Outsourcing the IRS

Published: Sunday, October 1, 2006 at 6:01 a.m.
Last Modified: Sunday, October 1, 2006 at 12:00 a.m.
The Internal Revenue Service estimates that $270 billion in taxes has gone uncollected. So the IRS is going to begin outsourcing the job of bringing in the money.
This year, the IRS announced that through competitive bidding, it had contracted with three companies in Iowa, Texas and New York to help collect the taxes owed.
To start the program, the IRS will turn over information on 12,500 taxpayers to the private collection agencies. All of them owe $25,000 on what IRS officials call "simple tax cases." The IRS will continue to pursue other debtors.
"The new authority that Congress gave to the federal government allows us to use private firms as well," said IRS Commissioner Mark W. Everson in announcing the collection program, which began last month.
Everson said, after considering criticisms for turning over sensitive private information to collection agencies: "We are putting tough safeguards in place to protect taxpayer rights and privacy. We will be closely monitoring contractor performance to make sure they're following the law as well as our own internal standards."
But Nina Olson, for one, doubts that outsourcing debt collection will work.
Olson is the national taxpayer advocate within the IRS. She works independently of the agency and is charged with identifying problems faced by taxpayers and finding ways to fix them. Prior to this job, she worked for 27 years as a tax attorney.
Last week Olson was interviewed by the Tax Foundation, a nonpartisan educational organization. The collection program won't work, she said, 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."
Even if the taxpayers have agreed the tax is owed, they can simply say, "I'm uncollectible," Olson said. Or they may argue they owe the tax, but the penalty should be waived because of extenuating circumstances.
And that, said Olson, "requires discretion. . . . And all of those things, the private debt collectors can't, constitutionally, decide, and so the cases go back to IRS."
Olson said with 25 percent of the tax bill going to the collection agency and another 25 percent going to the IRS unit working on the case, "the public fiscally only gets 50 percent, and my question is, what if we 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?"
Four years ago, Charles O. Rossotti, then the IRS commissioner, told Congress that it could spend $296 million to hire additional collectors and bring in more than $9 billion each year to the U.S. Treasury. Simply put: $1 spent in salaries brings in about $30 in revenue.
IRS officials told The New York Times last month that Rossotti's figures were still valid, but the collection agents never came because Congress opted to give the job to private collection services instead.
Olson said that taxpayers are also at a disadvantage when dealing with a private collection agency. "Because private collectors will operate under rules of profit maximization rather than the IRS' customer-service-based policy, private collectors may have less incentive to provide important taxpayer rights training to their employees," she wrote in a report to Congress last year.
The IRS has issued a warning saying scammers apparently are already posing as private collection agents. The IRS does not do business using e-mail, said the warning. The collections will be made by letters: One from the IRS naming the collection company involved and a second letter from the collection company seeking payment. Taxpayers are also being instructed to make checks payable to the U.S. Treasury, not to the company making the collection.
It's a lot of trouble to collect a lot less money using private agencies than would have been collected if the IRS could have hired its own agents. Welcome to the world of congressional economics.

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