Push to Privatize IRS Collections Meets Familiar Foe

A federal worker union is battling a bipartisan push in Congress to restart the Internal Revenue Service's controversial use of private collection agencies to pursue tax debts.

The National Treasury Employees Union said a similar effort by the IRS between 2006 and 2009 caused the government to miss out on millions of dollars in potential revenue while paying $102 million to fund administrative and commission costs. The NTEU had championed shutting down the program.

Congress authorized the Treasury Department to contract out 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. The IRS phased out the program in 2009.

The Senate Finance Committee recently approved an amendment to a draft tax package requiring the IRS to use private collectors. The House is considering similar legislation.

Advocates in the collection industry and in Congress argue that the IRS is 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.

But a study by the nonpartisan Taxpayer Advocate Service reported that private collectors lack the authority to negotiate tax liabilities, limiting their ability to work cases in the same manner as the government. Firms can only resolve bills for which taxpayers do not dispute the owed amount.

The study further revealed that the IRS collected about $139 million, $53 million (62%) more than private agencies in the first two years of the previous 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.