Taxpayer Advocate Raises Concerns About IRS Use of Private Debt Collectors

Nina Olson, the national taxpayer advocate, raised several concerns about the IRS’s use of private debt collection services in her annual report to Congress on Thursday, saying the practice will hurt taxpayers and harm tax administration.

The Fixing America’s Surface Transportation Act, P.L. 114-94, enacted in December 2015, requires the IRS to enter into tax collection contracts with third parties for the collection of certain outstanding inactive tax receivables. The tax debts that are included under the act are any tax receivable (1) that has been removed from the IRS’s active inventory due to a lack of resources or an inability to find the taxpayer; (2) for which more than one-third of the applicable limitation period has passed and no IRS employee has been assigned to collect the receivable; or (3) that has been assigned for collection, but more than 365 days have passed without interaction with the taxpayer for purposes of furthering collection of the receivable.

The IRS previously had a program that used private collection agencies to collect delinquent tax debts, which ran from 2005 to 2009. That program was ended because a cost-effectiveness study showed that collection by IRS employees was more cost-effective than the use of private debt collectors.

The previous program, while authorized by Congress in the American Jobs Creation Act of 2004, was not mandatory, and the IRS was free to discontinue the program when it determined it was not cost-effective. Now, under the Fixing America’s Surface Transportation Act, the IRS is required to use private debt collection services.

The taxpayer advocate raised concerns in 2005 about the first program, and in Thursday’s report she raises concerns about the new program.

Economic hardship

The first concern is “how the accounts of taxpayers who are experiencing economic hardship will be handled.” Olson’s report notes that, while the IRS “must refrain from seeking to collect money from taxpayers who are experiencing economic hardship,” under the new law, the IRS is not required—or even allowed—to refrain from sending such taxpayers’ tax receivables to a private collection agency.

And while the IRS has decided that taxpayer accounts that are in “currently not collectible” (CNC) status do not count as “tax receivables” for purposes of the law, and therefore will not be assigned to private collection agencies, the report notes that taxpayers who meet all the requirements for CNC status, but whose accounts have not been so designated, may have their accounts turned over to private debt collectors.

Furthermore, private collection agencies are not authorized to implement any of the specific procedures that the IRS uses to work with taxpayers experiencing economic hardship. These include the release of levies, offers in compromise based on doubt as to collectibility, and CNC status, which removes the taxpayer’s account from the IRS’s active collection inventory.

Private collection agencies also have no incentive to return the accounts of taxpayers experiencing economic hardship to the IRS. The IRS’s policy and procedures guide for the program acknowledges that some taxpayers may be unable to pay their tax debts because of financial hardship but does not require the private collection agencies to return those accounts to the IRS. According to the report, the private collection agency could continue to extract payments from a taxpayer who is in economic hardship, even though, if the IRS were handling the account, the taxpayer would be put into CNC status.

There are also no uniform standards that private collection agencies must use when determining whether a taxpayer is unable to pay.

Private collection agency procedures

Olson’s report says that under the previous program, the private collection agencies “used tactics inconsistent with IRS collection practices.” The current contracts and IRS policy and procedures guide, the report says, do not make any changes from the previous program, which merely required IRS approval of the scripts the private collection agencies use for phone calls.

Treatment of returned accounts

The report also raises a concern over how accounts returned from private collection agencies will be handled. Currently, the IRS intends to put these accounts into its inactive inventory, rather than attempting to collect. Under the previous program, there was a “referral unit” within the IRS that worked the returned accounts and, according to the report, collected more dollars than the private collection agencies did—even though the returned cases were presumably the hardest to collect.

Recommendations

The report says that the Taxpayer Advocate Service will advocate that the IRS require private collection agencies to disclose their operational plans, scripts, and training materials. It will also review private collection agency procedures to ensure that the IRS is not using the private agencies to perform collection activities that the IRS itself is prohibited from doing.

The report also says that the Taxpayer Advocate Service will seek advice from the IRS’s Chief Counsel on whether the Federal Communications Commission’s proposed rule that would limit calls to debtors’ cellphones to three per month applies to the IRS or to private collection agencies when they are attempting to collect tax debts. If the rule does not apply to the IRS or private collection agencies, then the Taxpayer Advocate Service will seek advice on the extent to which the IRS can prohibit private collection agencies from using prerecorded or automated voices when contacting taxpayers.

—Alistair Nevius (anevius@aicpa.org) is The Tax Adviser’s editor-in-chief, tax.