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Private tax agencies collected just 2% on tax debts

The private collection agencies that contract with the Internal Revenue Service to collect long-overdue tax debts were able to garner only about 2 percent of the taxes owed on the more than 700,000 taxpayer accounts assigned to them since 2017, according to a new government report.

The IRS headquarters in Washington
The IRS headquarters in Washington.

The report, from the Treasury Inspector General for Tax Administration, found that as of September 2018, the PCAs collected approximately $88.8 million of the balance owed on those taxpayer accounts. They also set up more than 21,000 payment arrangements with delinquent taxpayers, but the taxpayers later failed to make payments on more than half of them.

The disappointing results had been predicted by opponents of the private debt collection program. The IRS has twice before tried out private debt collection programs, but later canceled them after they collected far less tax revenue than anticipated, while prompting complaints from many taxpayers of harassment from debt collectors.

Despite warnings from the National Taxpayer Advocate and the National Treasury Employees Union, the IRS was forced to establish another private debt collection program after Congress passed the FAST Act, a highway funding bill that contained some tax-related provisions, in December 2015. The IRS awarded contracts in April 2017 to four private debt collection agencies: the CBE Group of Waterloo, Iowa; ConServe of Fairport, New York; Performant of Pleasanton, California; and Pioneer of Horseheads, New York. The IRS set up some stringent requirements this time around to try to prevent the debt collection agencies from harassing taxpayers and to discourage them from contacting taxpayers by phone, out of fear that they might be confused with scammers pretending to be calling on behalf of the IRS.

Both the IRS and the private collection agencies monitor performance using various attributes such as procedural accuracy and professionalism. All of the PCAs performed well under these attributes, according to the TIGTA report, which is the third one to be issued since the program was restarted. However, TIGTA noted, the performance attributes focus almost entirely on the PCAs’ telephone conversations with the taxpayers and don’t measure other important aspects of case management, such as returning cases to the IRS when required and the accuracy of payment arrangements.

TIGTA learned that the PCAs' payment calculators don’t calculate interest and penalties accurately. The IRS reviews and approves payment arrangements over 60 months because the private collection agencies are prohibited by law from establishing agreements for longer than 60 months. As of June 2018, the private collection agencies sent 2,547 proposed payment arrangements to the IRS for approval. But the PCAs’ calculation of payment terms for 92 percent of the arrangements were inconsistent with IRS payment calculators. The payment terms were different from IRS calculations by an average of over four months, and some differed by more than four years, TIGTA found. The inaccuracies included arrangements that the PCAs computed as both too long and too short. Most PCA payment arrangements are 60 months or shorter, and the IRS does not check shorter arrangements. TIGTA sampled 100 such arrangements and determined that 65 percent differed by at least one month.

The IRS also does quarterly and targeted quality reviews of the performance of the private debt collectors. The reviews identified various problems, such as mishandling of aged accounts and procedural errors on payment arrangements. The IRS made more the 60 recommendations to the PCAs to address these issues, but the issues aren’t reflected in the PCAs’ quality scores.

TIGTA also found that the IRS supported one PCA’s practice of encouraging taxpayers to borrow money from their friends and family members, even though the law doesn’t seem to permit that because the practice involves collecting financial information about people other than the taxpayer.

On the positive side, PCA customer satisfaction scores were high, routinely in the low– to mid–90 percent range, according to TIGTA. However, the report pointed out that customer service is just one of several performance criteria, and high customer satisfaction scores may not entirely reflect high overall performance.

The TIGTA report determined that improving the payment process could increase PCA revenue and reduce the number of defaulted agreements. For example. taxpayers who expressed a willingness to pay their outstanding tax debts were unable to do so because of technical problems with the IRS’s various payment options.

TIGTA made 13 recommendations to improve program efficiency and protect taxpayer rights in the report, including one recommendation that the private debt collectors try to reduce telephone background noise and any disclosure of personal taxpayer information. The IRS agreed or partially agreed with nine of the recommendations and plans corrective actions.

“The Private Debt Collection (PDC) program continues to evolve as we incorporate lessons learned to improve its effectiveness and to ensure that PCAs’ actions comply with applicable laws and are consistent with IRS policies and procedures,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. She said the IRS had noticed inconsistencies between the IRS’s own technology tools and the PCAs’ payment arrangement estimators and began working on a new payment arrangement estimator tool for PCAs that should be in production this month. “We are also working with the PCAs to develop a process that will require them to review payment arrangements nearing their estimated payoff dates to alert taxpayers if their agreements will require additional payments beyond the originally established terms,” Murphy added.

A trade group representing the private debt collectors also responded to the TIGTA report and defended the agencies. “First, TIGTA’s report covers program data from half a year ago, so it’s important to note that in the intervening six months many of the concerns raised have already been overcome,” said Kristin Walter, a spokesperson for the Partnership for Tax Compliance. “For example, the IRS has already addressed the calculation concerns the report discusses and has fixed the IRS online payment portal that was making it difficult for taxpayers to make their payments. The IRS has also recently added new payment options ‒ like the ability to set up recurring electronic payments ‒ which eases a taxpayer’s ability to stay current on their account. While the IRS has the discretion to send newer, more viable debts to the PCAs, the statute requires the IRS to assign PCAs all of the debts that have essentially been abandoned by the agency due to their age. And, as the report demonstrates, older tax debts are much more difficult to collect as taxpayers' contact information may have changed or they have relocated. Thus, PCAs are helping the government sift through a mountain of debt they otherwise would not collect or even try to collect – so far resulting in the collection of $88 million in federal revenue previously thought to be uncollectible (through September 2018 – data through the end of 2018 will be released shortly). The PDC program is successful because it works with taxpayers to determine manageable payment amounts that allow tax debts to be resolved over time. As the program moves forward, the revenue collected will grow exponentially as taxpayers continue making payments on their current installment plans and new installment plans begin.”

The recent data is likely to be affected, however, by the partial government shutdown that began on Dec. 22, 2018 and lasted until this past Friday. During that time, practically all government contractors working with the IRS and the Treasury Department were forced to suspend operations and were unpaid. While the federal government has promised that IRS and Treasury employees will eventually be paid, federal contractors so far have not received such assurances.

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