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IRS outsourcing just doesn’t pay

Tue., April 15, 2008

WASHINGTON – The Internal Revenue Service expects to lose more than $37 million by using private debt collectors to pursue tax scofflaws through a program that has outraged consumers and led to charges on Capitol Hill that the agency is wasting money for work that IRS agents could do more effectively.

Since 2006, the agency has used three companies to go after a $1 billion slice of the nation’s unpaid taxes. Despite aggressive collection tactics, the companies have rounded up only $49 million, more than half of what it has cost the IRS to implement the program. The debt collectors have pocketed commissions of up to 24 percent.

Now, as Americans file their 2007 taxes, Democratic leaders want to end the effort.

“This program is the hood ornament for incompetence,” said Sen. Byron Dorgan, D-N.D., who has introduced a bill to stop the program. The measure has 23 co-sponsors, all but one of them Democrats. “It makes no sense at all to be turning over these tax accounts to private tax collectors that end up costing the taxpayers money.”

Defenders say the program adds muscle to IRS efforts to close the gulf between what taxpayers owe and how much the IRS collects. In 2001, the “tax gap” was an estimated $345 billion.

“The real choice is whether we use private collection agencies or let these tax debts go uncollected,” said Rep. Jim Ramstad, Minn., the top Republican on the Ways and Means oversight subcommittee. “I hope we don’t take an enormous step backward in our efforts to close the tax gap by eliminating a program that’s working.”

After years of lobbying by the private collection industry, the Republican-controlled Congress created the program in 2004. The goal was to use collection agencies to close the relatively easy cases the IRS said it did not have the staff to handle: instances in which the taxpayer is not disputing the debt and the amount owed is modest. Supporters hoped that the program would eventually be expanded to take over more debt-collection duties, and the IRS predicts that the program will break even by 2010.

Three firms were awarded contracts: Pioneer Credit Recovery, based in the western New York district represented by Rep. Thomas Reynolds, R, who supported the program and recently announced his retirement; CBE Group of Iowa, the home state of Sen. Charles Grassley, R, who helped create the program; and Linebarger Goggan Blair and Sampson, a law firm based in Texas, home to President Bush.

Pioneer Credit employees have given congressional candidates and political action committees $117,450 since 1995, including $16,250 to Reynolds. CBE Group employees have given $9,372 during that period, including $2,500 to Grassley.

Linebarger, Goggan, one of the nation’s largest collection agencies, has extensive government ties. The firm, its employees and their spouses have given political action committees and federal candidates in both parties $423,260 since 1995. The Austin-based company was abruptly dropped from the program last year for reasons that the IRS declined to make public.

Since the federal program began, the National Taxpayer Advocate, an ombudsman’s office within the IRS, has logged more than 1,500 complaints. Taxpayers have accused private collectors of bombarding them with phone calls, or repeatedly calling the wrong taxpayer or sending written notification to the wrong addresses. Critics say the program has subjected taxpayers – some of whom owe the IRS nothing and have done nothing wrong – to harassment.

A common complaint is that contractors do not explain the nature of their calls until they confirm a taxpayer’s identity. They try to do that by asking for a Social Security number, something many people are reluctant to disclose.

Jeff Trinca, a lawyer for the Tax Fairness Coalition, which represents Pioneer Credit and CBE Group, said the phone calls come after taxpayers have received written notice.

“That layer of potential confusion is there to protect the taxpayer,” he said.

In testimony on Capitol Hill, IRS officials have agreed that agency employees are able to pull in about eight times as much as the private collectors because they have the authority to place liens, garnish wages and use other enforcement tools. But IRS officials also say that if private collection ended, it is unlikely that the IRS would redirect resources to the kinds of cases the private firms handle.

“Our own collection resources wouldn’t get down to this level, not that we wouldn’t have made an attempt,” said David Alito, director of collection at the IRS.

Russell George, the Treasury Department’s inspector general for tax administration, said his office thinks the program is generally well-managed.

But Dorgan and others say that tax collection is a central responsibility of government and that IRS employees could perform the work at a much lower cost.

“This is a waste of taxpayers’ money, and it could be much better spent if it were given to the IRS to hire more employees,” said Colleen Kelley, president of the National Treasury Employees Union, which represents 85,000 employees at the IRS. The union’s political action committee has given federal candidates and officeholders more than $2.8 million since 1995.

Rep. Chris Van Hollen, D-Md., is pushing legislation approved in the House Ways and Means Committee last week that would repeal the private program.


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