The voices of Tax Policy Center's researchers and staff
Tax season starts in just under two weeks. And for the fourth year in a row, my sister, who kept her Hindi surname when she married, is likely to get phone calls that go something like this: “Ma’am, this is the Investigation Unit of the IRS. I am calling to inform you that you are in imminent danger of being deported for lack of payment. Have you been receiving our notifications and ignoring them?”
These calls are scams, of course. My sister is a US citizen and a taxpayer in good standing but she’s on someone’s list. These calls are one reason why the IRS has been working so hard to explain that it never initiates contacts with taxpayers by phone. It always sends a written notice first.
But thanks to a measure passed by Congress and signed by President Obama late last year, that message is about to be muddled and it will be harder than ever to know whether calls are real or fake. The new law will, in certain circumstances, require the IRS to use private debt collectors to recover unpaid taxes. This year, a call might start out like this: “Ma’am, this is a collection agency hired by the IRS.”
It is easy to see why Congress is tempted by the allure of private debt collections. It is often looking for money to pay for new spending programs and in 2014 the IRS reported 12.4 million delinquent taxpayers owed about $131 billion in back taxes, interest, and penalties.
However, this is the third time in the past two decades that Congress has ordered the IRS to use private collection agencies, or PCAs. And the past results have been less than stellar.
In 1996, Congress ordered the IRS to run a pilot program to test whether PCAs could help collect delinquent taxes. At the time, PCAs could only locate and contact taxpayers to remind them of their debt and suggest various payment methods. Through January 1997, PCAs successfully contacted about 14,000 taxpayers and collected $3.1 million.
The IRS spent roughly the same $3.1 million on design, startup, and administrative expenses, plus an additional $1 million in performance payments based on the number of people the PCAs located and contacted. Later in 1997, Congress and the IRS abandoned the pilot program.
In 2004, Congress tried again. This time it granted the IRS limited authority to contract out the collection of overdue tax debt. From 2006 through 2008, PCAs tried to collect about $1.6 billion in outstanding tax liabilities. The National Taxpayer Advocate compared the effectiveness of the IRS with the PCAs and found that IRS staffers collected about 62 percent more than the PCAs ($139.4 million compared to $86.2 million). The IRS chose to end the program.
And here we are in 2016, and the IRS must try again. This time, the agency must use a PCA under certain conditions: (1) If the IRS can’t find the taxpayer; (2) If it hasn’t assigned an employee to collect the debt before one-third of the statute of limitations has run; and (3) If an IRS employee has not communicated with a debtor for a year.
If the PCA reaches the taxpayer—first by letter, and then by phone—it can request full payment or offer a five-year installment plan. However, the PCA cannot accept payments, which taxpayers should send directly to the IRS.
But will consumers really understand those rules? PCAs are supposed to contact taxpayers first by letter, then by phone, but if a letter lands in a mailbox and nobody opens it, was it ever received? Taxpayers are not supposed to pay the PCAs directly, but in their confusion and fear, they can be easily victimized by scammers pretending to be authorized collection agents.
In a recent interview, IRS Commissioner John Koskinen said, “We are doing our best to make sure the existence of private tax collectors doesn’t complicate our public awareness campaign about how the scams work.” But can he keep up with the scammers?
Private debt collection may create the worst of both worlds. I am certain my sister and countless other taxpayers will start hearing a clever new pitch from scammers, seemingly authorized by Congress. At the same time, I am not at all certain that legitimate private agencies will have any more success collecting unpaid tax debt than the IRS has.
When I described this to my mother-in-law over the holiday weekend, she said, “It’s all just a mess. People should pay their taxes, and we should get the money, somehow. It’s all just so complicated.” I don’t entirely disagree. I’m the rule-follower who, after all, overpaid her taxes as a teenager.
But cutting the IRS budget while requiring it to outsource to thus-far-cost-ineffective private debt collection agencies seems, at best, pennywise and pound foolish. At worst, the requirement feels like it’s setting the IRS up to fail. Last summer, Tax Analysts’ Joe Thorndike chalked up the private debt collection effort to the GOP’s longstanding desire to defund and dismantle the IRS entirely.
There is one way Congress could make tax compliance and collection easier and tax avoidance harder, while improving the public’s perception of the IRS. It could simplify the tax code. Unfortunately, that’s a call Congress has not chosen to make.
The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.