IRS Weighs Debt Collectors As a Way to Get Back Taxes

JOHN D. MCKINNON / Wall Street Journal 15oct02

WASHINGTON -- Unable to collect more than $200 billion in back taxes, the Internal Revenue Service is considering using private collection agencies to get taxpayers to pay the government.

The IRS has been circulating a detailed document asking some of the same firms that track down credit-card deadbeats to help it design a plan for private collectors to go after taxpayers in an attempt to gather up what one recent study estimates might be as much as $50 billion of the total.

According to congressional and industry officials, the IRS could put out a draft of its plan as early as next month, and would begin doling out the work late next year, either on a temporary or a permanent basis.

The IRS, which began distributing its request earlier this year, is still deciding whether bill collectors should be paid a flat fee or keep a percentage of the taxes collected. Under the latter option, especially, bill collectors could reap billions of dollars in revenue over the coming decade.

"Obviously the [IRS] has an obligation to make sure we're doing everything we can to collect debts on the books," says Pamela Olson, assistant Treasury secretary for tax policy. "To the extent we're not getting it done we ought to look at other options," including private bill collectors. Some Bush administration officials believe they need congressional approval for the change. They are considering including the proposal in the White House's 2004 budget plan, due out early next year. The IRS is part of the Treasury Department.

Big Pot

The IRS hasn't decided how much of the roughly $240 billion in unpaid taxes to turn over to collection agencies. Much of that amount is considered uncollectible because the delinquent taxpayers have died or don't have the money to pay, among other factors. But Congress's General Accounting Office estimates that at least $20 billion in unpaid taxes is readily collectible; much of that isn't being pursued. Tens of billions of dollars more could be collected after appeals of IRS tax assessments are decided, officials say. A PricewaterhouseCoopers study, commissioned by collection company DCS Inc. of San Leandro, Calif., estimates that as much as $50 billion could be collected over the next 10 years.

According to Jon Shaver, chief operating officer of DCS, one of the three collection agencies that the IRS chose to advise it on the project, private collections of $50 billion are "doable, without question." Other collection agencies expected to bid on the work include Allied Interstate Inc., of Minneapolis, a unit of Columbus, Ohio-based Intellirisk Management Corp., and GC Services LP of Houston. So far, the IRS has only conducted one short-lived pilot project using private collections, in 1996.

Recruiting collection agencies to do IRS work would be a remarkable turnaround for the agency, which has been feared for decades for the power it wields over taxpayers' lives. Those in arrears face the potential that the agency will garnish their wages, seize their property and even grab cash registers from their businesses.

But fear of the IRS has faded since the early 1990s when IRS personnel budgets began a steep decline. The agency's power also was clipped in 1998 when tough new procedural curbs were imposed on agents in an effort to make the IRS more taxpayer friendly. Under the 1998 law, the IRS must fire employees who harass taxpayers. Agents also complain that they must suspend collection whenever taxpayers make offers of settlement or propose installment arrangements, even when the offers seem unreasonable to agents.

Since then, the IRS and Treasury have fielded about 5,000 taxpayer complaints alleging that IRS agents have committed firing offenses, dubbed the "deadly sins" by agents. About 50 agents have been dismissed so far; another 100 or so have retired or resigned in the face of allegations.

Huge Backlogs

Agents contend that many of the complaints come from taxpayers trying to stall a collections case or intimidate agents. The law has produced huge backlogs in compromise settlement offers from taxpayers, many for pennies on the dollar.

"It's really bound our hands," Robert Ross, a veteran IRS revenue officer in the Bronx, N.Y., said of the 1998 law. "In a normal year, a seasoned officer would collect $1 million plus. Now it's a fifth or a third of that."

Tax-avoidance techniques widely available in bookstores and on the Internet frequently take full advantage of the 1998 reforms. And enterprising accountants run television commercials pitching other procedures that can drag out tax proceedings for so long that the IRS eventually gives up or agrees to settle.

To win congressional approval, however, the IRS must overcome substantial political and legal hurdles, including fighting the National Treasury Employees Union, which represents IRS workers. The union contends that its members could do a better job of collections than private companies, if Congress would restore the agency to its former strength, something officials also will consider. In 2000, the last year for which IRS reported collections activity as a separate function, it had a total of 10,678 collections personnel, or about 11% of its total personnel.

The union can be a formidable foe; in the current debate over a homeland-security agency, the NTEU and other unions have fought the Bush administration to a standstill over bargaining rights for the new department's employees. "I'm even opposed to them studying" privatizing tax-debt collection, said Colleen Kelley, president of the NTEU.

Meanwhile, taxpayer advocates worry that private collectors could trample the hard-won rights of individuals, hassling them with insistent phone calls and browbeating them into paying bills that -- given the IRS's record-keeping difficulties -- they might not even owe. Even if the collection agencies were required to drop cases where taxpayers dispute some aspect of a tax debt, critics doubt the bill collectors would fully comply and risk giving up lucrative fees.

States' Siege

Some state tax authorities have turned to collection agencies for help, says Nina Olson, the IRS's paid taxpayer advocate. But when taxpayers complain that the private firms have gone too far, she says, it is sometimes "difficult to get a case out of the hands of the collection agency." She isn't related to Pamela Olson, the Treasury tax official.

Collections agencies respond that they operate under tough, widely understood standards. For years, the Education Department and other federal agencies have used private bill collectors. Under that department's program to collect defaulted student loans, private collectors handle nearly all the cases and get about 20% of what they collect. The agency helps the collectors by agreeing to indemnify them up to a certain amount for violations of debt-collection laws.

Under a 1996 law aimed at speeding non-IRS collections, the Treasury Department itself uses private agencies to collect nontax debts owed to the government.

Any IRS program that uses outside bill collectors would also likely bar them from using tactics forbidden to IRS agents. "I don't think you can expect to contract it out without having contractors subject to the same rules," the Treasury's Pamela Olson says.