IRS prepares to start private debt collection next week

The Internal Revenue Service last week published guidance on an initiative to turn some tax debt collection over to private contractors, paving the way for three companies to begin receiving taxpayer data next week. But the initiative is facing stiff opposition.

Some uncollected tax debts will be assigned to three private collection firms starting Thursday, Sept. 7. The IRS said 12,500 taxpayers will be included in the first group, with about 40,000 accounts to be outsourced by the end of the year. The three companies were selected in March to perform the work. The agency plans to expand the program to 10 companies in 2008.

The initiative has attracted controversy, with critics including the National Treasury Employees Union, an IRS-appointed taxpayer advocacy panel and members of Congress arguing that it costs far more for contractors to collect outstanding tax debts than for IRS employees to do so, and that outsourcing exposes taxpayers to a greater risk of identity theft and privacy loss. In 1996, IRS officials argued against a similar initiative in Congress, expressing concern that taxpayer rights would be sacrificed.

But in recent statements, the agency has put a positive face on the effort. "We're going to implement this program very carefully so we have a good program on sound footing," said IRS Commissioner Mark Everson. "We are working hard to protect taxpayer privacy and taxpayer rights."

The agency's announcement last week specifies that private collection firms will work only on cases where the amount of debt is not in dispute. They will be authorized to make payment arrangements, but cannot use or threaten measures such as filing liens or seizing property. Nor can they handle cases involving bankruptcies, unusual hardship, litigation or partial payments.

Contractor employees will be subject to strict rules on how they use taxpayer information, and taxpayers can request in writing to work directly with the agency rather than a collection company.

Along with the general rules, IRS last week published a tip sheet for taxpayers on avoiding scams that could arise in connection with the initiative. People should be aware that they will first be notified directly by the IRS if their case has been turned over to a collection agency, the notice said, and legitimate collection firms will never ask for cash or for checks written to individuals.

"Warning taxpayers about scams has been a basic message for us in the past several years," said IRS spokesman Terry Lemons. He noted that scammers have a long history of impersonating IRS employees. "We decided to go ahead and put out this consumer alert up front because scam artists are constantly looking for new ways to game the system," he said.

Lemons said only 60 to 75 people would be working as collectors for the companies, though he acknowledged that a greater number could have some access to taxpayer data.

"Right now, these are collections cases that we can't get to," Lemons said. "There's been a lot of discussion of how employees could do this cheaper -- they could, but we don't have the resources … So this will be getting to money that wouldn't be collected otherwise."

In June, the House passed a Transportation-Treasury spending bill that would bar IRS from using 2007 funds to sign or administer contracts under the initiative. The Senate has not passed corresponding legislation.

A Senate Finance Committee staffer said his committee would strongly oppose such legislation, having worked to design a program that would protect taxpayers.

He highlighted language in the 2004 law authorizing the IRS to outsource tax collections that allows the agency to keep up to 25 percent of the amount private collectors bring in to finance collection activities. He said the agency now will be able to increase collections both by handing off backlogged cases to private firms and using some of the funds they generate to hire more staff of its own.

Lemons declined to speculate on what will happen with cases turned over to private companies if Congress approves legislation to block funding for the effort in the fiscal year that starts Oct. 1. "If both chambers agree and the decision is to take away the authority for [the initiative], we'll respond immediately and follow the wishes of Congress," he said.

On Monday, Rep. John Olver, D-Mass., sent a letter to Everson saying the IRS would be "clearly disregarding the will of the House of Representatives" if it proceeded with the plan to turn taxpayer files over before Congress completed its 2007 appropriations work.

"Whatever happens with the provisions in the conference report and whatever happens at the IRS, Congressman Olver doesn't plan to let this issue go," said Hunter Ridgway, his chief of staff.