Outsourcing of tax debt collection may not pay off in short term

Internal Revenue Service projections show that a controversial program to outsource some tax debt collection may not pay off during its pilot phase, following the story line of a similar program that the agency eventually abandoned.

The projections appeared in a Government Accountability Office report (GAO-06-1065) that generally supported arguments against the outsourcing project advanced by employee unions and others. The report recommended that the IRS count the fees paid to private collection firms as a cost of the outsourcing program.

The GAO review was prompted by a bipartisan request from leaders of the Senate Finance Committee. It assessed IRS implementation of a program to turn some routine debt collection cases over to contractors. The IRS awarded contracts to three firms under a pilot program in March, and the first cases were turned over to the companies in September despite stiff opposition from unions, a taxpayer advocate panel and some members of Congress.

According to IRS estimates cited in the report, the agency expects to collect between $55.8 million and $92 million from the program during the pilot phase from September 2006 to December 2007. Agency costs are projected at $61.2 million, exceeding the low end revenue estimate.

But these projected costs do not include fees of 21 percent to 24 percent paid to the collection agencies directly from the taxes they collect. Taking those into account, even the high-end estimate of $92 million in collections leaves just $69.9 million to $72.7 million, out of which to pay program costs.

The low-end revenue estimate of $55.8 million falls to a range of $44.1 million to $42.4 million, when the fees are taken into account. This is well below the fixed program costs.

The projections show that in a full implementation phase, with the timeline extended through September 2009, IRS would recoup costs at a much better rate. In that time, IRS would collect $1.4 billion, or about $1.1 billion after fees, but costs would only go up to $77.6 million, the agency estimated.

An IRS spokesman downplayed the fact that costs may exceed program revenues in the short term. "There are start-up costs involved with any project and what we're talking about is, if it occurs, a very small loss that would be offset by the full implementation," he said.

But a program history in the GAO report suggests the balance sheet could cause problems for the already unpopular program. IRS started a similar pilot program in 1996, but abandoned it when the $3.1 million collected was overshadowed by $4.1 million in direct costs and $17 million in revenues lost by taking agency staff away from tax collection tasks to work on the program, the report said.

GAO indicated that IRS officials have discussed introducing performance criteria that would feed into a yes-no decision on whether to move forward with the full implementation phase of the program. The officials have considered criteria including the amount of taxes collected, and any record of collectors abusing taxpayer data or harassing taxpayers. But the GAO report said they had not decided whether to include a comparison of collections with program costs.

GAO recommended the agency adjust its accounting method to include the fees among program costs.

The question of whether to count the fees is central to the accounting tangles that have fed controversy over the program. Agency Commissioner Mark Everson has testified before Congress that IRS employees could collect the debts in question at a lower cost than the contractor, and the National Treasury Employees Union has said it costs employees about one half of 1 percent to collect on those debts.

But the accounts in question are ones that have gone uncollected, and IRS has said it does not have, and Congress will not pay for, enough staff to handle them. Under the private collection program, fees are paid only on successful collections so the agency's upfront costs are limited to those associated with establishing and maintaining the program.

GAO criticized IRS for making the assumption that Congress will not pay for additional staff through to the debt collection program. "Unless Congress is fully informed on the true costs of the PDC program, and the potential impact of increasing collections funding, it will lack key information with which to make decisions on how federal funds can best be spent to meet tax collection goals," auditors wrote.

They recommended that in plans for a comparative study of collections under the PDC program and without it, IRS count the fees among its costs.

The GAO report also raised concerns that IRS has completed most, but not all, of the necessary planning for the program, with numerical goals among those elements that have yet to be developed.

Colleen Kelley, president of NTEU, said the lack of metrics for what would constitute success means the agency could "look at the performance of its contractors, set the parameters for success to meet what already has occurred, and then declare the implementation phase a huge success."