Taxpayer advocate urges repeal of outsourced debt collection

The IRS's national taxpayer advocate Tuesday issued a stinging rebuke of the agency's program to use private agencies to collect delinquent tax debts, saying the initiative is "fatally flawed" and urging Congress to terminate it "once and for all."

The recommendation came in Taxpayer Advocate Nina Olson's 2006 annual report to Congress, in which she listed the private debt collection initiative among the most serious problems facing the agency.

Under authority granted by Congress in 2004, the IRS began assigning certain taxpayer accounts to three private collection firms in September 2006. The agency planned to turn over 40,000 cases, although fewer than that ultimately were assigned due to various complications in administering the program. The IRS plans to turn over 446,000 cases over two and a half years.

The problem, Olson reported, is that under the program, "the government (aka taxpayers) has the 'privilege' of paying up to 25 percent of any taxes collected to private collection agencies, even while estimates show that IRS employees could perform the work far more efficiently, with a return on investment of approximately 13:1."

The law establishing the debt collection program does not allow for true cost-benefit comparisons between the use of private collectors and the IRS's own workers, Olson said.

In October, the Government Accountability Office reported that IRS projections showed that debt collection program might not pay off in its initial phase.

Rep. Steve Rothman, D-N.J., who sponsored legislation last year to end the initiative, applauded Olson's recommendation to kill it. "This outsourcing program is estimated to cost tens of millions of dollars a year," he said, "and has already allowed the most complained-about industry in America to get hold of tax returns, which include taxpayers' Social Security numbers." Colleen M. Kelley, president of the National Treasury Employees Union, which represents IRS workers, said Congress should move "immediately" to implement Olson's recommendation. In a response to Olson's report, the IRS said the private collection program has "started off well." During the first 10 weeks, the agency reported, the IRS referred nearly $90 million in outstanding accounts to the firms and collected $8.43 million. That, officials said, "exceeds the conservative target of 6 percent set for this initial year and is on target for achieving the business-case assumption of 10 to 15 percent annually, depending on case type." The Tax Fairness Coalition, which represents the private collection companies, issued a statement saying that Olson's report "fails to recognize the value of the program, the success it has seen so far, and the complementary way in which private collection agencies are working with the IRS to help recover billions of dollars in unpaid taxes, thereby helping to close the ever-widening tax gap." The group noted that the IRS has yet to find any instances of fraud or misuse of taxpayer information in the initiative.