The Internal Revenue Service has decided not to renew its contracts with two private debt collection agencies.

The IRS said that the decision came after it conducted an extensive review of the controversial program, in which the agency contracts with private companies to collect taxpayer debts. The program has sparked debate in Congress, with Democratic lawmakers introducing bills to end the program, and Republicans often pushing back.

A provision to end the private debt collection program was inserted into the omnibus spending bill that is currently before the Senate. National Taxpayer Advocate Nina Olson has called for ending the contracts, as has the National Treasury Employees Union. Last Tuesday, in a joint letter, a coalition of 16 consumer rights organizations, federal unions and public interest groups, led by the union, called on the Senate to retain the provision in the spending bill

The IRS said that it has determined that the work is best done by IRS employees who have more flexibility handling cases, particularly for taxpayers facing economic hardship. The current one-year contracts with the two companies, Pioneer Credit Recovery and CBE Group, expire Friday.

“After a thorough review of this program, I have decided not to renew the contracts,” said IRS Commissioner Doug Shulman (pictured) in a statement. “I believe this work is best done by IRS employees, and I believe we have strong support from the administration and the Congress for increased IRS enforcement resources going forward.”

Shulman also noted that the IRS anticipates hiring over 1,000 new collection personnel in fiscal year 2009. These new employees would give the IRS the flexibility to make assignments based on the areas of greatest need, rather than filtering which cases can be worked using contractor resources.

Shulman cited the results of a cost-effectiveness study of the private debt collection program. The study — supported by an independent review — showed that it is reasonable to conclude that when working similar inventory, IRS collection is more cost-effective than the contractors'. IRS employees also have a range of options in attempting to resolve difficult collection cases that, by law, the private contractors do not have. Shulman noted that the decision was not based on concerns over the performance of the two contractors affected.

Reaction to the end of the program was mixed. Rep. Charles Rangel, D-N.Y., praised the move. “Collection of taxes is an inherent function of our federal government,” he said, according to the Associated Press. “American taxpayers deserve to work with the trained professionals of the IRS to work through any issues they have.”

However, Senate Finance Committee ranking member Charles Grassley, R-Iowa, criticized the move. “The administration has decided that after spending nearly a trillion dollars in the stimulus bill to keep people working across the country, they are going to cut a program that provides jobs to hundreds of people during the middle of a recession, including 60 in Iowa,” he said in a statement. “It’s hard to believe that after worrying so much about keeping people employed, the administration has chosen this route.”

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