The tax gap in the United States is estimated to be about $385 billion. The tax gap is the difference between what the Internal Revenue Service (IRS) expects to collect in taxes and what they actually collect.
That sounds like a lot of money. And I agree that it is. But considering that the IRS collects more than $2 trillion in federal taxes each year, it’s actually not as bad as it sounds: it works out to about 84% voluntary compliance. That means that most taxpayers pay their fair share on time.
What to do about those that don’t pay on time remains a challenge for IRS. Sen. Charles E. Schumer (D-NY) thinks he has a solution: private collection agencies. And so, at his direction, a provision that would require IRS to turn over delinquent accounts of taxpayers to private collection agencies was inserted into the tax extenders bill currently being considered in Congress.
It’s easy to overlook. I did the first time I plowed through the bill. But it’s there. You’ll find it on page 63 of the 82-page bill (downloads as a pdf).
Sounds like a novel idea, right? Not exactly. About 20 years ago, the IRS tried their hand at using private debt collectors. That lasted a year amid complaints about unfair practices and harassment. They made another go during the George W. Bush administration. It didn’t end happily.
Sen. Schumer insists this time, it will be different. I have to think what drives him is a combination of wishful thinking together with a complete misperception about the tax gap – and not just because his state is home to two of the four private collection agencies that stand to benefit from this bill. At least I hope so.
No matter what the driving force, it’s a terrible idea. And just in case the word “terrible” might be ambiguous, I’ll go even further: I think the consequences will be devastating to taxpayers.
The overriding problem seems to be that Sen. Schumer – and other advocates of the bill – believe that there is a pile of money out there for the taking and the IRS is simply not chasing it. That’s not why we have a tax gap.
Yes, there are cheaters. And deadbeats. And protestors. And bad guys. And those who simply refuse to pay. But they don’t account for $385 billion in unpaid tax bills.
There are those who can’t pay their taxes now and those that can’t pay ever. Those taxpayers are included in that figure, some of them likely permanently not collectible. That happens. Anyone who has ever been involved in the business world understands that to be true.
It’s not as if the IRS is unaware of the need for collections. The IRS has an entire department devoted to active collections. My clients, like many other taxpayers, can speak firsthand about the power of liens and levies, of wage garnishes and seizures. The IRS collections department has teeth. Big sharp teeth. And you rarely want to cross it.
But when financial hardship does affect the ability to pay, the IRS has the capacity and willingness to step back and either negotiate a payment plan or delay collections. That’s huge for taxpayers trying to find their feet. And it would be lost with private debt collectors.
I’m not the only tax professional with concerns. Last week, the National Taxpayer Advocate Nina Olson wrote a letter (downloads as a pdf) to the chairmen and ranking members of Congressional tax committees this week outlining her issues with the proposal. Among her concerns is the impact on taxpayers who are in financial difficulty. After analyzing collections data for the 2013 fiscal year, Olson noted that 79% of the cases that fell into the “inactive tax receivables” (those that the bill would require to be turned over to private collections) involved taxpayers with incomes below the poverty limit. Simple math would bear out that if the money isn’t there, it’s not there. No amount of nasty phone calls and collections notices will produce a different result.
Noting the past experience with private debt collections, Olson wrote, “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 expressed opposition to the proposal. In his testimony before the House Ways and Means Committee, Koskinen noted that based on past experiences with private collections, “We ended up losing money.” In fact, during the last effort, while private agencies collected about $98 million, the Treasury didn’t keep that cash. The agencies were paid $16.5 million off the top. But most significantly, it took an additional $86 million to administer the program – in other words, the cost of producing the result. Koskinen, a money guy, understands that you cannot base profit predictions solely on gross revenue.
Of those administrative costs, some of it was dedicated to making sure that private data stayed private. That’s right. Your data. Your address. Your Social Security number. Your date of birth. Your banking information. Your retirement accounts. Where your kids go to daycare. How much you spend on medical care. Your tax preparer. Your employer. Your income.
The IRS has strict protections in place to safeguard taxpayer data. Third-party collections? Not so much. You say that you don’t completely trust the IRS? Do you trust debt collectors and marketers more? By statute, there must be controls in place to ensure that private data stays private. And that costs money.
Even so, there are additional worries about the collection tactics that private agencies might employ. Despite the Fair Debt Collection Act and related statutes, private debt collectors are regularly accused of being too heavy-handed. In fact, according to Olson, the Federal Trade Commission receives more complaints each year about the debt collection industry than any other industry.
What about offering alternative options for taxpayers? Taxpayers who call the collections department at IRS are generally advised of available options which may run the gamut from “pay in full now” to “currently not collectible.” That’s generally not the result with private collections. When pay is based on a percentage of collections, there is little incentive to offer alternatives which may actually result in taxpayers paying more than they are required to pay.
If you pay your bills on time every time, maybe you don’t think this could affect you. Notwithstanding the idea that many households in America are just a paycheck away from poverty, there are wider implications of this bill that could affect a number of taxpayers. The provisions of the bill would require the IRS to turn over certain debts, including those taxpayers that the IRS has been unable to locate after one year. That means that taxpayers who move or die without timely notifying the IRS become targets. Those who get sick or are going through a divorce or job transition could be at risk. And what about the elderly, students, or those who might not think they need to file a return?
Also potentially affected? Taxpayers who find themselves owing money under Obamacare. Remember that those who don’t buy health insurance will be hit with a penalty. And while taxpayers were sold the Health Care Act under the idea that the enforcement wouldn’t have teeth, it appears that they would, courtesy of private debt collectors.
And what if those directly affected aren’t you but those you know? If you’ve ever been on the receiving end of a collections call fishing for information about friends, relatives, or former employees, you know how disconcerting it can be. The IRS won’t call up your mother because of privacy restrictions – but a private collections agency certainly will.
Finally, what about collections activities that are the result of simple mistakes? A significant number of my clients aren’t the bad guys – they’re simply good folks who got into trouble. And sometimes the amounts at issue aren’t even accurate. The IRS will work with you to fix those mistakes. A private collections agency has no incentive to help you resolve your issue. As a private collection agency for the City of Philadelphia recently informed my client: “That’s not my problem.”
I’m not saying the IRS is perfect. In most of my cases, they’re my opposition. I spend a lot of my time writing letters and talking on the phone to sort out issues for taxpayers. And yes, I get frustrated. I’ve heard the collections horror stories. And I’ve dealt with less than cooperative agents. But I’ll put the ability of IRS to work with taxpayers up against private collections agencies any day: the two have very different mandates.
At the end of the day, this proposal doesn’t make sense. It puts taxpayer data at risk. It targets our most vulnerable taxpayers. And, from a practical standpoint, it loses money.
While Sen. Schumer says that this time it will be different, there’s nothing to suggest that it will. It’s been said that insanity is making the same mistakes over and hoping for a different result. I would submit that exactly sums up this proposal.
There hasn’t been a lot of conversation about the proposal, including whether it has enough support in Congress to survive. Sen. Ben Cardin (D-MD) is actively working to remove the provision from the bill altogether. Maybe it’s because no collections agencies in Maryland stand to gain anything from the bill. Or maybe, just maybe, it’s because Sen. Cardin gets it.