Private Debt Collection – Since When Does Cash Positive Equal Success?

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Today we welcome back guest blogger Mandi Matlock. Mandi is Of Counsel to the National Consumer Law Center. With a significant background in consumer law combined with tax controversy practice experience, Mandi brings us the consumer advocate’s perspective on the Private Collection Agency debate. As you will read, Mandi is not a fan of having private debt collectors collect federal taxes. Keith has written before how he is also not a fan of this practice. For more background, you can read our earlier posts on this topic here, here, and here, as well as a recent Quartz article quoting Mandi. Christine

If you’ve been keeping up with recent news coverage of the IRS’s private debt collection (PDC) program, you might be under the misapprehension that things are going swimmingly. The IRS released its latest quarterly report card last month evaluating the PDC program, showing $51 million in net revenue. In response, Sen. Charles Grassley (R-IA), the program’s most vocal Congressional proponent, asserted that the program “continues to prove its value.”

He is joined in this sentiment by, well, no one really, unless you count the Partnership for Tax Compliance, the debt collection industry trade group formed just to promote this program. According to the industry group, it is “crystal clear” the PDC program is “very profitable.”

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Even Sen. Charles Schumer (D-NY), a key supporter of the legislation that forced the IRS to try to resurrect the twice-failed program, kept quiet about its value to taxpayers when the report card came out. To the extent he commented at all on the updated data, he characterized it as a boon to New Yorkers, stating that it was “all about” debt collection agency jobs for his constituents. (Yes, one of the four private collection agencies participating in the PDC program is headquartered in New York. Two of the remaining three are headquartered in Grassley’s backyard.)

Meanwhile, the National Treasury Employee’s Union President acerbically commented, “It took a year-and-a-half and millions of taxpayer dollars, but [the PDC program] has finally brought in more money than it cost.” The National Taxpayer Advocate has studied and written extensively about the PDC program in many of her annual reports to Congress. Her focus has primarily been on what she considers to be the significant burden the IRS’s operation of the program places on low-income and vulnerable taxpayers. Senator Warren and others in Congress have expressed similar concerns.

And, of course, there was that bombshell TIGTA report two months ago that thoroughly savaged the PDC program. In its report, TIGTA concluded that while the program is minimally cash-positive, it generally harms taxpayers and jeopardizes tax compliance. The IRS rejected all but one of TIGTA’s recommendations to improve the program.

Setting aside for just a moment the prodigious valid concerns about harms to taxpayers and to tax collection generally, did much change in the program’s profitability between the TIGTA report and the recent report card?

The best, honest spin I could find was this: The PDC program is slightly more minimally cash positive. Here are the indisputable facts:

  • Private collection agencies are collecting an average of 1.7% of assigned receivables (up a whopping 0.3% since the previous report card). Compare this with the debt collection industry standard of 9.9%.
  • The return on investment for collection by the IRS is 21 to 1 (according to fiscal year 2017 Treasury data). Meaning, IRS collected $21 for every $1 spent on its collection program. Current return on investment in the PDC program? 2.64 to 1. And the 2.64 figure is artificially high because the IRS has thus far not tracked and shared the estimated opportunity costs involved, as it did in previous iterations of the PDC program. (“Opportunity costs” would be the dollars the IRS could have collected if resources had not been diverted to operate the PDC program.)
  • Grassley’s presser lauds $14.5 million in collections that the IRS retains. But that only adds about one third of one percent to the IRS’s enforcement budget.

The PDC program makes no financial sense. None. Well, except for maybe to the PCAs – who are happily hoovering up cash from the public fisc and out of the pockets of low-income and vulnerable taxpayers. Add to this the potential for hardball collection tactics, a system that relies on PCAs to self-report debt collection abuses (!), the reduced collection alternatives available to taxpayers contacted by PCAs, and so much more that is wrong with the PDC program.

When will lawmakers fairly weigh the real harms against the illusory benefits of this program? In its current form the PDC program makes sense for PCAs, and no one else. Unless we start to see some hard scrutiny of the real numbers, taxpayers shouldn’t expect change soon.

Comments

  1. Fabrice Georis says:

    I hope that, at a minimum, the IRS has audited the structure of the debt collectors that it hired for this program.

    It would be a shame if the profits of the debt collection activities are split between a “cost plus return” on the collection service centers located in the U.S. (and taxed in the U.S.) and an off-shore provider of capital which earns the bulk of the overall profits while avoiding U.S. tax by taking the position that it is merely an investor in debt instruments.

    This position has no merit because (among other reasons) the activities of the debt collection providers should be attributed under basic agency principles to the off-shore provider of capital, thereby making the off-shore provider of capital engaged in a U.S. trade or business.

  2. We should probably mention the changes that would be made to private debt collection of IRS accounts, by the tax legislation proposed this week that the House Ways and Means Committee is trying to push through the lame-duck Congress.

    The bill would prevent assignment of such accounts of taxpayers whose only income is from Social Security disability or SSI benefits; and from those whose adjusted gross income is not more than 200% of “the applicable poverty level.”

    Does this mean that the bill collectors are currently pursuing such debtors?

    The bill would also make many newer accounts eligible for referral. Under current law, accounts qualify if “more than 1/3 of the period of the applicable statute of limitations has lapsed.” Since the statute of limitations is 10 years, this means three years and four months after assessment. The bill would reduce this to “more than 2 years has passed since assessment.” If I were a debt collector, getting these accounts while still fresh would be really good news.

    Private debt collectors would then be allowed to offer installment agreements of up to seven years, increased from the current five.

    My favorite part of the existing law:

    Section 6306(f) No Federal liability
    The United States shall not be liable for any act or omission of any person performing services under a qualified tax collection contract.

    • Yes, my understanding is that taxpayers’ income level as reported on recent returns does not prevent / affect how IRS selects cases for referral to PCAs. The bill you mention is Rep. Brady’s answer to the pending Taxpayers First Act. It was introduced late Tuesday I think. Negotiations are hot and heavy I hear. LOTS in the bill. But the big difference w/r/t/ operation of the PDC program: Brady’s bill would carve out taxpayers who earn 200% FPL permanently, whereas the Taxpayer First Act carved out those earning less than 250% FPL through 2019, I think it was.

  3. If the Service simply hired far more Revenue Officers, collection and compliance would rise substantially.

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