The controversial use of private debt collectors by the Internal Revenue Service may be little more than a stopgap to make up for the service's lack of funding to hire its own personnel - while opponents charge that the initiative is expensive and risks exposing taxpayer's privacy.In a recent report to Congress, National Taxpayer Advocate Nina Olson, a fierce critic of the strategy, said that contrary to the government's rationale, use of private collectors is not cost-effective, the cases assigned are not the promised "easy" cases, and the IRS is substantially different from other federal agencies that use private collectors.
As part of the American Jobs Creation Act of 2004, Congress gave the IRS the authority to use private debt collectors to collect certain tax debts, in part to help shrink the massive tax gap of just under $300 billion. In September, the IRS began assigning taxpayer accounts to the PDCs despite opposition.
"It's not clear whether there are any really easy tax collection cases," she told lawmakers. "However, if the cases that the IRS identified for private collection are this easy, we wonder about the wisdom of working so diligently to identify the most productive cases, only to hand them off to private collectors."
Instead, the assigned inventory turned out to be far more complex than the IRS ever expected, according to Olson. In fact, she stated, "The shortage of the promised easy inventory is driving the IRS to assign inventory with the types of complexities that were never intended to be worked by private collectors."
She also questioned the validity of justifying the use of PDCs by the IRS on the basis that other government agencies use them.
"At this point in the initiative, the private collectors are using 75 collection representatives and the IRS is using 65 employees to monitor them," she charged. "Unlike other federal agencies, the IRS clearly has the resources to do what the private collectors are doing. However, the IRS has indicated that even if it had more resources, it would not work these cases; the priority is too low."
GRASSLEY FOR THE DEFENSE
Sen. Chuck Grassley, R-Iowa, ranking member of the Senate Finance Committee, took issue with Olson's criticisms. He voiced "serious concerns about your office's analysis of the costs and benefits of private debt collection, and your ultimate recommendation to repeal the IRS's authority to use private collection agencies - contrary to the recommendation of the IRS Oversight Board."
Although it's understandable for privacy and collection impropriety to be a concern, Grassley noted that the PDC program was designed to address those concerns and safeguard taxpayer's rights. "The PCAs are bound by the Fair Debt Collection Practices Act, the Privacy Act and the Fair Credit Reporting Act," he said. "The IRS Restructuring and Reform Act of 1998, which limits overzealous collection tactics by IRS collection agents, also applies."
Grassley noted that the three PCAs currently contracting with the IRS were chosen to participate in the program following a rigorous selection process and have been put under the microscope from the outset. "They have been subject to audits by the Treasury Inspector General for Tax Administration and the Government Accountability Office, and have been subject to continual oversight by the IRS, including the IRS Oversight Board and the Taxpayer Advocate's office," he said.
"It is frankly outrageous to argue that because of all of the oversight, monitoring and careful attention to the PDC program - which has been demanded by Congress, interested parties and your own office - this now should weigh against the PDC initiative," Grassley concluded.
Both Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, and Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, have each been highly critical of the use of private debt collectors.
However, E. Martin Davidoff, CPA, Esq., tax liaison chair of the American Association of Attorney-CPAs, said that Congress can't have it both ways. "I agree that private debt collectors are a silly idea, but it's Congress's fault," he said. "They should give the IRS enough funding to collect debts."
But Congress has been resistant to providing the funds necessary for this for several reasons, according to Davidoff.
"They feel if they give the IRS too much money, constituents will complain that the IRS is being harsh and overbearing," he said. "Essentially, Congress controls the aggressiveness of enforcement through the purse strings."
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