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Consumer Reports

IRS wants to hire private collection agencies | (KRT) The Internal Revenue Service, complaining that it lacks the resources to collect billions of dollars taxpayers owe, is pressing Congress to let it hire private collection agencies to recover some of the burgeoning tax debt.

Supporters, including many lawmakers, say this could help the government bring in long-lost money. But skeptics paint a picture of thugs threatening and intimidating terrified taxpayers, and the Bush administration proposal has sparked vehement opposition from consumer advocates, Democrats and others who worry that private contractors would be far more aggressive than IRS employees.

A House bill introduced last month on behalf of the administration would allow the IRS to farm out about $13 billion in tax debt to private collection agencies, which could receive as much as 25 percent of what they bring in. Critics argue that providing commission-like incentives to private collectors would encourage companies to badger and harass delinquent taxpayers and violate their rights.

Defending the proposal, IRS Commissioner Mark Everson told a House subcommittee last month that hiring contractors to recoup easily collectible unpaid taxes would allow his agency to focus its limited resources on more complicated cases. He insisted that safeguards would be sufficient to ensure collectors did not violate taxpayers' rights.

"A taxpayer contacted by a (private firm) would enjoy the same rights and protection as a taxpayer contacted by an IRS employee," Everson said.

Sen. Byron Dorgan, D-N.D., a former state tax commissioner, strongly opposes the proposal. He called it a "terrible idea."

Despite such strong opposition, Republicans in the administration and Congress say the proposal has a good chance of passing this year.

The measure's sponsor in the House, Rep. Amo Houghton, R-N.Y., considers the administration proposal the best way to increase the amount of unpaid taxes collected without spending more money.

"If we handle this with care, using private debt-collection companies could give the IRS much-needed resources to collect billions in unpaid taxes," Houghton said.

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Now, other government agencies may hire collection agencies to recover unpaid debt, but the IRS is prohibited from doing so. Houghton's bill would end that prohibition.

To prevent abuses, the IRS said it would use taxpayer-satisfaction surveys, audits of collection agency records and periodic performance reviews. The agency also would monitor telephone conversations between debt collectors and taxpayers.

Although collection agencies would receive a commission based on total taxes collected, a Treasury Department official said, the IRS would forbid a company's employees from being evaluated or paid based on how much money they collect.

In addition, Everson noted that laws allow individuals to sue collection agency employees who disclose confidential information or violate other rights. Collection agencies would be required to inform taxpayers that the IRS' taxpayer advocate is available to help them resolve a dispute with private collectors.

More than 40 states, including Illinois, use private collection agencies to recover unpaid taxes. However, that has not reassured critics of the IRS plan.

"I don't like the proposal of unleashing private bill collectors on the taxpayers of this country," said Rep. Earl Pomeroy, D-N.D., a senior Democrat on the House Ways and Means Committee, which oversees tax issues. "I think it is a very expensive and inefficient way of collecting taxes."

The IRS' taxpayer advocate, Nina Olson, has also raised objections, arguing that collecting taxes is "inherently governmental" and so should be done by federal employees. Only the IRS can seize property and cash and use other "powerful" governmental tools to collect tax debts, Olson told the House panel.

But she said Congress could reasonably grant the agency permission to contract out some collection work, as long as protections were in place to prevent abuses by private collection agencies.

Still, under the proposal as outlined in Houghton's bill, the government could not be held liable for the abuses of a private collection agency.

The safeguards against abuse do not go far enough, however, said Robert McIntyre, director of Citizens for Tax Justice.

"You'll be giving out some really private information to private companies, and who knows how well they'll protect it," he said.

This is not the first time in recent years that a significant IRS reform has been proposed. In 1998, Congress responded to complaints of the IRS using intimidating and unfair tactics by enacting far-reaching changes, for example shifting the burden of proof from taxpayers to the IRS in many cases.

Under Houghton's proposal, the IRS would farm out only cases that are likely to require little effort to secure payment. An agency would first send a letter explaining that they are collecting a tax debt on behalf of the IRS. The collection agency would then contact the taxpayer by telephone to answer any questions about the debt and request payment. Taxpayers would be asked to either pay in full immediately or agree to a three-year payment plan.

The IRS said it estimates that of about $2 trillion it is owed each year, about $32 billion goes unpaid.

In all, corporate and individual taxpayers owe the federal government $280 billion, of which $78 billion is potentially collectible, the IRS said. The rest is unavailable typically because of deaths or bankruptcy, and such debts are written off after 10 years. The IRS maintains that it does not have enough manpower to recover at least $13 billion owed by individuals who have acknowledged the debt. But critics of the privatization proposal argue that the safest, most cost-effective way to recover the funds would be to give the IRS more money to hire more of its own collectors.

Colleen Kelly, president of the National Treasury Employees Union, cited an IRS commissioner's report last year that said the agency could recover an additional $9.47 billion each year if Congress gave the IRS $296 million more_meaning it could bring in $31 for every $1 spent.

Under the administration's proposal, the return could be as little as $3 for every $1 spent.

"It is not even a good business decision," Kelly said. The IRS tried using private companies to collect unpaid taxes under a 1996 pilot program. But that initiative was more limited, and it was considered a failure because it cost more money than it recovered. Collection agencies were allowed to track down taxpayers and remind them of the money they owed, but not to ask them to pay it.

The Treasury Department official said another reason the pilot was unsuccessful was that the IRS sent the private collectors all sorts of cases, regardless of their complexity.

A Treasury Department audit found that some private collection agencies violated federal laws during the pilot program by calling individuals early in the morning or late at night and by failing to "provide adequate protection over sensitive taxpayer data."

Private collection agencies have a serious image problem in many quarters.

In 2001, the most recent year for which figures are available, the Federal Trade Commission received more than 15,800 consumer complaints about debt collectors, a number the agency said was a "relatively small percentage of the total number of consumers who actually encounter problems with debt collectors."

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© 2003, Distributed by Knight Ridder/Tribune Information Services