IRS' New Private Debt Collection Program Is Off to a Terrible Start, IG Says

Private companies contracted by the Internal Revenue Service are leaving taxpayers vulnerable to scams and exploitative practices, being trusted to self-report complaints and bringing in just a small fraction of the debt they are assigned to collect, according to a scathing new report from the agency’s inspector general.

While an earlier report from the National Taxpayer Advocate’s office found the program had cost more than the private debt collection firms had brought in, the Treasury Inspector General for Tax Administration's data showed a small net profit of $1.3 million as of May 2018. The privatization is the third such effort IRS has administered since 1995, with previous iterations quickly canceled due to poor management and negative returns. IRS launched the most recent program last year after President Obama signed a law mandating it in 2015.  

As of June, IRS had assigned 502,000 accounts to the four private companies with which it has contracted for outstanding debt collection. Those taxpayers owed $4.1 billion to the government, but the private agencies have managed to collect just 1 percent of that total. The industry average for debt collection is about 10 percent, TIGTA said, though the companies are generally dealing with cases that are at least three years old and are therefore harder to settle.

The IG suggested IRS give the companies newer debts to collect in order to boost their effectiveness, but the agency declined, saying the law only allowed for contractors to engage on “inactive” accounts. The auditors said the agency still had leeway on defining what constituted inactivity.

TIGTA strongly criticized the private debt collection program’s complaint process, saying the companies were inappropriately being relied upon to self-report grievances lodged against them. They have so far only done so in two dozen cases, while the IG noted debt collection is the most complained about industry in the country, according to the Federal Trade Commission. The IG said IRS should establish a referral unit to handle complaints, as well as a panel to investigate claims. Such a process would provide better transparency and help standardize the complaint response process.

IRS said it would not take those steps, despite the auditors noting that the private collectors have ignored federal law in collecting from delinquent taxpayers located in disaster zones. TIGTA said creating a complaint panel would “ensure that the persons in charge of reviewing complaints against the PCAs are not the same people who are responsible for the success or failure of the PDC initiative.”

The IG said taxpayers are particularly vulnerable today because identity theft has skyrocketed. IRS has recently advertised that it would never contact by phone taxpayers demanding payment, but private companies are now frequently doing exactly that. Because the companies work on commission, TIGTA said, they are incentivized to make as many calls as possible. The contractors are putting taxpayers at risk when they attempt to verify who they are speaking to, the IG found, because they ask for Social Security numbers in some cases. Doing so makes it easier for scammers to trick individuals into offering that information and increases the hang-up rates that legitimate companies encounter.

IRS management again rejected TIGTA’s recommendations, saying they would not change their verification processes.

In one of their most pointed critiques, the investigators said IRS was defeating the very purpose of debt collection by declining to follow up on cases in which private companies could not make a collection. The collection agencies have returned 2 percent of cases to the government, but IRS has no plans to further pursue them.

“When the government encounters willful noncompliance but does nothing to address the taxpayer’s conduct, it runs the risk of emboldening future willful noncompliance by that taxpayer and other taxpayers as well,” TIGTA said. It added that it is “antithetical to debt collection to inform taxpayers who can pay some of what they owe but not everything that the government is not interested in receiving payment amounts that the taxpayer can afford.”

The auditors suggested IRS allow taxpayers to pay some of their debt when they cannot afford all of it and that private companies should refer to IRS—which has stronger tools at its disposal to mandate payment—cases in which individuals are willfully not complying. IRS management rejected both recommendations. The agency similarly said it would not follow recommendations to prioritize the cases given to private companies based on the size of the debt and the availability of contact information, nor would it accept a suggestion to cease making companies responsible for all future tax debts incurred by delinquent taxpayers they are already tracking down for payment.

The IG said IRS’ failure to comply with its recommendations would put at risk both the private collection program and taxpayers themselves.

“TIGTA believes the IRS’s lack of responsive actions will lead to increased taxpayer burden and negatively affect taxpayer service, rights, and program revenue,” the auditors wrote.

The program was established despite pushback from some lawmakers, good government groups and employee advocates, who warned that history has shown the privatization of tax debt collection is inefficient and targets the nation’s most vulnerable taxpayers. Several Democrats in the Senate and House, among them Sen. Ben Cardin, D-Md., and Rep. John Lewis, D-Ga., have introduced legislation that would end the private collection program.

Tony Reardon, president of the National Treasury Employees Union, called on lawmakers to kill the program. 

"NTEU has long opposed the use of private contractors, who work on commission, to take the place of professionally trained civil servants of the IRS," Reardon said. "Like two previous failed attempts, there is growing evidence that the third attempt to operate a private debt collection program is equally flawed."

This story has been updated with additional comment and to correct an error on the profitability of the private debt collection program.