Like springtime weeds in the garden, the idea of collecting federal tax debts through private collectors pops up with regularity. Recently, it has popped up again as a part of the Expiry legislation even though it has nothing to do with the extenders that bill primarily addresses. Whatever statistics opponents use as weed killer for this idea have failed to stop it from returning for the third decade in a row. I will examine the newest version of the idea and explain why it needs to go away with the hope that additional funding for real tax collectors working at the IRS will replace it.
It surprises me that a Congress that seems to like to lodge new programs at the IRS not central to its mission that soak up its resources and keep it from mission critical programs cannot see a better path to collecting the taxes owed to the United States. The Collection function of the IRS has some issues with which I could take exception but generally does an excellent job at collecting the taxes owed. Assigning debt collection of federal taxes to private debt collectors diverts resources better spent providing proper staffing to the Collection function at the IRS creating a broader system impact than measured and subjects taxpayers to collection by individuals with less training, accountability and proper incentives.read more...
The National Taxpayer Advocate has long fought against private debt collection. During the most recent period of private debt collection from 2006-2009, it was regularly a point of discussion in her annual report to Congress. Those reports contain many thoughtful arguments and statistics supporting the position that private debt collection does not work as well as collection by the IRS. On May 13, 2014, she wrote a 21 page letter to several members of Congress detailing again the arguments against private debt collection. Her letter contains twelve reasons why Congress should not adopt private debt collection and ten suggestions regarding the current proposal. I will not recount all of her arguments here and recommend the letter if you have an interest in this issue.
My concerns about the proposal fall into four broad categories mentioned above: training, accountability, system impact and proper incentives. I will mention each in turn. As the director of a low income taxpayer clinic, I also want to mention that I think the proposal will fall heavily upon the group that I represent. The types of accounts given to private debt collectors generally involve relatively low liabilities and frequently include the accounts of low income taxpayers. This group already enters into installment agreements regularly that are not sustainable. Private debt collectors will likely put extra pressures on these taxpayers that will yield little revenue but further burden the tax system.
Despite the IRS’s lack of funds for training, it still provides significant training to its employees. Collection of federal taxes involves the application of many special statutes, regulations and rulings. The IRS not only trains its front line employees but has special units and counsel available to answer the more difficult questions. Understanding the nuances can take many years. I do not believe that the private debt collectors will understand the nuances of the law or policies adopted by the IRS to allow the law to work most efficiently.
Sitting in a classroom listening to someone tell you the legal concepts underpinning federal tax collection will not imbed these principles in the minds of the employees of the private debt collection companies. It takes real world experience over a period of time. The biggest part of the training comes through doing. Bringing in private collectors means a brand new class of collectors receives numerous accounts to collect with only a rookies experience on how to do it. The person sitting next to the private debt collector will be another rookie and not someone with experience.
The IRS has the infrastructure to absorb more collection employees. It has the training modules and the experienced workers to train the new ones and sit beside them as they learn. If we want the best trained individuals collecting federal taxes, use the system already in place and provide it with the funding necessary to work. Building a parallel system will give us two weak systems with undertrained employees.
Private debt collection employees will not operate with the same system of accountability that exists for federal employees. In 1998 Congress imposed some serious consequences to IRS collection employees engaged in certain behaviors, which I discussed in a post in November found here. Those consequences will not apply to the private work force. While I disagree with the way Congress went about establishing the rules for accountability in the 1998 Revenue Reform Act through the adoption of the never codified section 1203 of that legislation, the provisions in that legislation represent a strong statement by Congress of the special nature of the IRS. No other agency has that type of accountability statement leading to essentially automatic termination. If Congress believes that the actions of IRS employees have such significance in the tax collection area that actions of the type enumerated in 1203 require termination, why would it put those same functions in the hands of individuals not subject to those consequences?
The Congress that passed 1203 had a deep concern for the special nature of the IRS and its functions. Placing those functions in the hands of private parties greatly reduces the protections Congress sought to build with that legislation. Even though 1203 is deeply flawed, it serves as recognition of the importance of the bond between tax collection and the public. It creates strong remedies for breaches of proper conduct by government officials because of the importance of that bond. Placing those same duties in the hands of private parties significantly removes the accountability Congress sought to create in this important relationship.
The National Taxpayer Advocate does an excellent job of demonstrating that the last round of private debt collection lost money for the government. I do not think she went far enough in describing the loss. Every time a system gets established it has downstream consequences. The private debt collection system puts a burden on the downstream functions at the IRS not captured by the data I have seen. This burden has a cost that also needs to be measured, or at least considered, in the decision to hire private debt collectors.
When a person in the federal tax collection function takes an action, whether it is a private collector or an IRS employee, it can have an impact on the next function or functions down the line. Debt collection does not stop with the first contact. Debt collection frequently impacts the employees in the Taxpayer Advocate Service who must deal with taxpayers claiming hardship or other consequences of the collection activity. My perception is that TAS bears the brunt of actions by private debt collectors but their actions could also implicate Appeals or Counsel.
Aside from the cost based on individual case action, the IRS needs to deal with the contractual and monitoring of the private debt collectors also places a burden on the system. The National Taxpayer Advocate does talk about this cost and provide useful details.
As with 1203, Congress has also spoken about proper incentives for IRS employees. The laws passed require the IRS to take care in evaluating employees to not rely upon certain indicators. High on the list of matters the IRS cannot consider in evaluating collection employees is how much money the employee brings into the federal coffers. So, Congress has specifically told the IRS not to evaluate its employees based on the amount they collect but to use other measures in preparing their annual evaluations. This makes sense. If IRS employees get evaluated based on the amount of money they bring into the coffers, they have an incentive to collect as much as possible without thinking of the consequences on the individuals from whom they collect. You can imagine that motivated IRS employees could think of many ways to collect as much as possible if the emphasis is on how much they collect and not on whether they do so properly. We might make an analogy here to the alleged incentives on local police forces that result in end of the month activity.
While Congress has properly constrained the IRS from using dollars collected as the appropriate basis for rewarding employees, private debt collection specifically uses that as its foundation. Private debt collectors will get a percentage of what they collect. They will not get a percentage of the write down of debt that needs to be placed in currently not collectible or needs an offer in compromise. They have no incentive to look for the correct result if that result drives them to something other than the collection of more dollars. As with the policy behind 1203, it is difficult to understand why Congress would feel it necessary to specifically impose guidelines on the IRS to keep it from using dollars collected as a measurement point for its employees and then hire private debt collectors with precisely the opposite approach.
I give just a few examples why I think private debt collection has little to offer. Putting more money specifically directed to the Collection function of the IRS would bring in more revenue and do so with the proper safeguards. Why must we debate this every decade? Fund and train IRS employees so that we achieve the maximum revenue with the proper regard for the people who owe. I want everyone to pay their taxes. I know that not everyone can do so. Striking the proper balance during the collection phase of a case requires careful consideration by the IRS and proper application of the law. Private debt collections will provide neither.