IRS plan to outsource tax collection panned

The IRS should hire more agents rather than outsource tax collection to private debt collection agencies, critics of a Bush administration proposal said Tuesday.

While IRS Commissioner Mark Everson said private contractors could bring in tax money that would otherwise go uncollected, Rep. Earl Pomeroy, D-N.D., and several witnesses at a House Ways and Means Subcommittee on Oversight hearing, said the government would get a greater return on its investment if the IRS hired more revenue agents instead. Pomeroy said the Bush administration's plan to outsource tax collection was not a good idea.

"This is the $600 toilet seat of tax collection," Pomeroy said.

In its 2004 budget plan, the Bush administration proposed using private firms to contact taxpayers and set up payment arrangements for outstanding tax bills. Everson said the IRS would use private agencies to collect the simplest forms of tax debt, including debts from taxpayers who reported the amount of tax due but didn't pay up or those who have made three or more voluntary tax payments but then stopped. Private agencies would not be allowed to threaten or intimidate taxpayers or take any enforcement actions against them, Everson said.

The firms would also be prohibited from calling taxpayers in the middle of the night or from contacting other people to track them down. The administration estimates the contractors would bring in $1 billion in tax money over the next 10 years. Contractors would be paid out of the money they collect, eliminating the need to fund the contracts through appropriations.

The administration's proposal would require congressional approval because current law prohibits private firms from collecting taxes. The Senate (S. 2) and House (H.R. 1169) versions of the proposal would allow the IRS to pay the contractors up to 25 percent of the amount that they collect.

Colleen Kelley, president of the National Treasury Employees Union, told the subcommittee that an internal IRS report last year found that if the agency spent $296 million to hire more employees, the agency could collect an additional $9.5 billion a year, or $31 for every $1 spent. If the IRS pays the contractors up to the proposed limit, the agency would reap $3 for every $1 spent.

"This proposal will cost the taxpayers more money than having this work done by IRS employees and will jeopardize the rights and privacy of thousands of taxpayers by putting millions of taxpayer files in the hands of private companies," Kelley said.

Nina Olson, the IRS' national taxpayer advocate, told the subcommittee that she would rather debt collection remain in the hands of IRS employees. But Olson said she worked with IRS officials to make sure the plan would prevent abuse of taxpayers.

The Treasury Department's Financial Management Service contracts with private debt collection firms to help agencies across government collect old debts. From March 1998 to February 2003, the firms have collected $136 million in delinquent debt, none of which is tax debt. The service collects far more debt through its wage garnishment program, through which it recovered $2.8 billion in fiscal 2002 alone.

In 1996, the IRS conducted a pilot project to outsource tax collection. According to a General Accounting Office review, the IRS collected $3.1 million thanks to the private contractors, but also spent $3.1 million and wasted another $17 million of IRS employees' time, which could have been spent collecting taxes.

Pamela Gardiner, acting inspector general for tax administration, said IRS officials have learned from the mistakes of the 1996 pilot by looking at other federal agencies' and states' experiences with debt collection agencies and by limiting the age of cases that would be referred to private firms. "This time they have a better idea of what they need to be cautious of," Gardiner said.

Forty states use private debt collection agencies to collect delinquent taxes. North Carolina tax official Alan Felton told the subcommittee that using private firms has helped the state bring in 40 percent more delinquent taxes over the past two years.

Rep. Amo Houghton, R-N.Y., chairman of the subcommittee, said it appeared that in-house employees could do the job more cost-effectively, but it seemed unlikely that Congress would allocate more funding for IRS agents. In absence of that funding, relying on contractors is better than letting the debt go uncollected, Houghton said.