National Taxpayer Advocate Blogs on Private Debt Collection

On July 5, the National Taxpayer Advocate (NTA) posted a blog on the private debt collection program.  She has followed that up with two more blogs on this subject found here and here.  In June, she posted two blogs, found here and here, about the passport revocation program which contain a number of useful examples about how that program will work.  Because of her position inside the IRS and her knowledge and insight on collection issues, these blogs serve as an important resource for practitioners confronted with these issues.  I have blogged before on private debt collection here and here.  The private debt collectors are now at work contacting taxpayers.  One of our prior clients has received contact which is not surprising as you will find out when I discuss the statistics in her second blog post on this subject.

read more...

Nina starts her first blog with a background about the earlier failed effort to use private debt collectors and about the statutory authority surrounding their use.  She notes that it was agreed that the IRS could not use private debt collectors with specific Congressional authorization.  The American Jobs Creation Act in 31 U.S.C. 3718 generally permits federal agency heads to contract with private debt collectors but that act specifically excludes federal tax debts.  Viewed through that lens, IRC 6306 authorizes the IRS to hire private debt collectors for very specific limited activities.

The specific action authorized is entering into “qualified tax collection contracts.”  The statute defines this term as an agreement for services: “(A) to locate and contact a taxpayer; (B) to request full payment from such taxpayer and, if the taxpayer cannot make full payment, to offer the taxpayer an installment agreement for a period not to exceed five years; and (C) to obtain financial information with respect to such taxpayer.”  Nina’s blog takes the position that the IRS has gone beyond the authorization in the statute.

She points first to installment agreements.  The agreement allows the private debt collectors to enter into installment agreements that last up to seven years.  If the agreement for an installment agree goes beyond five years, the private debt collector must obtain approval from an IRS technical analyst.  She feels that allowing this goes beyond the language of the statute but that, even worse, the private debt collectors can monitor the installment agreements that go beyond five years and receive commissions on them even though this monitoring is not specifically authorized by IRC 6306.

When Congress passed the newest version of private debt collection and mandated that the IRS use it, the carrot in the legislation is that the IRS gets to keep 25% of the amounts collected.  This carrot provides an incentive for the IRS to maximize the use of private debt collections and may lead to use of them in a manner not authorized by the statute.

The IRS is not requiring private debt collectors to solicit financial information from debtors even though that is one of the categories of things the private debt collectors are explicitly allowed to do.  This information would allow the IRS to determine a taxpayer’s ability to pay.  Private debt collectors did this the last time they were working tax debts.

Their scripts instruct their employees to “suggest that liquidating assets or borrowing money may be advantageous” and to provide ideas on how and where to borrow including borrowing from a retirement plan or obtaining a second mortgage.  Since the private debt collectors are not gathering information about the taxpayer’s financial situation, unlike the IRS when it is engaged in collection, the private debt collectors might suggest borrowing that would be detrimental to the taxpayer’s financial well-being.  Because of the payment structure, the private debt collectors have an incentive to get the taxpayer to pay even if it would prove to create financial hardship.

As sad as you might be about private debt collectors after reading Nina’s first blog, her second post provides a clearer picture of which accounts are going over to these companies.  Not surprising, the accounts include a high percentage of low income taxpayers.  One of the reasons for the failure of the last effort to use private debt collectors is that they receive the accounts the IRS cannot collect.  A high percentage of those accounts involve individuals who have little or no ability to pay.  The data in her second post makes this clear.  She has had her researchers look at the income levels of the accounts being sent out.  The median income of the group of almost 10,000 taxpayers sent out early in the program was $31,000 and about half of the group fell under 250% of poverty level which means they would qualify for the services of my clinic under the guidelines Congress established in creating the grant funds for low income taxpayer clinics in IRC 7526.

