National Taxpayer Advocate Blogs on Private Debt Collection

8 Flares Filament.io 8 Flares ×

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.

 

Comments

  1. It’s clear that Congress has no interest in funding the IRS except for funding private debt collectors to bring in minuscule amounts from low income taxpayers who are unaware that the private debt collectors have NO enforcement powers whatsoever.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*