IRS Ends Private Debt Collection Program

March 9, 2009

Last week, the IRS suddenly announced that it is cancelling its debt collection contracts with private vendors:

After conducting an extensive review of the private debt collection program, including the cost effectiveness of the effort, the Internal Revenue Service will not renew its contracts with two private debt collection agencies, the agency announced today.

The IRS determined that the work is best done by IRS employees who have more flexibility handling cases, which is particularly important with many taxpayers currently facing economic hardship.

The current one-year contracts expire Friday.

“After a thorough review of this program, I have decided not to renew the contracts,” IRS Commissioner Doug Shulman said. “I believe this work is best done by IRS employees, and I believe we have strong support from the Administration and the Congress for increased IRS enforcement resources going forward.”

Shulman also noted that the IRS anticipates hiring over 1,000 new collection personnel in FY 2009. These new employees would give the IRS the flexibility to make assignments based on the areas of greatest need rather than filtering which cases can be worked using contractor resources.

The IRS has been using private collectors since 2006, and it has been very controversial. In 2006, we had a podcast with Taxpayer Advocate Nina Olson, where she laid out her concerns with the program:

That’s the very problem with why this won’t work. It’s because it’s premised on the concept that there are basic, simple tax cases, and I’m here to tell you, after having practiced outside the IRS for 27 years, and now being National Taxpayer Advocate for five years, that there is no such thing as a simple tax case. That even when you think that you’ve got somebody who has signed their tax return that shows a balance due, that they’ve agreed to the amount, when you actually go out to touch them, often they say, “Well, I can’t afford to pay this right now, I’m uncollectible.” That requires discretion. It requires a decision whether you’re going to put a lien on that taxpayer’s account while you hold off collecting. Or somebody will say, “Well, I don’t mind paying the tax, but I don’t think I should have to pay the penalty, I was in the hospital,” you know. And all of those things, the private debt collectors can’t, constitutionally, decide, and so the cases go back to the IRS.

So here we have this situation where we’re paying 25% to the private debt collectors, then we’re going to reserve 25% of whatever we collect to pay for the IRS unit that is going to have to work these cases, so the public fiscal only gets 50%, and my question is, what if we had just sent a letter to that taxpayer?

Sen. Charles Grassley (R-Iowa) sees it differently, and has requested more justification from the IRS for ending the program:

“It seems the IRS and Treasury Department went out of their way to knock out an emerging, effective and even-handed way to collect tax debt that the IRS will otherwise never collect. They’ve sanctioned small-scale tax cheating because agency employee unions didn’t want it revealed that someone else might be able to collect debt in a way that generates fewer complaints from taxpayers. The action is a set-back to attempts by the IRS to modernize, save money and deal with taxpayers in a more professional way,” said Grassley.

(Hat tip: CCH)

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