Nina does note that she has once again made being the subject of private debt collection a policy basis for getting assistance from her office even if the taxpayer does not meet the hardship criteria of the statute.  Most of these individuals will not know that or know why they should seek assistance from her office or clinics like mine, but assistance is available for the taxpayers who are the subject of private debt collection.  As Nina points out, the IRS voluntarily agreed to exclude certain taxpayers but declined to exclude others she felt should be added to the list meaning that a fair number of vulnerable individuals will be handed over to the private debt collectors.

In her third and final blog on the subject, she points out that one decision made by the IRS is to send new tax debt out to the private debt collectors in situations where the taxpayer has old debt already in their hands.  The post has an informative chart on the amount of money each of the four notices in the IRS collection stream brings into the coffers.  New debt is much easier to collect for the IRS than old debt.  A statistic I remember from working on similar issues years ago is that the IRS only collections about 15% of debts once they go past two years.  By turning over new debt to the private debt collectors, the IRS is giving them debt the IRS itself might have collected in its notice stream without having to pay the fee to the private debt collectors.

Here is where potential gamesmanship comes into play.  While the new debt might get collected without assistance from the private debt collectors, if they do collect it not only do they get to take out a fee but 25% of the amount collected goes into a fund the IRS can use for its operation.  Going back to 1954, Congress eliminated incentives for tax collectors to collect money to make it a more professional operation.  The new IRC 6306 puts this type of incentive out there for the IRS as a way to augment its budget.  To be sure, none of this 25% directly benefits anyone at the IRS but the system does provide an incentive for the IRS to toss to the private debt collectors some of the “better” debt because the more debt collected by them the more the IRS has additional funds to spend at a time when Congress has decided to starve it.

 

FDCPA’s Application to IRS’ New Private Debt Collectors

Today we welcome first time guest blogger Chi Chi Wu.  Ms. Wu is an attorney at the National Consumer Law Center (NCLC.)  While her primary portfolio centers on issues involving consumer law, she is the point person at the NCLC when tax law issues cross over into consumer law.  Some of her previous advocacy focused on tax-time financial products, such as refund anticipation loans.  She writes today about private debt collectors because their use raises consumer rights issues.  As all of our readers know the IRS has begun hiring private collectors to collect on delinquent tax obligations, and this post explains why these collectors are subject to Fair Debt Collection Practices Act requirements and remedies.  Keith

The Internal Revenue Service (IRS) has begun placing federal tax debts with private debt collectors.  One critical question is whether the Fair Debt Collection Practices Act (FDCPA) and its private remedies apply to these private debt collectors.

read more...

Background

Internal Revenue Code (IRC) § 6306 requires the IRS to outsource the collection of certain federal tax debts. The IRS must enter into one or more “qualified tax collection contracts” with private agencies for the collection of “inactive tax receivables.” 26 U.S.C. § 6306(c). Inactive tax receivables are any tax debts in the IRS “potentially collectible inventory” that meet at least one of these criteria:

  • The tax debt has been removed from active inventory by the IRS for lack of resources or inability to locate the taxpayer;
  • More than one-third of the applicable statute of limitations has lapsed and the tax debt has not been by assigned to an IRS employee for collection; or
  • More than one year has passed without an interaction with the taxpayer or a third party for purposes of collecting the debt.

Certain taxpayers are statutorily exempt from the program. See NCLC’s Fair Debt Collection § 8.10.1.

The only activities that the IRC authorizes private debt collectors to perform are locating and contacting taxpayers, requesting full payment or offering installment agreements lasting up to five years, and obtaining financial information about the taxpayer. 26 U.S.C. § 6306(b).

Any amount collected from a taxpayer must be fully credited toward the taxpayer’s tax debt; in other words, collection fees will not be deducted from the amount paid by the taxpayer. 26 U.S.C. § 6306(e).The IRS is permitted to pay private collectors up to twenty-five percent of the amount of tax debt collected.

