IRS turns to private debt collectors in selected cases

Chris Gaetano | Trusted Professional Staff
Published Date:
Feb 11, 2016

IRS turns to private debt collectors in selected cases

By CHRIS GAETANO  |  Trusted Professional Staff

Owe the IRS money? Recent legislation shows that back taxes might be pursued not by the government but by a private debt collection agency, marking the third time since 1996 the government has launched such a program.

Tucked inside a highway infrastructure bill signed into law last December, the measure requires the IRS to hire private debt collection agencies to pursue certain delinquent tax cases.

The legislation states that the IRS will enter into “one or more qualified tax collection contracts for the collection of all outstanding inactive tax receivables.” The key word is “inactive.” A tax receivable is considered inactive if the IRS lacks the resources or ability to collect it; if one-third of the statute of limitations has elapsed without the case being assigned for collection by any IRS employee; or if the receivable has been assigned for collection, but the taxpayer has not communicated with the IRS in more than one year.

The law allows a few exceptions. An inactive receivable is not eligible for private collection if it—

• is subject to a pending or active offer-in-compromise or installment agreement;

• is classified as an innocent spouse case;

• involves a taxpayer who is dead, a minor, in a designated combat zone or a victim of tax-related identity theft;

• is currently under examination, litigation, criminal investigation or levy;

• is currently under appeal.

While a Dec. 4 report from the Congressional Budget Office estimated the measure would raise $4.8 billion over the next nine years, a May 2014 letter from Taxpayer Advocate Nina E. Olson pointed out that both times the government tried this in the past—from 1996 to 1997 and again from 2006 to 2009—it actually lost money.

Alan J. Straus, a sole practitioner based in Manhattan, cautiously greeted the new development. In a 2009 interview in The Trusted Professional about the end of the previous program, he welcomed the news, saying he didn’t think anyone was sorry to see it go. Now, years later, Straus questioned the point of the new program, considering what happened the last two times the government tried this.

“I don’t know what it improves. … It didn’t work well all those years back; why does anyone think it will work well now?” he said.

Straus noted that, historically, as a practitioner, he has found it easier to work with the IRS than private agencies, saying that the service is “much more sensitive to protections that are granted by the law than a private collection agency,” and that it has access to information private agencies don’t have, which can make it easier to cut a deal.

There’s also a matter of temperament and motivation. Israel Goldman of Raich Ende Malter & Co. LLP, in a 2009 Trusted Professional interview, characterized private collection agencies as “rude” and “unknowledgeable,” and felt that as tough as the IRS can be, they treat people with more respect than private agencies. His opinion hasn’t changed much since then, and felt that the government was not making the right move by allowing private agencies back into the collections process.

“Based on previous experience, I feel collection agencies are the wrong way to go. Agencies have no compassion for taxpayers, cannot negotiate compromises and are totally focused on the bottom line—right or wrong,” he said in a recent interview.

David Sands, a member of the NYSSCPA Relations with the Internal Revenue Service Committee, was slightly more sanguine in his appraisal. He emphasized that the private agencies will be used only on “old and cold deals” that have been out of the system for a while, and noted that, even then, there are a number of exceptions to whom they can go after.

“It seems to be that if a group of people owes them money, and they’re doing the dance to avoid them all these years, it’s not a bad idea to go after them,” he said.

But Sands was worried about how the collection agencies would go about their activities. If they’re just going after “big fish,” he said, methods shouldn’t be of major concern. But, he acknowledged, that might not be the case, and those same agencies might also pursue those “who can least afford to defend themselves.”

“I’d just hate to see them just start harassing those who can’t afford to have good CPA representation, who may have perhaps fallen out of the system or moved a few times and never got the notices,” he said. “There may be all sorts of reasons why they fell out of the system and, because they’re so small, fell off the radar. So that would be a concern of mine.”

The measure was signed into law last December.

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