In December 2015, Congress enacted Sec. 6306(c)(1) to relaunch the IRS-supervised private debt collection (PDC) program that was in place from 2006-2009. As the IRS is empowered to resolve tax debts using a variety of payment options, and private collection agencies (PCAs) do not have the powers afforded to the IRS, the program creates the conditions for taxpayers to enter into payment agreements with PCAs that are less generous than they would receive from the IRS. These conditions are especially acute for individuals who are unrepresented and unfamiliar with IRS enforcement procedures. Taxpayers who are targeted by the PDC program may not have engaged a tax professional in the past but could pursue professional representation when contacted by a PCA. This column identifies weaknesses in the PDC program that create hazards for taxpayers, and makes recommendations for tax practitioners representing clients affected by the program.The PDC program
Sec. 6306 requires the Treasury secretary to enter into qualified tax collection contracts with PCAs to collect "outstanding inactive tax receivables." During 2017, the IRS selected four PCAs to participate in the program: CBE, ConServe, Performant, and Pioneer (see the IRS's Private Debt Collection webpage at www.irs.gov). Under the statute, a tax receivable means any outstanding assessment included in the "potentially collectible inventory." Eligible receivables for the program meet one of the following criteria:
- The IRS has removed the receivable from the list of collectible inventory at any time after assessment due to either a lack of resources or the inability to locate the taxpayer;
- The tax receivable has not been assigned for collection to any IRS employee, and more than one-third of the applicable statute-of-limitation period has passed; or
- There has been no contact between the IRS and the taxpayer or a representative for more than 365 days with respect to collecting the tax receivable (Sec. 6306(c)(2)(A)).
Thus, the IRS must make an assessment pursuant to its assessment authority under Sec. 6201 or be seeking payment from the taxpayer for an amount due on a previously filed tax return before the account is assigned to a PCA. However, the IRS cannot assign accounts of taxpayers who are:
- Deceased, under the age of 18, serving in a designated combat zone, or are victims of identity theft;
- Currently under examination, litigation, criminal investigation, or levy;
- Subject to a pending or active offer in compromise or an installment agreement;
- Subject to a right of appeal;
- Classified as innocent spouses; or
- Affected by a federally declared disaster and requesting relief from collection (Secs. 6306(d) and (i)).
The IRS will send written notices to taxpayers whose accounts have been assigned to PCAs (IRS Notice CP 40). Then the PCA will contact the taxpayer by mail and follow up with a phone call. The IRS notice and PCA letter will include a description of the collection process and instructions for requesting that the account be transferred back to the IRS (see the IRS's Private Debt Collection webpage). Since PCAs must comply with the Fair Debt Collection Practices Act, if a taxpayer notifies the PCA in writing that he or she wants the PCA to cease further communication with the taxpayer about the debt, the PCA must honor the written request for no further contact and return the case to the IRS (15 U.S.C. §1692c(c)).
The Service has implemented processes to give taxpayers assurance that the PCA is acting on behalf of the IRS. The IRS is responsible for training and monitoring PCAs, and a condition of the contract requires that PCAs respect taxpayers' rights and act in a manner that is consistent with IRS employee policies. These policies include adherence to the Fair Debt Collection Practices Act (Sec. 6306(g)), statutory taxpayer protections restricting unauthorized access or misuse of information (Sec. 6306(b)(2)), and a restriction on the use of subcontractors (Secs. 6306(b)(3) and (4)). In addition, orders issued and actions taken by the national taxpayer advocate (NTA) apply to PCAs in the same way they apply to IRS employees (Sec. 7811(g)).
The initial IRS notice and PCA letter include an authentication number. When the PCA calls, the taxpayer will be asked for the first five digits of the number, and the PCA will provide the remaining digits of the number. Practitioners acting on behalf of a client will undergo a similar authentication process. The PCA will record the calls so that the IRS can review them. If a taxpayer or a taxpayer's representative does not agree to have the call recorded, then the call will be terminated.
PCAs can use authentication methods in addition to the number included in the letter to verify the taxpayer's identity. These methods could include asking the taxpayer or the representative for the name used on the last five tax returns or the taxpayer's current address and date of birth. If a question is answered incorrectly, then the call will be terminated.
For practitioners who are calling on behalf of a client, the authentication questions will differ from questions asked by the IRS Practitioner Priority Service. For example, the representative is expected to know the legal name changes of the taxpayer for each year of the deficiency period. Representatives will be asked for their Centralized Authorization File (CAF) numbers and whether they are calling from a cellphone or a landline. When the authentication is complete, the PCA will review the amount of the deficiency and request payment in full. The IRS is authorized to pay PCAs commissions of up to 25% of the amount collected (Sec. 6306(e)).
