IRS debt collection initiative set to break even next spring

A controversial Internal Revenue Service debt collection pilot program is performing at the high end of projections and is expected to cover its costs by next April, according to the IRS.

In an agency briefing paper obtained by Government Executive, IRS officials said the program, which was launched last August, will break even in April 2008.

The program had resulted in collections of $19.49 million as of mid-April, according to the briefing, toward the high end of an earlier estimate that revenues would range between $15.05 million and $20.69 million by the end of that month.

"Based on conservative projections for revenue, the program is projected to recoup all costs, including sunk costs, in April 2008," officials predicted.

As of April this year, the IRS had given 33,824 cases to the three companies involved with the pilot, representing a total of $218 million in unpaid taxes. Of the $19.49 million collected, $3.2 million had been paid in commissions as of mid-March, while $3.76 million had been retained by the IRS, according to the briefing, with the rest to be returned to general Treasury funds.

IRS also reported that 25 taxpayers contacted by the private collection companies, or less than 1 percent, had filed complaints, and only one of those had been found valid.

The briefing was presented to the IRS Oversight Board, a presidentially appointed body established under a 1998 law.

"Overall, this program seems to be working well, although the board intends to continue to monitor it closely," chairman Paul Jones said following a meeting to discuss the program. "Through this program, the IRS has found a way to reach a specific segment of the noncompliant taxpayer population."

Dan Drummond, spokesman for the Tax Fairness Coalition, an association of debt collection companies, said the figures were "further proof that the private debt collection program is working for American taxpayers."

"Taxpayers are being treated professionally, and the IRS is getting much needed help in the effort to close the $345 billion tax gap, providing vital funds for government services," Drummond said, referring to the gap between taxes owed to the Treasury and those paid on time.

A consultant working with one of the participating collection companies said the firms had earned about 18.5 percent commission on the total collections as of January, though the figure appeared lower in the recent numbers due to differences in the periods covered.

He said the groups had put significant resources into upfront costs such as dedicated facilities and computer systems and would recoup those faster with a higher volume of work, but that IRS was moving slowly in the pilot phase.

The consultant said the companies also are not paid for some cases they work on, such as those in which they update contact information and other data in a taxpayer's file but the taxpayer refuses to pay and the file is returned to the IRS.

The Treasury inspector general for tax administration reported in March that the program generally was in good shape, though there were certain improvements that could be made. The Government Accountability Office also looked at the pilot program in October, when auditors expressed concern that it would not pay for itself when all contractor fees and program management costs were accounted for.

The program is slated to move from a pilot to full-scale implementation early in 2008, after expanding to about 10 companies.

A spokesman for Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee and a staunch opponent of the debt collection program, said the panel was nearing conclusion of an investigation of the program and expects to hold a hearing in the next few weeks.

Rangel has threatened to repeal IRS' authority to outsource debt collection. He and other critics have argued that private companies cost more than hiring additional IRS employees to collect back taxes, and that using private sector workers puts taxpayer information at unnecessary risk.

Rep. Steve Rothman, D-N.J., has also backed legislation to end the program.

"The board has not released any study or any statement voted on and approved by the board members that says this program is working," said Kimberly Allen, a spokeswoman for Rothman. "The fact that a board member appointed by the Bush administration touted it in a press release is meaningless. Mr. Rothman continues to take the guidance of the taxpayer advocate, who has called for its repeal."