The Internal Revenue Service’s comparative study of its private debt collection program was not designed soundly enough to support its decision to discontinue contracting out debt collection to private companies, according to a new report by the Government Accountability Office.

The IRS started the private debt collection program in September 2006, using private collection agencies to help collect some unpaid tax debts. Aware of concerns that the contractors might cost more than using IRS staff, the IRS began studying the collection costs and performance of the PCAs and the IRS. In March 2009, the IRS announced that it would not renew its PCA contracts based on the study and announced plans for increasing collection staffing. In a new report, the GAO compared the IRS’s study to federal and other guidance on what should be included in analyses to support program decisions, and analyzed the IRS’s changes given expectations that the IRS would consider the PCAs’ best practices.

The GAO found that the IRS study was not originally intended or designed as the primary support for its decision on whether to continue with the private debt collection program, but IRS officials nonetheless used it as such. The IRS did not have guidance for program managers on the type of analysis that should be done to support their decisions to create, renew or expand programs. The IRS also had not retained sufficient documentation on the sample used in the study or documented some analyses that would have been helpful if performed.

“According to this report, the IRS used a flawed study to justify ending its contracts with private agencies to collect owed taxes that the IRS wasn’t collecting on its own,” said Senate Finance Committee ranking member Charles Grassley, R-Iowa, in a statement. “The IRS knew the study was flawed because the GAO told the IRS how to do the study. But the IRS didn’t implement the GAO’s recommendations to fix the study, even though it agreed with them. The IRS used the results from the defective cost-effectiveness study to defend its decision to terminate the use of private collection agencies, even though that wasn’t the primary purpose of the study.”

The study results may have been overstated or understated because the study sample was not generalizable to the program as a whole, said the GAO. The study had a narrow objective of comparing the results for the IRS working the same cases as PCAs had, and as a result, the study design did not consider other factors recommended by the Office of Management and Budget and other guidance on conducting program analysis. For example, the study did not analyze alternatives to program scale, such as expanding it or scaling it back. Program analysis guidance states that to the extent possible, all costs and benefits should be counted and alternative means of achieving a program’s goals should be considered.

But the study did not identify important costs and benefits, such as whether taxpayers’ compliance costs would be different if the IRS or PCAs worked debt cases, the GAO noted. Nevertheless, neither GAO nor IRS officials know whether the study results and decision on the program would have differed significantly if it had been designed to be the primary support for the IRS’s PDC program.

In commenting on a draft of the GAO’s report, the IRS disagreed that the PDC study was not soundly designed. GAO stands by its analysis detailing the study's errors, narrow scope, and lack of adherence to guidance. These design and methodology deficiencies limited the study's usefulness in supporting the IRS’s decision. The IRS has not made or planned changes to its collection approach based on its PCA experience and study.

In authorizing the use of PCAs, Congress required the IRS to report to Congress its measurement plan to identify any of the PCAs’ best practices that the IRS could adopt to improve its own collection operations. The IRS did not continue to report to Congress as required. In an unpublished draft report, the IRS asserted that it had reviewed a number of PCA practices and found no immediate opportunities to change its collection approach. The IRS did not provide the GAO with documentation on the study to support that conclusion, according to the GAO.

“Union advocates, including members of Congress, Obama administration officials and the taxpayer advocate, tried to tell the public that IRS employees could collect the tax debts cheaper and better than private employees,” said Grassley. “Yet, the IRS’s own information shows that the fledgling pilot program was returning money to the Treasury and that private employees’ quality ratings were consistently higher than that of IRS employees. Union supporters’ successful disinformation campaign ultimately hurts other taxpayers, as private agencies were collecting dollars that the IRS wasn’t and isn’t going to collect anyway.”

In part because PCA-type cases had previously been considered low priority, IRS officials were surprised by the PDC study results, which indicated that IRS staff might have better results working PCA-type cases than some of the cases IRS normally works, according to the GAO report. IRS officials said that they initiated a pilot study in 2009 to help them decide whether to use IRS staff to work selected types of PCA cases. As the GAO concluded its review, the IRS provided conflicting information on the role of the pilot study.

On one hand, IRS said a collection selection system to be implemented in January 2011 overtook the need for the study. On the other hand, an IRS official said that the results from PCA-type cases were not used in the development of the new case selection system.

“The IRS used a poor study to secure a task it said it could perform but hasn’t,” said Grassley. “As of the most recent fiscal year, unpaid tax debts equal $328.1 billion. Only $120.4 billion of that amount is deemed potentially collectible and IRS is not actively pursuing $27.4 billion that it says is collectible. These are significant increases from when GAO first started tracking these numbers. So, not only has the IRS made no progress in reducing unpaid tax debt, but also we’re worse off every year.”

The GAO recommended in the report that the IRS establish guidance on analyses to support program decisions, establish a policy requiring documentation of program studies, and ensure that PCA-type case results are considered for IRS's new case selection model.

The IRS agreed with the first two recommendations and agreed in principle with the third, which the GAO revised to reflect updated information that the IRS provided.

“Private collection agencies were supposed to help the IRS collect debts that it couldn’t or wouldn’t collect on its own,” said Grassley. “And, despite the IRS’ announcement last year that it would be dedicating IRS resources to working cases that the private agencies would have worked, GAO tells us today that that isn’t the case. At the same time, the number of hours IRS employees dedicate to union activity at the office, on the taxpayer’s dime, is significant. Those IRS employees should spend more time doing the government’s work and less time protecting their jobs.”

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