IRS Oversight Board Opposes Private Debt Collectors

The IRS Oversight Board has sent a letter to the leaders of Congress’s main tax committees urging them not to re-instate a privatized tax debt collection program.

A provision in the tax extenders legislation, the EXPIRE Act, introduced last month by Senate Finance Committee chairman Ron Wyden, D-Ore., would restore the private debt collection program that the IRS discontinued in 2009 (see IRS Nixes Private Collection Contracts). The controversial program had attracted both proponents and opponents in Congress.

The IRS Oversight Board said it was siding with National Taxpayer Advocate Nina Olson, who also expressed her opposition to the private debt collection program earlier this month.

“The concept has already failed twice,” said IRS Oversight Board chairman Paul Cherecwich, Jr., in a letter Tuesday to the leaders of the House Ways and Means Committee and the Senate Finance Committee. “When direct administrative costs are included, which the Joint Committee on Taxation failed to do, the program costs more to administer than the revenue retained. We concur with the NTA in that outsourcing federal debt collection is a bad idea and it makes little sense to resurrect, let alone expand the program to include the assignment of all ‘inactive tax receivables'’ to PCAs [private collection agencies]. The IRS Oversight Board respectfully suggests that if Congress wishes to improve revenue collection, it should invest in IRS priority enforcement programs, such as the Automated Collection System (ACS), which has a proven 20:1 return on investment. Funding another private debt collection program is throwing good dollars after bad, and in our view, should be summarily rejected.”

Cherecwich pointed to the two previous efforts at private debt collection of delinquent taxes owed the federal government. “Although America’s taxpayers were promised a high return on investment from the collection of old debts, the opposite proved true,” he said. “The NTA correctly notes that the IRS terminated the last version of the program after concluding it lost money—$17 million—when opportunity costs, such as diverting IRS collection personnel to administer the PDC, were taken into account. In other words, there was a negative return on investment.”

Cherecwich pointed out that independent studies have confirmed that private collection firms did not outperform IRS employees. During the most recent failed private debt collection program from 2006 to 2009, he noted, employees who worked in the IRS’s Automated Collection System function needed to stop working on their own inventory of cases so they could help the private collection agents who could not resolve tens of thousands of cases. If the nearly $68 million in total costs for the 2006 private debt collection effort had been invested in an additional 700 full-time equivalent employees in the IRS’s ACS function, he observed, they would have collected an estimated $1.4 billion in enforcement revenue rather than the loss incurred by the private debt collection program.

“Moreover, the PDC program never came close to being self-funded or operating independently of the appropriations process as promised,” Cherecwich added.

In a letter earlier this month, National Taxpayer Advocate Olson also wrote to leaders of the House Ways and Means Committee and the Senate Finance Committee arguing against the program.

“The Office of the Taxpayer Advocate and I personally were intimately involved in the development of the 2006-2009 PDC program,” she wrote. “We also handled more than 3,700 cases involving taxpayers against whom PCAs sought to collect. Based on what I saw, I concluded the program undermined effective tax administration, jeopardized taxpayer rights protections, and did not accomplish its intended objective of raising revenue. Indeed, despite projections by the Treasury Department and the Joint Committee on Taxation that the program would raise more than $1 billion in revenue, the program ended up losing money. We have no reason to believe the result would be any different this time.”

IRS commissioner John Koskinen has also objected to the program, telling a hearing of the House Ways and Means Committee this month that the IRS ended up losing money on the private debt collection program.

Sen. Chuck Grassley, a senior member and former chairman and ranking member of the Senate Finance Committee, pointed out last week after reading Olson’s comments in the Washington Post that the non-partisan congressional Joint Committee on Taxation, the official estimator of tax provisions, said the current proposal in the tax extenders bill to engage private contractors to collect tax debts would generate $2.4 billion over ten years for the U.S. treasury. 

“The use of private contractors is meant to get at legitimate tax debts that the IRS can’t or won’t collect on its own,” Grassley said in a statement. “These contractors are set up to do the work. They aren’t meant to detract from the IRS’ work. They’re meant to make up for what the IRS can’t do, while saving money. And there’s no getting around the estimate from the Joint Committee on Taxation that the current proposal would raise $2.4 billion over 10 years. That says the proposal would work, as intended. Collecting tax debt is only fair to all taxpayers who pay what they owe.”

Sen. Charles Schumer, D-N.Y., reportedly inserted the provision in the tax extenders legislation, according to the Post. Two of the firms that have been approved by the IRS to provide private debt collection services are located in his state, ConServe and Pioneer Credit Recovery. Another approved contractor, the CBE Group, is in Grassley's state, Iowa. The other approved contractor, Performant Financial, is in California.

Cherecwich disputed the estimate from the Joint Committee on Taxation, noting that it relies solely on gross receipts and the assumption that they will come in for 10 years regardless of the administrative costs.

“From a private sector perspective, such an approach would be contrary to fiduciary responsibility and full financial transparency,” he wrote. “What private sector company would make business decisions based solely on gross revenue while ignoring costs and still stay in business? It is doubtful they would. It would be like a major construction firm making a bid for a contract without taking into account labor costs. In this regard, we believe the JCT should modify its 10-year revenue score for any PDC program.”