrupulous collection tactics, although this might be due to the IRS refusing to let the investigators listen to phone calls between collection agents and taxpayers. A footnote in the report makes a vague reference to the watchdog office receiving 30 cases during FY 2017 in which “the taxpayer asked for assistance in stopping contact from” private collection agencies.

As we have long been pointing out, tax collection seems to be a function best left to the government. In fact, the report found that “a simple letter from the IRS” reminding taxpayers about their debts achieved better results than a private collector.

Three strikes and you’re out. Congress should direct the IRS to end this program and give up on privatized tax debt collection.