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Private agencies collecting less than 2% of tax debts

A new program requiring the Internal Revenue Service to hire private debt collection agencies is falling far short of its goals and putting taxpayers at risk of falling prey to scammers, according to a new government report.

The IRS headquarters in Washington
The IRS headquarters in Washington.

The report, from the Government Accountability Office, found that the IRS's private collectors recovered less than 2 percent of over $5 billion in debts. The GAO said the IRS's reports to Congress on the private debt collection program haven’t provided complete financial information either. For example, as of September 2018, the IRS reported program revenue collections of about $89 million and costs of $67 million, suggesting a positive balance of $22 million for the Treasury’s general fund. However, the GAO pointed out the IRS report didn’t clarify that approximately $51 million of the amount collected went to the Treasury and the remaining $38 million was retained by the IRS in two special funds to pay for current and future program costs.

“Without this information, Congress has an incomplete picture of the program's true costs and revenues,” said the GAO.

The GAO said the IRS also hasn't fully assessed the potential taxpayer risks in the program. The IRS has documented six risks, including "imposter scams," in which scammers pose as private collectors, but the GAO has identified 10 additional risks.

The IRS has twice before put in place a private debt collection program, only to cancel it after it proved to bring in less money than anticipated. In 1995, Congress authorized the RS to contract with private debt collectors to collect unpaid tax debts, but the GAO found two years later that the program cost about $21.1 million but collected only about $3.1 million. The program was soon canceled. Then in October 2004, Congress gave authority to the IRS for a private debt collection program to collect some portion of unpaid taxes. The IRS began assigning cases to private collection agencies in September 2006 while also studying the program’s cost effectiveness. In March 2009, the IRS released a study concluding that the IRS itself was more cost-effective than collection agencies in collecting tax debts when working on similar cases. As a result, the IRS announced it wouldn’t renew expiring contracts with the private collection agencies.

The current program is the result of legislation passed by Congress in 2015 with a provision requiring the IRS to set up another private debt collection program. The IRS eventually hired three contractors, and began assigning them cases in April 2017.

The GAO found that the objectives of the current program aren’t clearly defined and their linkages with program measures are unclear. “For example, one objective is to provide taxpayers an opportunity to understand and resolve their tax debts, but the proposed measure focuses on taxpayer satisfaction with collection agencies rather than taxpayers' understanding,” said the report. “The objectives also do not include some key program risks, such as scams. Without clearly defined objectives and measures, IRS will have limited ability to assess program results.”

In the 2015 legislation, known as the FAST Act, Congress defined three types of inactive tax debt cases that must be assigned to the collection agencies. They include cases that have been removed from active inventory due to a lack of IRS resources or inability to contact a taxpayer; cases that were not assigned for collection to an IRS employee where more than one-third of the period of applicable statute of limitation had lapsed; and cases assigned for collection where more than 365 days have passed without any interaction with the taxpayer or a third party for purposes of furthering collection.

The law also excluded certain taxpayer accounts from being assigned to a collection agency. Specifically, accounts are supposed to be excluded if the taxpayer is deceased; under the age of 18; in designated combat zones; a victim of tax-related identity theft; under examination, litigation, criminal investigation or levy; subject to pending or active offers in compromise, an installment agreement, or a right of appeal; or involved in an innocent spouse case.

However, the GAO found that the IRS hasn’t analyzed the results of the program to identify the types of cases that should not be assigned to collection agencies because they do not result in collections. The GAO's analysis of IRS data found that between April 2017 and September 2018 about 73,000 of 111,000 cases closed by collection agencies had little or no revenue collected because the collection agencies weren’t able to contact the taxpayer or collect the debt, among other reasons.

“Given the costs associated with managing these cases, without such analyses, the IRS may continue to use resources inefficiently and assign cases with little or no potential for revenue collection, or miss opportunities to assign other cases that could produce more revenue,” said the GAO.

Counting the risks

The IRS has identified and taken steps to mitigate some of the program risks that could harm taxpayers, the GAO acknowledged. However, the service hasn’t yet completed the process of identifying and documenting all the risks, and has not fully assessed the risks to taxpayers from the program or its response to these risks.

The GAO found that while the IRS has identified and documented six taxpayer risks related to the private debt collection program, such as scammers impersonating collection agencies, it didn't identify an additional 10 risks identified by the GAO, such as taxpayers agreeing to debt payments they cannot afford. The IRS also hasn’t consistently assessed the impact or likelihood of the identified risks. As a result, the IRS's responses to mitigate risks were broad in nature, and weren’t prioritized or aligned to address specific risks.

While the IRS does monitor a sample of collection agencies' telephone calls with taxpayers and reviews complaints from taxpayers, for instance, those methods don’t offer information on whether the IRS's responses to risks are effective, the GAO noted. Without addressing these risk management issues, the IRS can’t ensure it has fully identified the risks of the program and effectively responded to protect taxpayers from them.

The GAO made 12 recommendations in the report, including that the IRS improve its objectives and measures for the program, as well as the revenue and cost reporting, analysis to assign cases, and management of taxpayer risks. The IRS agreed with nine of the GAO’s recommendations, partially agreed with the GAO's recommendation on improving objectives — which the GAO clarified in response — and disagreed with two recommendations to include certain costs in reporting and analyze data to identify cases not collectible. The GAO maintained that the recommendations would more fully report program federal costs and prevent waste.

An IRS official contended that the program has brought in significant revenue since the IRS began assigning cases in April 2017 to private collection agencies. “Since that time (through the end of FY 2018) we have assigned over 730,000 cases to PCAs and recovered over $88 million in overdue tax debts for the government,” wrote Kirsten Wielobob, deputy commissioner for services and enforcement at the IRS. “The current PDC program has already proven itself to be significantly more effective in the first two years, as compared to its prior iterations.”

She also disagreed with the GAO’s contention that the IRS’s reports to Congress on the program had not provided complete financial information.

A group representing the private tax debt collectors also responded to the report. “The PCAs welcome effective program oversight, have a strong compliance record, and are always looking for opportunities to improve as the IRS expands the successful Private Debt Collection Program,” said a statement from the Partnership for Tax Compliance. “The IRS is consistently transparent about the program and continually works to make improvements that ensure program success. The GAO report makes a number of observations and suggestions not consistent with statutory requirements and face-to-face reviews of the actual program. We would look forward to sitting down with GAO staff sometime soon to discuss the program’s proven success.”

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