According to an IRS analysis, 79% of the cases that are likely to be referred to private debt collectors involve taxpayers with incomes below 250% of the federal poverty level. See Letter from Nina Olson, National Taxpayer Advocate, to Senate Committee on Finance and House Ways & Means Committee 8 (May 13, 1994).

This is not the first time the IRS has tried to use private collectors, and such prior efforts were far from successful.  For a history of prior IRS efforts to use private collectors, see Fair Debt Collection § 8.10.2.

FDCPA Applicability and Other Taxpayer Protections

Any contract between the IRS and a private collector must prohibit the collector from committing any act or omission that IRS employees are prohibited from committing in the performance of similar duties. 26 U.S.C. § 6306(b)(2). These prohibitions include communicating at inconvenient times and places; contacting represented debtors (with certain exceptions); calling the debtor at work if the collector knows the debtor’s employer prohibits such calls; and various other types of harassment and abuse  See 26 U.S.C. § 6304. See also NCLC’s Collection Actions § 10.2.13.10.

In addition, the IRS Code provides that “[t]he provisions of the Fair Debt Collection Practices Act shall apply to any qualified tax collection contract.” 26 U.S.C. § 6306(g).  While the law says that the FDCPA shall apply to the contract, the legislative history shows that Congress meant by this language that provisions of the FDCPA “apply to the private debt collection company.” Conference Rep. No. 108-755 (2004).

Thus, the FDCPA should apply to private collectors of IRS tax debts, despite the fact that the FDCPA normally does not apply to tax debts. See Fair Debt Collection § 4.4.2.3.

There is an exception to the extent that the FDCPA is superseded by: (1) IRC § 6304, which establishes the prohibitions discussed above that are very similar to the FDCPA; (2) IRC § 7602(c) governing contact with third parties; and (3) “any other provision” of the IRC.  See 26 U.S.C. § 6306(g), cross-referencing 26 U.S.C. §§ 6304, 7602(c).

Remedies for Violations by Private Collectors

The IRC includes a civil remedy against a debt collector who recklessly, intentionally, or negligently disregards any provision of the tax code or any regulation under it. 26 U.S.C. §§ 7433A, 7433(a).  The taxpayer has the right to bring suit in federal court for “actual, direct economic damages,” with a cap of $1,000,000 ($100,000 in the case of negligence), plus costs.  26 U.S.C. § 7433, incorporated by reference in 26 U.S.C. § 7433A(a).

Unlike suits when the misdeeds are committed by IRS employees, the plaintiff need not exhaust administrative remedies. However, the law insulates the IRS from liability for any misconduct by the private collector, permitting suit to be brought against the private tax collector only, not against the United States. 26 U.S.C. § 7433A(b)(1), (4). See also 26 U.S.C. § 6306(f).

FDCPA private remedies should also apply to private collectors when collecting tax debts.  The IRC makes the FDCPA applicable to the private debt collection program. 26 U.S.C. § 6306(g).   There is an exception to the extent that the FDCPA is superseded by, inter alia, “any other provision” of the IRC, which would include the civil remedy discussed above. 26 U.S.C. § 6306(g), cross-referencing 26 U.S.C. §§ 6304, 7602(c).

This section provides that “such civil action shall be the exclusive remedy for recovering damages resulting from such actions.”  26 U.S.C. § 7433(a).  However, the IRS private collection provision specifically refers to IRC § 7433A to establish a civil remedy. See 26 U.S.C. § 6306(k)(1). Section 7433A in turn states that “[s]uch civil action shall not be an exclusive remedy with respect to such person.” 26 U.S.C. § 7433A(b)(3).

Thus, a taxpayer’s remedy for unlawful debt collection activities is not limited to the IRC’s civil remedy provision, and FDCPA civil remedies should be applicable for private collectors conduct in collecting IRS tax debts.  This is important because the IRC civil remedy provision does not provide for statutory damages or attorney fees. 26 U.S.C. § 7433(b). Private collectors should also be liable for common law torts committed in the course of collecting tax debts, whose remedies might include punitive damages.