IRS Walks Tightrope in Plan to Use Private Debt Collectors

The Internal Revenue Service is looking to use private contractors to help collect tax debt but some warn there is a risk of increased scams and abuse.

The IRS announced its intent to use private debt collectors  Sept. 26 in response to a congressional order. The federal agency hopes to have the program operational by spring. The idea could help the agency to more efficiently collect tax debt, but it might also be opening the door to fraud and abuse.

“What makes it worse is the prevalence of these scam artists who call pretending to be IRS collectors,” National Consumer Law Center Attorney Chi Chi Wu told InsideSources. “We think having private collectors is just going to make that situation even worse by confusing people. Now they don’t know if it’s a real private contractor or a scam.”

taxes photo Private Debt Collectors

Private Debt Collectors

Photo by Perlinator

Taxpayers are currently at risk of being scammed by people posing as tax collectors. The IRS advises taxpayers to ignore collection notices that aren’t coming from the agency directly. Opening the program to private collectors could make it more difficult to tell the difference. Nevertheless, others aren’t completely opposed.

“I think there’s more good in it than bad,” National Taxpayers Union Research Director Demian Brady told InsideSources. “Of course there are always concerns about taxpayer rights and the protection of taxpayer privacy but those are also concerns under our current system with government employees.”

Brady adds that outside firms could have better expertise and be more effective at collecting tax debt. They know where to go to retrieve the money and how to get a hold of people. Heritage Foundation Scholar Alden Abbott says the success of the program essentially comes down to those involved in it.

“I don’t think its necessarily a bad idea,” Abbott told InsideSources. “The questions is, are they going to be effective, are people going to suspect fraud or are there going to be restraints in place to prevent misuse by the employees of these companies.”

The Business Coalition for Fair Competition agrees that the idea could be beneficial so long as there are legitimate efforts to protect taxpayers. The IRS merely has to be diligent to make sure a system is in place to protect taxpayers against fraud and other forms of abuse.

“I feel confident that there are safeguards that can be built in to make sure there are not scams and to make sure the firms that are working for the IRS are doing so legitimately,” BCFC President John Palatiello told InsideSources. He added that the government should also be “building adequate safeguards and protections.”

Congress ordered the tax collection agency to use private contractors in December 2015. Some lawmakers were concerned too many tax debts were going uncollected. The policy was passed as a provision within the highway funding bill that year.

“I think Congress did the right thing in telling them to resume the practice,” Palatiello said. “It’s a classic example of something that the government is doing that is commercial in nature that could be done by the private sector.”

Congress didn’t leave the agency much discretion when making its decision. The IRS must use private debt collectors and must collect debts from everyone regardless of their circumstances. Wu warns the decision puts the agency in a tough spot without many options.

“The IRS has no discretion,” Wu said. “All these cases have to go including Affordable Care Act tax debt and tax debt for people who are below poverty. Basically, poor people who can’t afford to pay. They’re all going to have private collectors sent to them.”

The IRS has attempted similar programs twice in the past. It first tried to use private debt collectors in the mid-1990s before trying again just about a decade after. Wu adds the government lost $17 million on the first attempt and $4.9 million when they tried it again.

“The idea itself is something that we think is very troubling,” Wu said. “So you now send these private debt collectors with a record of problematic practices to taxpayers. So that’s bad enough. The fact that this has been tried twice before and each time IRS lost money on this, is bad enough.”

Brady counters the plan could actually help the IRS collect more money. He notes the agency is currently losing money already but that private collectors could help them retrieve debts that are not currently being pursued. There are many small tax debts that go uncollected and often unnoticed.

“I think it would be better to use a contracting service like this,” Brady said. “The IRS tax debt has gone up a lot and their enforcement staff has gone down. This is a cost effective way to go after some of that debt.”