A new compromise package in a Senate highway funding bill proposes to raise $2.4 billion by handing the job of tax collection over to private collection agencies. The bill would require the Treasury Department and Internal Revenue Service to contract with private collection agencies as one of several pay-for provisions of the highway bill.

The Senate bill cleared a key procedural hurdle this week and is expected to receive a vote soon. Senate Majority Leader Mitch McConnell, R-Ky., and Sen. Barbara Boxer, D-Calif., crafted the bill. They still have the option of moving to eliminate the private debt collection provision.  

Congress authorized the Treasury Department to contract out the task of recouping unpaid tax bills in 2006, but the agency phased out the program in 2009. The National Treasury Employees Union, which represents IRS workers, said the program proved unsuccessful, as the government spent more on administrative fees and commissions to the companies than it took in. The union is denouncing the possibility of again contracting with private collection agencies as an offset for some of the costs of extending funding for the Highway Trust Fund. "The use of [private collection agencies] to collect tax debts has repeatedly been shown to be a waste of taxpayer dollars," NTEU President Colleen Kelley wrote in a letter to senators. "The Treasury secretary currently has the authority, but has chosen not to enter into such contracts." The first attempt to privatize tax-debt collection was scrapped a year after the program was launched in the mid-1990s, NTEU officials said. Taxpayers lost $17 million and some of the companies selected for the pilot projects were found to have violated the Fair Debt Collections Practices Act. The second attempt began in 2006, when proponents estimated the program would collect up to $2.2 billion in unpaid taxes. That effort was stopped three years later, after the program brought in $4.5 million.  
Kelley said the commission-based payment incentive led to abuse of the system and a disproportional focus on low-income taxpayers.The federal highway program has traditionally been funded by a tax on gasoline.   

Sen. Chuck Grassley, R-Iowa, has been a longtime proponent of privatizing tax collection. This week he said it was hard to see the logic of NTEU’s argument. Citing a recent report from the National Taxpayer Advocate, he said the IRS just finished one of the worst filing seasons for customer service on record.

He said the IRS isn't even pursuing tax debts and reportedly regularly hangs up on callers because it can't handle the call volume. "The private contractors would take on accounts involving taxes that are due and owed that are just sitting dormant right now," he said.

The situation isn't likely to improve for the IRS. An appropriations bill approved by a Senate subcommittee Wednesday would cut spending at the agency in fiscal 2016 by $470 million compared to the current fiscal year. The House version of the bill goes even further, funding the agency at $838 million below the fiscal 2015 spending level.

Annual spending for the IRS has been slashed by $1.2 billion since 2010 and the agency is operating with 18,000 fewer employees. Call center staff alone has been cut by 26%.

Nina Olson, the National Taxpayer Advocate, confirmed the IRS answered just four in 10 calls to the agency in the latest tax season, a ratio she hadn't seen in her 40 years in tax issues.

The Treasury Inspector General for Tax Administration found in a 2013 report the revenue collected by the IRS from tax enforcement dipped 13% between 2010 and 2012. In that time, the IRS shed 5,000 front-line enforcement personnel.

President Obama, during an appearance Tuesday on The Daily Show with Jon Stewart, said the real scandal around the IRS is that they have been so poorly funded that they can't "go after these folks who are deliberately avoiding tax payments." 

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