On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act, or “FAST Act.” It provides long-term funding for transportation projects, including new highways, over a period of ten years. And as you would expect in a bill targeting highways and infrastructure, it also requires Internal Revenue Service (IRS) to use private debt collection companies.
Wait? You didn’t expect that? Of course not. Because tax policy has no business being stuffed into an already bloated bill (1,300+ pages) ostensibly focused on highways. But when has that ever stopped Congress before?
But there it is, at Section 32102: Reform of rules relating to qualified tax collection contracts.
Why reform? Under current law, IRS already has the authority to use private debt collection companies to locate and contact taxpayers owing outstanding tax liabilities and to arrange payment of those taxes. Historically, farming out collection hasn’t worked out for IRS.
Under the new law, there’s little in the way of discretion: IRS is required to use private debt collection companies to collect “inactive tax receivables.” Inactive tax receivables are defined as any tax debt that has been:
- removed from the active inventory for lack of resources or inability to locate the taxpayer;
- for which more than 1/3 of the applicable limitations period has lapsed and no IRS employee has
been assigned to collect the receivable; or
- for which, a receivable has been assigned for collection, but more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection.
For purposes of the law, a tax receivable is any outstanding assessment which IRS includes in potentially collectible inventory.
Debts which are not eligible for collections from private debt collection companies include those that are subject to a pending or active Offer-in-compromise (OIC) or installment agreement as well as innocent spouse cases. Also excluded are cases currently under examination, litigation, criminal investigation, or levy and those subject to appeal as well as any taxpayer who has been identified as deceased, a minor under the age of 18, in a designated combat zone, or a victim of identity theft. The bill also allows for procedural discretion for matters involving taxpayers in presidentially declared disaster areas.
The language regarding disclosure is sufficiently vague. Private debt collection companies “may” – not must – identify themselves to taxpayers as IRS contractors, as well as the subject and reason for the contact. Disclosures are “permitted only in situations and under conditions approved by the Secretary.”
And since IRS doesn’t have enough to do, the law requires IRS (although the letter of the law says Secretary of the Treasury) to prepare two reports for the House Committee on Ways and Means and the Senate Committee on Finance: one is an annual report including, among other things, the total number and amount of tax receivables provided to each contractor together with the total amounts collected by and installment agreements resulting from the collection efforts together with collection costs incurred by the IRS. The second report is required biannually and will include an independent evaluation of each private debt collection performance and a measurement plan that includes a comparison of the best practices used by private debt collectors to those used by the IRS as well as how they identify and capture information.
Criticisms of the plan to outsource collections – which have been unsuccessful in the past – include the costs to IRS to administer and oversee such outsourcing. The 1996-1997 pilot program resulted in a $17 million net loss to the government. A second effort in the mid-2000s resulted in a loss of $4.5 million. Those aren’t costs. They’re losses. In terms of costs, the government paid out $16 million in commissions to private collectors in the mid-2000s. An additional $86 million was paid out simply to administer the program – in other words, the cost of producing the result. That result was a net loss.
Concerns were also raised in previous years about tactics used by private debt collectors. Year after year, the Federal Trade Commission receives more complaints about debt collectors than any other industry. In 2013 alone, there were over 200,000 complaints filed with respect to collection practices (you can see a list of collectors banned from the industry here).
Additional concerns about taxpayer privacy and fraud should not have been ignored. Last year, J. Russell George, the Inspector General Treasury Inspector General for Tax Administration (TIGTA), referred to a scheme where fraudsters called up taxpayers as “the largest scam of its kind that we have ever seen.” TIGTA, IRS and Treasury have all warned taxpayers to be on guard against scammers, reminding them that “It’s worth noting that the IRS doesn’t generally initiate contact by phone.” But private debt collectors do. Outsourcing collections will no doubt cause potential confusion for taxpayers and create new opportunities for scammers.
There are a number of reasons to be concerned about the consequences of outsourcing tax collections to private debt collections. When it was still in the early stages, the proposal was labeled “wrongheaded,” “the wrong approach,” “misguided,” and “a recipe for taxpayer abuse” (downloads as pdf). Nevertheless, Congress signed it into law, ordering IRS to “implement the proposal without delay.”
You can read the text of the law here (downloads as a pdf). Settle in first. It’s a lengthy read.
For other tax proposals currently under consideration, check out this post.