IRS 'Outsourcing' Debt Collections

The taxman is outsourcing.

The Internal Revenue Service (search) has gotten the go-ahead to begin contracting out to private debt collection agencies (search) to go after uncollected federal tax payments, believed by the IRS to be around $270 billion a year.

"The use of these collection agencies will allow the IRS to focus its resources on more complex cases and will allow the IRS to handle more cases at an earlier stage before they become harder to collect," said IRS spokeswoman Nancy Mathis.

Though several federal agencies use private collectors to retrieve debts, the IRS was only given the authority when President Bush signed the American Jobs Creation Act of 2004 (search) in October.

Despite some bipartisan effort to thwart the new policy, it was codified in the fiscal year 2005 Transportation-Treasury spending bill passed in November.

Supporters of private contractors say allowing debt collectors to go after simple delinquency cases will free the IRS to pursue the more complicated ones, particularly when such a heavy backlog exists, and will make the agency more efficient and responsive to taxpayers overall.

"Without a significant change in business practice, the pool of uncollected, but potentially collectible, tax liabilities will continue to plague us," IRS Commissioner Mark W. Everson told Congress when he testified two years ago in support of private debt collectors. At the time, Everson said the dollar amounts owed to the government was growing 3 to 4 percent annually.

"More troubling is the fact that this backlog of cases will only grow over time," he added.

But critics say private collectors, who stand to reap up to 25 percent of every successful collection, are bound to harass citizens. Furthermore, contracting out collections raises privacy concerns about handing over tax information to third parties. Finally, turning over the job to private companies puts federal workers out to pasture.

"This whole bounty scheme is one that will work against taxpayer rights," said Colleen Kelley, national president of the National Treasury Employees Union (search), which has been fighting, so far unsuccessfully, against farming out debt collection.

"This is going to risk taxpayer privacy as well as invite aggressive collection tactics," she said in a press conference on Wednesday.

Kelley said that despite the backlog, the IRS is planning to let go of 700 employees who provide customer service as well as 105 local tax service centers.

Rep. Shelley Moore Capito, R-W.Va., who has 1,000 IRS employees in her district, said a lack of adequate resources has led to the backlogs and the decision to privatize, a policy she opposes and has tried to foil in the past.

"They don’t have the funds to hire more IRS workers -- the politically sensible thing is not to give more money to the IRS to go after taxpayers," she said.

"It’s a 'catch-22,'" Capito added, because now third parties who stand to make a profit will be going after taxpayers.

But Rep. Pete Sessions, R-Texas, who supports the privatization effort, said an additional, expensive federal bureaucracy is not needed to rein in delinquent taxpayers. He noted that more than 40 states already use private third parties to collect debts.

"While I believe the tax burden on Americans is too high, I feel strongly that individuals who are delinquent in paying their taxes should be held accountable," Sessions said.

Jennifer Loon, director of government affairs for the American Collectors Association (search), which represents about 3,600 debt collection agencies, said private collectors will be bound by more rules and regulations than even the IRS customer service agents.

"First of all, in terms of the overall project, it is not a replacement of IRS employees or a displacement of them," Loon told, adding that private collectors "would not have a fraction of the responsibility or authority of IRS employees."

In addition, Loon said private collectors are bound by the federal Fair Debt Collection Act (search) and can be sued by consumers if they don’t abide by the rules protecting consumer privacy. They will also be subjected to government regulations regarding customer service.

Mathis added that private collectors will have access only to the information pertinent to the payer’s delinquent payment, not full tax histories. The collector will have the ability to enter into payment plans with the individual but is "prohibited from threatening or intimidating any taxpayer."

The IRS said it plans to phase in the private collectors by hiring three companies to handle the initial work. Eventually, the IRS will hire 10 companies selected through competitive bidding.

Critics point out that a pilot program that hired private companies to alert delinquent taxpayers that they owed money but not collect it directly was spiked in 1996 after it was found to have lost money.

Not deterred by the IRS’ plans to move forward, Reps. Chris Van Hollen, D-Md., and Rob Simmons, R-Conn., introduced a bill on Tuesday to repeal the authority for privatizing the collection services.

"This provision opens the door to taxpayer intimidation and abuse, practices that have been outlawed by Congress," Van Hollen said on the House floor. "We must repeal this onerous provision."