I. Introduction
Empowered by the American Jobs Act of 2004,
the IRS recently implemented a private debt collection program designed
to "reduce the growing number of uncollected tax liabilities while
allowing the Service to better focus on more complex tax cases and
issues."[1] The plan was criticized early on for paying the private
collectors as much as 24% of the recovered liabilities in return for
their collection efforts, which amount was thought could result in
improper collection practices on the part of the private
collectors.[2] While the plan hasn't been in action long enough to
render judgment on whether these concerns are warranted, another
problem has reared its head: the program isn't making money. It may
not so much as break even.[3] This article addresses concerns of abuse
and well as profitability in the short and long term.
II. Analysis
The
legislation under which the collection program was implemented
specifies that private collectors are to behave no differently than the
IRS, and that taxpayers are to be afforded the same access to the
Taxpayer Advocate Service as they would were they being pursued by the
IRS itself.[4] In order to ensure that private collection tactics
remain above board, the IRS has said that the private collectors shall
be prohibited from taking enforcement actions (liens, foreclosures,
etc.) and also from threatening or intimidaing tax debtors.[5] The
private collectors are also prohibited from engaging in debt settlement
negotiations with the debtors - - such activity is considered
"inherently governmental."[6] In addition to these prohibitions, the
IRS will monitor live collection phone calls, perform extensive
background checks on collection contractors, as well as require
contractors to subject their employees to similar background checks.[7]
Critics of the program do not suggest that the IRS hasn't
created safeguards against cutthroat collection practices, rather they
question whether the safeguards in place are enough to overcome the
collector's incentive to maximize her own profits through coercive or
fraudulent means given the significant rewards of successful
collection.[8] In particular, some critics point to the fact that
Congress legislated against incentive-based pay for IRS employees in
1998, underscoring its fear that such incentives would result in overly
aggressive collection practices.[9]
III. Scandal & Debate
There has already been one scandal concerning abuse of private
collection - - a bribery in Texas connected with the obtention of a
private collection contract.[10] Prosecutors ultimately dropped the
charges after the accused contractor made a substantial charitable
donation to a University of Texas program dealing with money and
politics.[11] The IRS maintains that the collection companies/goals of
profit maximization do not create a substantial and ongoing conflict
with proper collection practices.
In addition to fear of abuse, early critics expressed concern
that the cost of implementing this program (hiring contractors,
performing all the necessary training and background checks and
instating a constant review process, the 24% contract fee) would be too
high to justify outsourcing of the debt collection.[12] The concern
has proven not unwarranted, as the initial costs of the program (around
$60 million) could prove to be greater than the initial collection
efforts (potentially as little as around $58 million) by this
December.[13] Still, the government maintains that over time potential
collections could amount to as much as $1.4 billion, far in excess of
the projected 10-year cost of around $77 million.[14]
IV. Conclusion
From this author's perspective, there is little fear that the
private debt collection program will more than pay for itself as it
goes forward. Undoubtedly there were relatively high fixed costs in
getting this program off the ground that will be paid off in spades
over time. However, this author is highly suspect of the ability of
the private collection institution to stay its bloodlust sufficiently
to comply with fairly high levels of governmental ethics being imposed
upon them. If the IRS fails to collect on its debts, the government
doesn't go into bankruptcy - - the people of the country don't sue them
for failing to maximize their revenues - - the Service employees don't
suffer paycuts and layoffs. There is a lot of money out there in the
form of uncollected back taxes to be had, and it would surprise this
author a great deal if the early scandal in Texas wasn't indicative of
the future for this program, one replete with much backscratching and
corruption.
[1] Private Debt Collection Program, at www.irs.gov/businesses/small/article/0,,id=155136,00.html.
[2] Jim Kouri, IRS to Use Private "Bounty Hunters" to Collect Taxes, The Conservative Voice, October 31, 2006, at www.theconservativevoice.com/article/19813.html.
[3] Kevin McCoy, Initial Costs Hit IRS Plan to Recover Delinquent Taxes, USA Today, November 1, 2006, available at www.usatoday.com/money/perfi/taxes/2006-10-31-irs-usat_x.htm.
[4] Supra note 1.
[5] Id.
[6] Id.
[7] Id.
[8] David Cay Johnston, IRS Enlists Help in Collecting Delinquent Taxes, New York Times, August 20, 2006, available at www.nytimes.com/2006/08/20/business/20tax.html?ex=1313726400&en=b7fe1a06a605c749&ei=5088&partner=rssnyt&emc=rss.
[9] Supra note 2.
[10] Kevin McCoy, IRS Plan to use Private Debt Collection Runs into Snags,
USA Today, May 4, 2006, available at www.usatoday.com/money/perfi/taxes/2006-05-04-irs-usat_x.htm.
[11] Id.
[12] Supra note 8.
[13] Supra note 3.
[14] Id.
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