IRS agents to get help from private debt collectors
By Jay MacDonald • Bankrate.com

When President Bush signed into law the American Jobs Creation Act of 2004 last October, one industry in particular had cause to celebrate new career opportunities: America's debt collectors.

The bill authorizes the Internal Revenue Service to contract with private collection agencies to help whittle down $78 billion in potentially collectable debt. The IRS estimates that $13 billion of that is "low-hanging fruit," fully adjudicated and uncontested cases owed by taxpayers who can and will pay up. The IRS simply doesn't have the time or resources to chase down these debtors. Private collectors will likely make time for the job; those chosen to do the IRS's legwork stand to keep up to 25 percent of what they collect.

But IRS outsourcing is not going to happen overnight. If all goes as anticipated, the IRS will solicit requests for proposals in late 2005, identify a vendor or vendors in the spring of 2006 and begin outsourcing some collection activity in 2007.

Outsourcing outrage
Outsourcing was not the agency's first or favorite choice to tackle its collection backlog. IRS Commissioner Mark Everson had asked Congress for a modest increase in funding that he estimated could return $9 billion to the public coffers. The funding wasn't forthcoming, and President Bush instead suggested outsourcing.

It quickly became a controversial plan B, in part because of a roundly criticized IRS pilot private collection program in 1996-1997 that was so disastrous Congress pulled the plug on it. That program not only failed financially, it also abused taxpayers in violation of the Fair Debt Collection Practices Act.

When the private collection idea resurfaced in this latest incarnation, it prompted a bipartisan challenge in the House. Opponents argued that the law forbidding the IRS from outsourcing tax collection exists for a very good reason: No taxpayer wants personal financial information falling into the wrong hands.

Former IRS Commissioner Sheldon Cohen fears that a double standard will ultimately undermine the private collection program. Congress forbids the IRS from rewarding its internal tax collectors with bonuses or promotions based on the debts they recover for fear that would lead to overzealous tactics, yet it believes that private debt collectors will act responsibly when presented with a 25-percent cut.

"I ask rhetorically, are they going to be allowed to do the things that you've forbidden IRS people from doing?" Cohen says. "I suspect that they will not. The IRS contracts all forbid them from doing certain things. Now, who's going to supervise them? That's a different question. Murphy's Law applies to these people just as it applies to anyone else: If something can go wrong, it will. The worst-case scenario is, you'll have some terrible scandal coming out of some group pushing the envelope and it will discredit the service and the whole program, not of their own making."

Would Cohen have resorted to outsourcing, even as a last resort?

"I would have resigned first," he says flatly. "I've been with groups of eight or 10 former commissioners at a time who served under both Republican and Democratic administrations and I've never heard any one of them speak in favor of it."

Widespread disapproval
Cohen and his colleagues aren't the only ones upset with the outsourcing plan. The National Treasury Employees Union counts 98,000 IRS employees among its 150,000 membership. Colleen M. Kelley, president of the National Treasury Employees Union, points out that in addition to her constituency's concern about increased privatization, the program is simply penny-wise and pound-foolish.

"If the IRS were provided with enough money to hire IRS employees to do this type of collection work, there would be a much greater return on the dollar," Kelley says. "It would take a very small investment compared to the money they are willing to pay these debt collection contractors, who will be keeping up to 25 percent of the money they collect.

"It would take not nearly that kind of money to give the IRS the resources they need to hire some more employees and collect nearly $9 billion in taxes that are owed, which is about 10 times as much as is projected to come in through private debt collectors."

San Francisco attorney Robert Sommers, author of the Tax Prophet Web site, is equally skeptical that taxpayer privacy will be maintained.