The Internal Revenue Service has not collected delinquent taxes in a sampling of nearly half the past-due tax cases left over from its discontinued private debt collection program, according to a new government report.
The program was a controversial one in which the IRS contracted with three private collection agencies to pursue taxpayers who owed outstanding tax debts. The program was discontinued in 2009 after complaints from the National Taxpayer Advocate and the National Treasury Employees Union, among others (see IRS Nixes Private Collection Contracts).
From 2006 to 2009, however, the program collected $98.2 million from delinquent cases that were considered low-yield and therefore not generally worked on by IRS employees.
When the PDC program was discontinued in March 2009, the IRS recalled cases with a total assessed balance of $848.5 million from the remaining contractors. A new report from the Treasury Inspector General for Tax Administration reviewed the effectiveness of collection actions taken by the IRS on the taxpayer accounts returned by the PDC program. TIGTA reviewed a statistical sample of 62 of those past-due tax cases and found that the IRS had not taken collection actions on 29 (that is, 47 percent) of them.
The cases were not selected for collection action due to collection policies and inventory assignment practices at the IRS. However, TIGTA estimated that potentially $30.7 million in collections would remain as outstanding liabilities. In addition, TIGTA estimated that the IRS might not collect an additional $103.2 million per year, or $516 million over the next five years, from similar cases in its inventory that would have otherwise been assigned to the PDC program.
The IRS did not always pursue collection actions on the cases returned to the agency or analyze the best practices of the private debt collection agencies in the PDC program for possible improvement of IRS collection practices, TIGTA found.
“The IRS must do its best to work these cases, since taxpayers who do not timely pay all their taxes create an unfair burden on taxpayers who do,” said TIGTA Inspector General J. Russell George in a statement. “This sense of unfairness can erode the public’s respect for the tax system.”
Sen. Chuck Grassley, R-Iowa, of the Senate Finance Committee, who had been an early supporter of the PDC program, said the program should never have been discontinued,
“The IRS assured us all that the agency could do a better job with these tax cases than outside firms and didn’t need any help," he said in a statement. "It turns out that the IRS isn’t doing a better job and in many cases, isn’t doing the job at all. The IRS and Treasury Department went out of their way to stop a means of collecting tax debt that the IRS otherwise will never collect. They bowed to union pressure and terminated an alternative collection program before it had a chance to reach its full potential. It’s a shame the IRS continues to let tax debt slide while honest taxpayers pay what they owe. The agency should explain why that’s the case. And the Administration should be focused on collecting existing taxes owed before trying to impose new taxes, as is being suggested in deficit reduction proposals.”
TIGTA also reviewed a statistical sample of installment agreement cases returned during fiscal year 2009 and determined that no collection actions were taken for six (10 percent) of the 61 cases it reviewed. TIGTA estimated that potentially $58,000 in collections would remain as outstanding liabilities. Finally, the IRS did not capture or use PDC program data and results to improve its own collection practices.
TIGTA recommended that the IRS ensure that its collection policy and procedures are reviewed for inventory assignment practices to determine if cases that otherwise would have been assigned to the PDC program would be worked, or consider reinstituting the program. The IRS should also evaluate the best practices and lessons learned from the private collection agencies for potential improvement of the IRS’s own collection processes.
In response to the report, IRS officials partially agreed with the recommendations and said they have begun taking steps to address TIGTA’s concerns. The IRS implemented a process to improve balance-due case prioritization and reviewed collection agency operations to identify potential best practices.
IRS officials disagreed with the outcome measures, but TIGTA maintained the outcome measures were reasonable and were based on actual PDC program results.
The IRS also insisted that it actually had worked on many of the cases left over from the PDC program.
“The report states many of the cases returned from the PDC program were not worked,” wrote Faris R. Fink, the commissioner of the IRS’s Small Business/Self-Employed Division. “We believe this characterization is misleading. IRS systemic actions—such as levies and refund offsets—continued even after cases were returned from the [private collection agencies] into IRS inventory. In fact, systemic actions were undertaken while the PDC program was fully operational and accounted for over 75 percent of full-paid modules. In addition, when taxpayer accounts were returned from the program, the IRS conducted research for new levy sources. We then applied business rules and the cases were assigned to the appropriate collection strategy or inventory. Cases that remain unresolved are subject to refund offsets, systemic levy programs and federal tax lien filing, and will receive written correspondence from the IRS on a regular basis.”
TIGTA said it is encouraged by the IRS’s commitment to improving case selection and prioritization processes. However, it is still unclear how the IRS would actually work lower-priority cases like those eligible for the PDC program.
Colleen Kelley, president of the National Treasury Employees Union, defended the closure of the PDC program. "By any measure, the use by the IRS of private debt collectors over a period of several years was a financial failure—costing the government more money, when necessary start-up costs are included, than it brought in," she said in a statement. "The program was projected to generate $2.2 billion in revenue for the Treasury; in fact, it resulted in a net loss of nearly $5 million. In responding to the TIGTA report, the IRS took issue with TIGTA’s methodology in assuming potential future collection rates that are not supported by actual results obtained by the private companies. The agency notes that the highest annual revenue amount attributable to the debt collectors was $28 million, while TIGTA estimates that would have grown to more than $103 million a year. Further, TIGTA examined only 62 cases out of more than 192,700 returned to the IRS in 2009 after the program was ended, a sampling far too small to be representative. It cited 29 returned cases in which the IRS has taken no action, but also notes that the total assessed balance of those cases was only $105,000. NTEU, which strongly opposed the use of private debt collectors and continues to do so, believes the IRS is best positioned with the tools needed to assist taxpayers in meeting their tax obligations, particularly in these difficult economic times. These include the ability to postpone, extend or suspend collection activities for limited periods of time; make available flexible payment schedules; waive late penalties; postpone seizures; and provide the opportunity for an offer-in-compromise. Taxpayer service is equal in importance with the IRS’s enforcement efforts."
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