Tucked into the pending highway and transportation spending bill is a provision authorizing the IRS to outsource some tax collection activities. If this sounds familiar, it is. Several times in the past 20 years, the IRS has contracted with private sector debt collection agencies for tax collection work. The results have been mixed, but as lawmakers scramble for money to pay for highway and transportation spending, the potential for significant revenue is attractive.
Note: At the time this article was posted, House and Senate conferees were still negotiating a final highway bill. The exact parameters of private tax collection will be known when conferees complete their work and both the House and Senate pass the conference agreement.
To pay for a multi-year highway and transportation spending bill, lawmakers turned to tax compliance measures rather than increasing taxes, such as the federal gasoline tax. Privatization of some tax collection work is one such compliance measure. According to supporters, the outsourcing of tax collection would raise more than $2 billion over 10 years. That number has been questioned by opponents.
In 2004, Congress passed the American Jobs Creation Act, which granted the IRS the authority to contract out the collection of past due taxes to private collection agencies. Two years later, the IRS began assigning taxpayer cases to the private collection agencies. At that time, the IRS assigned only certain types of cases to private collection agencies. These generally were cases that involved an individual taxpayer with a balance due of $25,000 or less (sometimes higher in certain cases). The cases fell into three categories: accounts awaiting assignment to the collection field function but not being worked; accounts not being worked due to IRS resource limitations; and cases where the IRS could not contact or locate the taxpayer.
According to the IRS, it placed approximately $1.8 billion in outstanding tax debts with the private agencies for collection over two years. The National Taxpayer Advocate reported that the private collection agencies recovered some $86.2 million during those two years.
The private agencies worked taxpayer accounts with many restrictions. The private agencies could not determine or negotiate the amount of a taxpayer’s debt. In addition, the private agencies could not negotiate a taxpayer’s debt. If a taxpayer requested that his or her account be returned to the IRS and no longer worked by the private agency, the agency had to comply.
Moreover, the private collection agencies had to operate within rules set by the Federal Trade Commission and the Fair Debt Collection Practices Act. This meant, for example, that the agencies could only contact individuals during certain times of the day. The Fair Debt Collection Practices Act also prohibits collection agencies from misrepresenting an individual’s legal rights, disclosing personal information to third parties (unless authorized), and obtaining information through false pretenses.
If privatization of tax debts returns, the program will likely operate in a similar manner as it did under the 2004 Jobs Act. The IRS will need to develop rules for the working of taxpayer cases by private collection agencies. The IRS also will solicit bids from interested collection agencies. The process is likely to be a slow one.
If you have any questions about the outsourcing of tax collection, please contact our office.