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You’ll Wish the IRS Were Collecting Your Taxes.

posted by Angie Littwin

The New York Times and the AP report that the IRS is moving forward with its plan to turn over the collection of relatively small amounts of back taxes to private collections agencies. Starting this September, CBE Group Inc., Linebarger Goggan Blair & Sampson LLP, and Pioneer Credit Recovery Inc. will be in charge of collecting back taxes of under $25,000 from 12,500 taxpayers.  The agency plans to contract with eight more private debt collection companies to collect back taxes from approximately 350,000 taxpayers by 2008. 

There’s an idea.  Take an industry that’s come under scrutiny for abusive practices in two recent exposes [and here] and turn over a core governmental function to it.  The private companies will be paid by the amount they collect, so they will have strong incentives to use aggressive collection tactics. The Associated Press quoted National Treasury Employees Union President Colleen Kelley as saying that she has “‘no confidence at all’ in the agency's ability to make sure the private firms are not overstepping their bounds.”

Budgetary constraints appear to have forced the IRS’ hand. The agency has funds already allocated for a private program, but believes that it could not get budget authorization from Congress to hire additional IRS collection agents. But there are several problems with this proposal, not the least of which is that the IRS acknowledges that it will cost the federal government substantially more to contract with private companies than to hire more IRS agents to do the job.  In addition, giving volumes of confidential personal information about taxpayers to private companies raises significant privacy concerns.  But from a debtor-creditor perspective, my worry is this:  in an industry where debt collectors are often accused of overreaching, what kind of power will companies have when they can say they are collecting debts on behalf of the United States government?


Spoken like some who doesn't know a thing about the collection industry. Without knowing what powers the agencies have under law, and by contract, how can you assess the efficacy of an outside collector or predict how abusive the agents will be? Your entire comment starts from the twin premises that anyone trying to collect money is a bad guy and anyone who owes money is a victim. This tells me that you are not interested in rational debate, but only in demonizing those playing an important role in the economy, while apologizing for those who have failed to satisfy their legal obligations.

Yes, I am in the collection business. As an attorney, however, I have also defended dozens of consumers in collection actions and prosecuted FDCPA claims against over-reaching collectors.

I readily concede that there are those in the collection industry who should be summarily persecuted (pick your favorite persecution method - tar and feathers, boiling oil, Dr. Phil). I also recognize that the IRS, being a part of the federal government, is not known for its ability to regulate its own conduct, let alone that of others. These are valid concerns which should be examined.

Your post, however, evidences little examination, and much knee-jerk.

One of the firms tapped by the IRS has quite a checkered history. http://www.usatoday.com/money/perfi/taxes/2006-05-03-irs-collection-usat_x.htm

The IRS using private debt collectors is certainly an interesting story for those of us who think about debtor-creditor law and collection generally (see also Michelle Dunn's post on this at bizcreditpolicy.com). I'm curious about whether the alleged higher cost for private collections is expected to persist over many years or is just a short term thing, but I haven't investigated this at all. In terms of making claims of overreaching, I do think one needs to distinguish illegal practices from practices that may seem aggressive to some observers in specific instances but are perfectly legal under the system of debt/contract enforcement that currently exists. This is an issue I've struggled with in studying hospital billing and collection. I haven't seen any published empirical studies of debt collection (although as I've mentioned in an earlier post, some state-specific studies by academic researchers are underway now), so the state of systematic knowledge of collection practices still seems pretty illusive to me. In any event, I think it would be interesting to look at the agreements between the IRS and the collectors to see what restrictions have been imposed. So there are many lines of inquiry for debtor-creditor (and tax) researchers to be considering here.

It's great to hear from someone who works in the collection industry and has seen both sides of these issues.

I agree with Mr. Engel that it is difficult to assess the abusiveness of using private debt collectors ex ante but I think Angie Littwin's post still raises some good points. When the collection function is centralized with IRS agents, there is likely to be more control over the behavior of agents and more uniformity of approach. You are right that carefully defining the powers of the private debt collectors will help, but I still suspect that it is easier to police one large well-known federal agency than a variety of diffuse private agencies.

I am also concerned about consumers becoming confused when a private collector contacts them about taxes. Most people fear the IRS in its collection capacity and respond promptly; I hope consumers give the private debt collection agents the same attention rather than assuming a mailing from "Pioneer Credit Recovery" is another credit card solicitation, offer for a debt management program, etc.

I was also intrigued by the point that hiring private agents will be more expensive. Why should we as taxpayers pay for private debt collection companies if the IRS can do it cheaper? The only justifications would seem to be that private collection agents are better at recovering debts and more careful to observe collection laws, evidence that I would be interested to see.

Given the horror stories we've all heard over the years about IRS collection tactics, I cannot accept at face value Ms. Porter's assertion: "When the collection function is centralized with IRS agents, there is likely to be more control over the behavior of agents and more uniformity of approach." If person gets paid based on money collected, might he or she be more inclined to accept a reduced amount if paid in a lump sum (assuming there is any discretion to haggle over the debts)? I know I'll talk about it with debtors. I also know that when repreenting debtors, many collection lawyers will talk settlement as well. I think your premise is, if not incorrect, at least partially flawed.

Neither can I accept at face value the idea that the govenment can do anything cheaper than private industry. Let's keep in mind, things the government does are not free. Those collector salaries need to be paid. Also keep in mind that the fees paid to outside agents are not fixed (unlike salaries of IRS collectors); they are taken out of monies actually collected.

I am concerned about taxpayer confusion (please, tax debts do not arise from consumer transactions, so let's not call these people "consumers"). The IRS is, however, sending letters to those whose debts are being placed for collection. The biggest problem both the IRS and the agencies face is the fact that most of these people will not even open the envelopes. (The last assertion is based upon my many years of experience in this business).

Many issues, but little data at this point.

I completely agree that more data is needed on all aspects of debt collection, public and private. The idea that the new private collection plan will cost more than if the IRS simply hired more agents comes from the congressional testimony of Charles O. Rossotti, commissioner from 1997 to 2002. The I.R.S. has acknowledged that his figures are correct.

His calculations were printed in the New York Times article to which I linked in my original post: "The private debt collection program is expected to bring in $1.4 billion over 10 years, with the collection agencies keeping about $330 million of that, or 22 to 24 cents on the dollar. By hiring more revenue officers, the I.R.S. could collect more than $9 billion each year and spend only $296 million — or about three cents on the dollar...."

The history of governmental entities outsourcing collection work is one of increased efficiency. The arguments espoused in the NYT about IRS debt are the same ones used 20 years ago regarding the collection outsourcing of student loans, dept of ag loans and back child support.

Those programs have produced, over time, far greater cost effectiveness than governmental agencies can produce. The past will foretell the future in these matters. Overly aggresive tactics have never been a problem. Despite the concerns of a public employees union (please....), private collectors running amok is pure Chicken Little. Try to find a horror story about overzealous student loan collections by a private firm.

Cost effectiveness is the ultimate reason these programs are initiated. The current estimate that the pilot program will not match in-house cost effectiveness is immaterial. All startups are expensive. The same thing happened in the student loan and agriculture dept programs. The IRS program is being funded because history has taught government these programs work.

Privacy concerns are a non-starter. The collection industry has always handled various types of confidential information (financial, medical and personal) without problems. The collection industry has a better security record than the Department of Defense.

While you will find this difficult to believe, the private collection industry is far more compassionate to individuals owing public debt than government has the capacity to be.

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