A proposed U.S. Senate bill that would send unpaid Internal Revenue Service taxes to private collection agencies would be a money-loser for the tax agency, argues the IRS Oversight Board, a watchdog panel.

Sen. Charles E. Schumer (D-NY) recently introduced the private debt collection proposal, which is now on the Senate floor. The measure has bipartisan support but would be unlikely to reach President Obama’s desk quickly because of an ongoing dispute with the House over reviving expired tax breaks.

While Congress's Joint Committee on Taxation has estimated that private collection agencies could raise $4.8 billion in new tax revenue over 10 years, the IRS watchdog panel - a nine-member board appointed by the president - argues that estimate excludes administrative costs and is "far too optimistic."

"The experiment has failed twice and there is nothing to lead us to believe it will not fail again," the IRS Oversight Board said in a letter to lawmakers this week.

The IRS phased out a similar private collection agency program in 2009. Congress had authorized the Treasury Department to contract the task of recouping unpaid tax bills in 2006 and three collection agencies won initial contracts: CBE Group Inc., in Waterloo, Iowa; Pioneer Credit Recovery Inc., in Arcade, N.Y.; and Linebarger Goggan Blair & Sampson LLP in Austin, Texas.

A study by the nonpartisan Taxpayer Advocate Service revealed that the IRS collected about $139 million, $53 million (62%) more than private agencies in the first two years of the earlier program. The IRS collected a larger percentage of available dollars than private agencies, 9.2% to 5.4%.

At the outset, the collectors produced significantly better numbers but that effectiveness dropped dramatically after collecting on "easy cases," according to the study.

After the first program ended in 2009, the IRS recalled cases from the private agencies with a total assessed balance of $848.5 million. The Treasury Inspector General for Tax Administration (TIGTA) later reviewed the effectiveness of collection actions taken by the IRS for the returned accounts and said the IRS had not taken collection actions on 29 of a sample of 62 cases.

TIGTA estimated that potentially $30.7 million in collections would remain as outstanding liabilities and at the time reported that the IRS might not collect up to $103.2 million per year from cases in its inventory that would have otherwise been assigned to private agencies.

Advocates in Congress and in the collection industry argue that the IRS is now too distracted with other tasks, including new responsibilities created by the 2010 Affordable Care Act. Private agencies bring the collections expertise and save the government the cost of training.

Further, the Government Accountability Office reports that the IRS has absorbed an estimated $900 million in budget cuts since fiscal 2010, through reductions in personnel, less employee training and some efficiencies.

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