Weaknesses and hazards of the PDC program
The weaknesses of the PDC program are the limited payment options the PCA can administer for the IRS, and the use of third parties in tax collection processes. If the taxpayer is unable to pay the full amount owed, then the guidelines require the PCA to offer the taxpayer an installment agreement for the full payment of the tax due. The term of the agreement can be for a period of up to five years. If the five-year term is insufficient time for the taxpayer to pay, then the PCA is to obtain the taxpayer's relevant financial information and provide this information to the IRS for consideration of further action on the account.
If the taxpayer cannot pay the full amount in five years but could pay in six or seven years, and the extended period is within the collection statute expiration date (generally 10 years under Sec. 6502), then the IRS can approve an installment agreement for six or seven years. Under these circumstances, the account can remain with the PCA, and the agency can receive commissions for collection. If the taxpayer is unable to pay the full amount due in seven years, then the PCA may request a one-time voluntary payment and must inform the taxpayer of alternative payment options from the IRS. The PCA will not earn commissions on account balances transferred back to the IRS (see the IRS presentation, "Advocating for Clients Whose Debts Were Assigned by the IRS to a Private Collection Agency," available at www.irs.gov).
A concern of the prior and current PDC programs is the use of an industry with a reputation for harassment in the tax collection process, as the combination of unpaid tax debts and contacts from PCAs could intimidate taxpayers. The IRS is addressing this concern with screening processes for the selection of PCAs, training programs in IRS procedures, and internal controls to prevent bad behavior. Nonetheless, the PCAs may make mistakes as they implement the program. Examples of violations could include calling a taxpayer before 8 a.m. or after 9 p.m. or calling a taxpayer at work. Similarly, PCAs may not falsely claim that the taxpayer has committed a crime and threaten the taxpayer with criminal penalties or misrepresent the amount the taxpayer owes; indeed, the statute does not give PCAs the authority to initiate enforcement actions. In addition, the IRS is issuing guidance to keep taxpayers informed of prohibited behaviors by PCAs.
In News Release IR-2016-125, the IRS describes boundaries of PCA payment procedures. That is, PCAs cannot ask taxpayers for payments on prepaid debit cards or for payments to be sent to the PCA. Rather, PCAs should provide instructions consistent with those provided at irs.gov/payments, and all payments should be payable to the U.S. Treasury and sent directly to the IRS. The Treasury Inspector General for Tax Administration (TIGTA) has established a hotline (1-800-366-4484) for complaints about PCAs. If a taxpayer has been the victim of bad behavior, reporting the violation will assist the IRS in ensuring that legitimate PCAs are acting appropriately and scams are stopped.
The hazard to taxpayers of the limited payment options and the use of third parties can be illustrated in collection data from the first year of the new program. Under IRS enforcement procedures, taxpayers with incomes of less than 250% of the federal poverty level are assumed to have living expenses that exceed their incomes and would suffer financial hardship from tax payment plans. The IRS can consider financial hardship of the taxpayer when resolving tax debts; however, the PCAs cannot consider this information, as they do not have the authority to reduce the tax debt and they are not provided with taxpayer financial information to assess the taxpayer's ability to pay. Thus, when PCAs contact taxpayers, the primary payment options presented include full payment of the tax due through either immediate payments or an installment plan. If the taxpayer is unable to pay and communicates to the PCA an inability to pay living expenses, then the PCA is authorized to gather financial information and refer the account back to the IRS, but an unrepresented taxpayer might not anticipate that a referral could produce a better outcome than dealing with the PCA.
According to the NTA's 2017 Annual Report to Congress (vol. 1, p. 16), between April and September 2017, 43% of taxpayers who made payments after their debts were assigned to PCAs and 46% of taxpayers who entered into installment agreements through PCAs had incomes below 250% of the poverty level. Thus, the program may be unfairly pressuring low-income taxpayers to make payments that the IRS would not have pursued in its enforcement procedures. The remedy to this hazard is for the IRS to exclude these accounts from the PDC program. The NTA in a Taxpayer Advocate Directive (TAD) issued April 23, 2018, and members of the House of Representatives (H.R. 5444) have both publicly urged the IRS to remove these accounts from the "potentially collectible inventory" eligible for PCA assignment (NTA Blog (June 6, 2018), available at taxpayeradvocate.irs.gov). However, in June 2018 the IRS deputy director for services and enforcement rescinded the TAD, and the House provision has not been enacted into law; therefore, these accounts continue to be eligible for assignment (RIA Washington Alert (July 3, 2018)).
