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Overdue tax bill? A collection agency may call

Collection agencies have recently begun contacting tax dodgers about their unpaid tax bills. Meanwhile, a group of U.S. Senators have introduced a bill to stop the practice just as it's getting started.

The Internal Revenue Service is outsourcing the task of collection to three private firms in the limited implementation phase of a congressionally approved private-debt-collection initiative. The records of some 12,500 taxpayers have been released to these firms.

A bill co-sponsored by Senators Byron Dorgan (D-North Dakota) and Patty Murray (D-Washington) calls for the IRS "to cease and desist from having private companies harass taxpayers," Murray said in a press release. The bill was introduced in mid-September, less than a week after collection efforts had begun.

IRS officials have publicly conceded that the collection would be less costly if handled internally, but Congress prevented the agency from hiring more revenue officers; hence the private firms are picking up the slack by handling the easier cases.

The agency expects its private contractors to collect $1.4 billion in outstanding taxes during the next 10 years. If all goes well, the IRS expects to contract with up to 10 additional private collection agencies to expand the program beginning in 2008. But a lot can happen between now and then.

Outsourcing debt collection might be a relatively new phenomenon to the IRS, but the three firms chosen from a total of 33 applicants have already collected millions for a variety of federal agencies as approved contractors with the General Services Administration.

"They were all on the GSA's debt collection schedule, so they've already been prescreened to do debt collection work with the U.S. government," says IRS spokesman John Lipold.

The three chosen firms include:

Approximately 140 federal agencies refer their delinquent debt to the Department of Treasury, which then contracts with approved private collection agencies. Among those departments that routinely outsource collections are Labor, Defense, Agriculture, Health and Human Services, the Veterans Administration, the Immigration and Naturalization Service and the Environmental Protection Agency.

Why has the IRS been late to outsource its debt collection? For starters, it was prohibited by law from doing so for years, due in part to fears that taxpayers' personal financial information might fall into the wrong hands. Then came an outsourcing pilot program in 1996-1997 that fared so poorly that Congress pulled the plug on it.

In 2004, after turning down IRS Commissioner Mark Everson's request for a funding increase, Congress approved, with President Bush's endorsement, the American Jobs Creation Act that opened the door to IRS debt outsourcing.

Limited authority
The act imposes strict taxpayer protection and privacy rules on the private debt collectors. For instance, private collection agencies are prohibited from using subcontractors. The IRS also developed its own strict guidelines: All private firm personnel must pass a government background check, submit to fingerprint screening and complete an IRS training program. The private collection agencies must also provide a separate secure facility dedicated to IRS collections and cannot compensate its employees based on dollars collected.

"Our people are going to be trained as well as most of the IRS people who handle this kind of stuff, and more because we're looking at the Fair Debt Collections Act and everything else that we have to comply with," says Tom Penaluna, CBE Group president, CEO and owner. "Our people are going to be experts by the time they get on the phone and start talking to taxpayers."

Next: "We really expect to see a lot of IRS people in our facility."
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