Congress passed legislation in October of 2004, the American Jobs Creation Act, that permits the IRS to hire private firms to collect federal tax debts.
Outsourcing of federal tax collection is an idea that has been around for a while. Some states use private collectors to collect state income taxes, and many jurisdictions collect real estate taxes through private collectors. See this 2003 MSN Money article and this Bureau of Labor Statistics report. The article also reports on the 1996-97 experiment funded by Congress to test the use of private tax collectors. The pilot program garnered a meager $3.1 million additional tax monies, at a cost of about $3.1 million and was discontinued. The Clinton Administration concluded the program was not worth renewal. The combination of high costs, worries about aggressive tactics and potential for massive loss of confidential information was enough to kill it. Even Nina Olson, IRS Taxpayer Advocate, expressed her concerns about privatization of this function: "I have a level of discomfort with the concept of using private collection agencies based on my earlier professional experiences representing taxpayers in states that used them." Id.
Mark Resnick has written an article exploring in greater depth the issues in connection with privatization of federal income tax collection. See Outsourcing Federal Tax Collection. He notes the earlier programs permitting government outsourcing of bill collections, such as the 1966 Federal Claims Collection Act and the 1982 Debt Collection Act. Under the 2004 Act, private collectors will not be able to perform inherently governmental functions. They will be authorized to locate taxpayers, send collection notices, and enter into three-year installment agreements. They will collect financial information on taxpayers when requested by the Secretary. Id. Use of subcontractors will be limited, and the Fair Debt Collection Practices Act would apply to protect taxpayers from harassing practices that debt collectors have used in some instances in other settings.
But accountability measures appear to be insufficient. The legislation provides only loose guidelines and does not limit the types of cases that can be collected by private agencies. Taxpayers may have inadequate remedies against tax collection firms that harass or otherwise abuse their roles. And the IRS may have little incentive to provide adequate oversight of collection processes. Whereas IRS employees are subject to strict sanctions (including termination) under the Code for failure to protect confidential information, the IRS will be exempt from liability for the actions of the private collection agencies.
As the MSN article notes, if there is money to be made at this job by private tax collectors, "[w]hy can't the IRS do the job itself? Isn't the collection of taxes so inherently a government function that it shouldn't be delegated to the private sector?" Id. The IRS decides in its discretion which cases to transfer. Under guidelines developed by the IRS, it is likely that the simplest collection cases will be transferred, since one of the rationales for private collectors is that it will free IRS employees to pursue more difficult cases. In the pilot program, a large number of cases that were merely in deferred status but considered likely to be paid were transferred. With compensation of as much as 25% of the taxes collected, those cases may be more a giveaway to the collection agencies than a benefit to the IRS. Resnick notes that the Joint Committee on Taxation reported that the use of private agencies "at the 25% rate would bring in less than $1 billion over ten years, while the IRS could bring in that amount in 1 year with just $30 million of additional resources." Id.
Resnick concludes that outsourcing makes sense at best only as a supplement to regular IRS collection activities and should only be implemented with additional measures to ensure accountability.
The Bush Administration, though, is gung ho for privatization, and appears set to move the outsourcing project forward as quickly as it can. On Thursday, the IRS named the first three firms that are eligible to start tax-collection duties for the IRS. They are CBE Group, Inc., Linebarger Goggan Blair & Sampson LLP, and SLM Corp's Pioneer Credit Recovery. They likely will make a tidy profit. The question remains whether the government will get its money's worth.
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