In addition to the collection of data, there is another opportunity for PCA taxpayers to be treated differently than other taxpayers. When the IRS assigns a taxpayer's account to a PCA, tax debts on returns filed after assignment are automatically given to the PCA. Consequently, the taxpayer might not receive the routine four billing notices from the IRS for recently filed returns. The NTA maintains that debts on recently filed returns do not qualify for assignment as an "inactive tax receivable," and the lack of notification distinguishes PCA taxpayers from other taxpayers (see the IRS presentation, "Advocating for Clients Whose Debts Were Assigned by the IRS to a Private Collection Agency").
Representing PDC targets
Taxpayers who regularly engage a practitioner are unlikely to become the target of the PDC program, but unrepresented taxpayers may pursue professional representation when contacted by a PCA. Tax practitioners can provide a valuable service to PDC program clients by exploring the full array of options for settling their debts. For many clients, this exploration will begin with a referral of the account back to the IRS, as the Service can administer offers in compromise or partial-pay installment agreements, or can suspend collection procedures by classifying the account as "currently not collectible — hardship status."
However, a referral to the IRS can be challenging. Practitioners may have difficulty obtaining IRS CAF unit approval for their Form 2848, Power of Attorney and Declaration of Representative. Many taxpayers assigned to PCAs have not been required to file tax returns for several years. Taxpayers may have married, divorced, or changed addresses since the last filed return. If the taxpayer's name and address on Form 2848 do not match IRS records, the CAF unit will not accept the new Form 2848. Filing a current tax return or filing a change of address form for the taxpayer with current information will resolve these issues; however, this process will delay the practitioner's ability to represent the taxpayer by a minimum of six weeks. In these circumstances, calling the IRS Practitioner Priority Service line with the taxpayer present may streamline the process.
Two additional issues in the PDC program will likely hamper its success. First, the PCA may not be able to locate the taxpayer. This circumstance can create an issue for tax professionals who previously represented a taxpayer selected for the PDC program, as representatives under IRS powers of attorney are copied on the IRS and PCA contact letters. Tax practitioners who are no longer in contact with these former clients should consider revoking their authorizations for representation.
In addition, the PCAs lack enforcement power. They cannot place liens on taxpayers' properties or garnish taxpayers' wages, and they cannot threaten these actions under IRS guidelines. The limited actions the PCAs are authorized to take are to locate the taxpayer and to request payments. As the statute of limitation will continue to run with the assignment of the account to the PCA and the PCA has no enforcement authority, it appears that taxpayers who ignore the PCA contacts and wait for the statute of limitation to expire will face no adverse consequences.
The IRS has a difficult balancing act to perform to administer the PDC program, as the Service must provide enough guidance about its procedures to protect taxpayers but not provide so much information that a criminal can mimic the procedures to dupe unsuspecting taxpayers. Consequently, practitioners can safeguard non-PDC clients by making them aware of the PDC program and suggesting that all suspicious correspondence be directed to the practitioner for evaluation. Practitioners can check PCA phone numbers and addresses on the IRS's Private Debt Collection webpage. In addition, the website includes resources that can be shared with clients, such as: "How to Know It's Really the IRS Calling or Knocking on Your Door" (IRS Fact Sheet FS-2017-07, available at www.irs.gov).Poor cost-effectiveness
In 2009, the IRS ended the prior PDC program, and the NTA concluded after studying two years' worth of the program's data that IRS collection activities were more successful and cost-effective than the PCAs (see the NTA's 2013 Annual Report to Congress, available at www.taxpayeradvocate.irs.gov). Early data from the new PDC program reveal similar results. In September 2018, TIGTA reported the PDC program produced $1.29 million in net revenue collections in its first year. This amount comprises $56.62 million in gross revenue collections and $55.33 million in costs incurred. The gross revenues represent approximately 1% of the account balances assigned to PCAs (see TIGTA Rep't No. 2018-30-052, Private Debt Collection Was Implemented Despite Resource Challenges; However, Internal Support and Taxpayer Protections Are Limited (Sept. 5, 2018), available at www.treasury.gov).
Despite the weaknesses in the PDC program, there is no legislative proposal for ending it. While it remains, practitioners can help PDC clients by exploring the full array of payment options, protect non-PDC clients by alerting them to the existence of the program, and assist the IRS by reporting violations in the program's procedures to TIGTA.
Gerard H. Schreiber Jr., CPA,is with Schreiber & Schreiber in Metairie, La. Kristine R. Wolbach, CPA,is with Eide Bailly LLP in Spokane, Wash. Marilyn Young,CPA, Ph.D., is a professor of accounting at Belmont University in Nashville, Tenn. Mr. Schreiber, Ms. Wolbach, and Prof. Young are members of the AICPA IRS Advocacy & Relations Committee.For more information about this column, contact firstname.lastname@example.org.