January 29, 2007

Congress May Put an End to Private Tax Collection

Two Democrats in the U.S. House of Representatives, Steve Rothman (D-NY) and Chris Van Hollen (D-MD) have introduced a bill that would end the IRS's program using private companies to assist in collecting delinquent taxes. (I have argued here before that the ineffectiveness of this program from a cost perspective is even more alarming than the implications for privacy.) This comes after Nina Olsen, the National Tax Payer Advocate, who heads an independent office within the IRS, called upon Congress to end the private collection program in her annual report. With the Democratic takeover of both chambers of Congress, the private collectors' days may be numbered.

The program began last fall with 12,500 delinquent cases handed to private debt collectors and is expected to expand to hundreds of thousands of cases over two years, all of them considered easy to resolve. The problem is that the private collectors will receive a commission of 25 cents for each dollar they collect, while it's argued that IRS employees could do the same work for just 3 cents for every dollar collected. IRS Commissioner Mark Everson admitted last year that the IRS staff could collect these debts for less cost but said that the agency lacked the funding to do so.

This actually points to a broader problem with the way the IRS is funded. The Congressional budget and appropriations process does not have any mechanism to consider the money that more IRS staff can collect as receipts that will more than offset the cost of such staff. In other words, expansion of IRS enforcement staff would show up as a cost in the federal budget, but the greater amount of money the new staff would surely rake into federal coffers would not. This leads to a very irrational outcome in which Congress passes up an opportunity to fully fund the one agency that offers a large, direct return on its investment.

This is a problem that comes up in the debate over closing the "Tax Gap," the difference between taxes owed and taxes actually paid. CTJ Executive Director Bob McIntyre offered several suggestions for closing the Tax Gap in testimony before the Senate Budget Committee last week. One of these was simply to increase funding for IRS enforcement. The IRS estimates that somewhere between $5 and $30 could be collected for every new dollar of funding for enforcement.

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