Privatizing Tax Collection?

The IRS is contracting with private debt collection agencies that are given the task of locating delinquent taxpayers and requesting payment. While many critics in Congress and elsewhere have raised concerns over possible privacy violations, there is actually a much greater reason for concern: The private collection agencies are being paid to do something the government could do more cheaply and effectively.

One of the appropriations bills passed by the House of Representatives before adjournment included a provision that prohibits the IRS from taking this action, which was originally authorized in the tax cut legislation enacted by Congress and the President in 2004. The Senate has not yet passed its version of the appropriation bill (one of many that the lame-duck Congress will attempt to work out when it returns to Washington in a week). As of now, the IRS is moving ahead with its plans. The sponsor of the provision, Rep. Steve Rothman (D-NJ), as well as the National Treasury Employees Union cite the risk of identity theft or other improper uses of taxpayer information, as well as the widely shared belief (shared even by the IRS Commissioner) that federal employees could do the job more cost-effectively.

The privacy concern is a legitimate one but is probably dealt with under the restrictions placed on the private collection agencies. Their tasks are only to locate and contact taxpayers, obtain financial information about them and ask them to pay their debt either in full or in installments. They cannot enforce payment in any way and taxpayers can opt to work with IRS employees instead after they are contacted. The private agencies cannot contact the taxpayer's employer, bank or neighbors.

The much greater concern is that this is a ridiculous waste of money. IRS Commissioner Everson admitted in a hearing before the House Appropriations Committee in March that using the collection agencies will actually cost more than using federal employees. But it was basically assumed that Congress would not want to fund an expansion of IRS staff. The program was supposed to be started with an appropriation of $54 million (which would be blocked by the Rothman amendment) and then the private agencies would be paid out of a revolving fund of tax revenues that are collected in the program. But the private agencies will receive commissions of up to 24 percent of what they collect, while it's argued that IRS employees could collect the same debts for a cost of just 3 percent of what they collect.

Everson said that the real factor preventing Congress from simply hiring more IRS employees to do the job is the federal budget process. The budget rules would require that Congress recognize the cost of expanding IRS staff (and that cost would show up as an expenditure each year) but not the much larger amount of revenue that the new employees would be bringing in after they are hired.

The idea of using private collection agencies is not new. There was a pilot program in 1996 that was ended early because it resulted in only a few million collected while the direct costs and the costs of using IRS employees to establish the program were both more than that. To the IRS's credit, this program is probably better than the 1996 version: the private agencies were paid a fixed fee in 1996 instead of a commission based on what they collected, and they were really just reminding debtors about the taxes rather than trying to work out resolution.

Nonetheless, there is reason to be skeptical and the Government Accountability Office has now gotten into the act. About a month ago the GAO issued a report questioning the way the IRS is evaluating the private debt collection program and said one concern is that "...it will not compare the results of using PCAs with the results IRS could get if given the same amount of resources, including the fees to be paid to PCAs, to use in what IRS officials would judge to be the best way to meet tax collection goals."

In other words, the IRS's evaluation won't include the commissions paid to the private agencies as program costs.

Colleen M. Kelley, the President of the National Treasury Employees' Union was a little more blunt, calling the program "a direct handout to the private sector, which won't generate an appreciable return to the Treasury and will cost taxpayer's money."