Taxpayer Advocate Nina Olson on Private Debt Collection at the IRS

September 19, 2006

We’ve released the seventh episode of our Tax Policy Podcast this morning, featuring a terrific interview with Nina Olson, National Taxpayer Advocate at the IRS.

One issue discussed in the interview is the recent controversy over whether the IRS should employ private debt collectors to reign-in back taxes from taxpayers, which Olson opposes. Here’s a clip from the transcript:

Hodge: The IRS has started looking at contracting out or using private debt collectors to collect those unpaid tax bills. The New York Times has been very critical of this effort. They think it’ll actually be more expensive, and obviously one of the biggest issues is the concern about privacy or the sensitivity of all of this data. Can you help us sort through all this, is the New York Times off base on this, and what’s the perspective of your office?

Olson: I personally am opposed to using private debt collectors to actually collect the tax. I think that the IRS has the authority to do this, and although I think that the program as designed right now is legal, it’s constitutionally permissible because the private debt collectors aren’t really doing anything that requires discretion and judgment, which is reserved to government employees.

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? I mean, these are cases that have just been lying fallow, you know? And so what if we had just shaken the tree ourselves with a letter? Which goes to my other point about, there might be a role for private debt collectors, in the fact of, they might be very helpful to us in doing skip tracing, trying to find the taxpayers, you know? Or trying to find assets. Not necessarily engaging in the conversation with the taxpayer, but assisting the IRS in doing some of its core responsibilities.

Hodge: Just to play devil’s advocate for a minute, there are a lot of cases in the government where using private debt collectors has been pretty effective, such as the student loan programs, farm loan programs, the Small Business Association Administration loan programs, etc., where the government has proven to be pretty ineffective at maintaining the effectiveness of those collections, and moving to private collectors has proven to be very effective, and actually improved the servicing, in some cases, of those loans. Wouldn’t that apply in this case?

Olson: I think there are two issues. One is that from the Secretary and the Commissioner on down, everyone acknowledges that the IRS collects the tax cheaper, better, and more effectively than the private debt collectors. The Commissioner has sworn before Congress, on sworn testimony, that that is his position. It’s just that we’re not getting additional funds from Congress to hire the employees to do that work. The second point is, the Constitution doesn’t reserve the authority to issue a student loan to the government, but the Constitution does say that the power to lay and collect tax resides in the government. There’s really a constitutional issue there. And my final point is, the government will not fall down if the student loans are not made, but the government will fail, and the social contract with the taxpayers will fail, if we do not protect taxpayer rights, and protect taxpayer privacy, and raise the funds that we need to.

You know, we can argue that whether we need a smaller government, or a larger government and lower taxes, and things like that, but there is this understanding and I view it as a social contract between the tax administrator and the taxpayers, that we are going to absolutely protect their rights, and absolutely protect their privacy, and really honor the fact that they are coming in and paying the lifeblood of government with their hard earned dollars; and I think that makes it very, very different from the other kind of areas where we have used private debt collectors quite effectively. And again, I view that there is a role for private debt collectors, it’s just not the role that this test has, or this program has envisioned.

Listen to the full interview or read the transcript here. If you haven’t subscribed to our podcast using iTunes already, click here to do so today.

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