TIGTA: IRS Private Debt Collection Program Not Losing Money, but Not Making Much Either

Chris Gaetano
Published Date:
Sep 12, 2018

The Treasury Inspector General for Tax Administration (TIGTA) has issued a report finding that, on the one hand, the IRS's private debt collection program is not losing money, as it had in the past. On the other, though, the report said that the program hasn't really generated all that much revenue, having collected about 1 percent of the $4 billion in delinquent taxes it was charged with collecting.

The IRS private debt collection program was formally approved through a highway appropriations bill in December 2015. Unlike previous attempts to privatize tax collection—one in 1996-1997 and another in 2006-2009—this program aims private agencies only at cold debts that the IRS has already given up on collecting. While the first two attempts were eventually shuttered after having cost more money than they brought in, TIGTA said the current initiative is, so far, making a net profit of $1.3 million: It costs $55.33 million to run the program and, as of this past June, it had brought in $56.62 million from 502,893 taxpayer accounts.

Despite the program being technically profitable, TIGTA noted that, when counting revenue alone, this is a mere fraction of the $4.1 billion that had been assigned to these agencies. TIGTA said this might be due to the types of cases assigned to these agencies, versus underperformance compared to in-house tax collectors. 

"The law requires the IRS to use the PCAs for 'inactive receivables.' These tend to be older cases," the report stated. "A principle in debt collection known as the “Collectability Curve” theorizes that the older a debt becomes the harder it is to collect to the point that a debt is nearly uncollectible beyond three years. TIGTA analyzed the average age of accounts being assigned to the PCAs and determined they were an average of 3.97 years old."

Beyond its extremely low rate of collection, TIGTA also said its review has sparked serious concerns that IRS policies surrounding private debt agencies could be harming taxpayers and jeopardizing compliance. 

For one, the complaint process is dependent on private debt collectors reporting on themselves. While taxpayers can file a complaint with the FTC, the IRS has no established mechanism to receive these complaints directly. Instead, policies and procedures require private debt collectors to self-report complaints to TIGTA's Office of Investigations. While 9.500 individuals sought help from the IRS regarding the program, TIGTA's Office of Investigations received just 50: one company self-reported 22 complaints, while another self-reported only 3. Most of these complaints were actually filed by employees of the agencies themselves, "complaining about the taxpayers they called who were alleged to have made physical, bomb, or other similar threats." The next more frequently reported complaint was about inadvertent taxpayer information disclosures "because someone other than the taxpayer pretended to be the taxpayer or because the PCA employee inadvertently provided the information to a person other than the taxpayer." 

TIGTA said the experiences of tax delinquents in federally declared disaster areas illustrate the need for a referral system or complaint model. While official policy bars the transfer of these accounts to private agencies, the IRS nonetheless assigned at least 2,467 such cases to private collection agencies. In other words, despite the disaster declaration to affected taxpayers, the private agencies continue collecting until a hold is placed on the account. 

TIGTA recommended that the IRS assist taxpayers who call either to complain about the agencies or to authenticate the legitimacy of the agencies. The IRS disagreed with this recommendation even though it conceded that the cost of allowing taxpayers to call into the regular IRS tollfree telephone number would be minimal, given the high volume of calls the IRS regularly receives from taxpayers and the relatively small number of calls that would be received from taxpayers whose accounts were assigned to the agencies. The IRS said that the current process ensures that substantiated complaints are acted upon and that systemic problems are identified and addressed. 
The TIGTA report also recommended that the IRS bring accounts of those in federal disaster areas back in-house, but the IRS rejected the recommendation, stating it would have no mechanism to then later return those accounts to the PCAs after the suspension period. The IRS also stated that the law allows taxpayers to request the return of a case to the IRS and does not require the IRS to automatically pull these cases back.

The inability for people to directly contact the IRS regarding a private collection agencies, the report pointed out, also runs counter to other IRS communications regarding staying safe from identity theft. For instance, while the IRS website says it will never call to collect payment, private agencies will. Given the large number of impersonation scams, TIGTA said it makes sense that people would be skeptical when contacted in such a way, especially since scammers may have already been using the program as a ruse to confuse taxpayers. 

While the IRS does maintain authentication procedures, TIGTA said these are not sufficient and, ironically, may even put people at heightened risk for identity theft. The current procedure is this: The IRS transfers the account to a private agency and sends a letter to the taxpayer; then the private agency sends a follow-up letter confirming the IRS letter. Then, when an employee of the debt collector makes the first call, he or she asks for the first five digits of the taxpayer's Taxpayer Authentication Number (TAN), and the employee then provides the taxpayer with the final five digits, enabling a two-party authentication. 

If, however, the tapxayer does not have a TAN or can't remember the digits, the agencies are allowed to authenticate through providing a name, address and date of birth; if these check out, then the debt collector can ask for the first five digits of the taxpayer's  Social Security number. 

"Allowing the [private collection agencies] to request taxpayers’ SSNs when the TAN is not available increases the risk of fraud and may undermine the integrity of the PDC program, stated the report. "Additionally , the IRS will be unable to warn taxpayers that the PCAs will never ask them for their SSNs for authentication purposes or that the PCAs must always authenticate their identity using a TAN. Tax scammers could exploit this process in an effort to steal the taxpayer’s identity. Second, taxpayers may be more inclined to discontinue the call because requesting sensitive information is common in a scam. Such practices could undermine the taxpayers’ faith in the legitimacy of the PCA and ultimately hinder the collect ion of taxpayer debts."

TIGTA said that if the taxpayer does not have the TAN handy, then the private agency should just resend the initial contact letter. It should not be able to request Social Security numbers. The IRS disagreed with this recommendation, saying that using Social Security numbers is standard practice throughout the IRS and noting that debt collectors do not ask for the whole number. Further, it said it is the taxpayer's choice whether to provide this information. 

The IRS also disagreed with a recommendation that it at least make available a telephone number people can call to authenticate the validity of a particular debt collector, or to make a complaint. The agency said it already has a toll-free line, as well as procedures to protect taxpayers from potential scams and to authenticate private collectors. TIGTA pointed out, however, that the toll-free number goes to an automated message telling taxpayers who call to complain about the agency or to ask clarifying questions to contact the agency instead. TIGTA said this system really doesn't work. 

"An automated message is not quality service, if it is service at all," stated the report. "Taxpayers with accounts assigned to the PCAs face other barriers to this right as well. For example, taxpayers who have a dispute with the PCA about the amount owed (such as a claim that they made a payment) must provide support. To obtain support, such as payments made, taxpayers must often communicate with the IRS. However, the IRS ’s automated message redirects taxpayers whose accounts have been assigned to the PCAs back to the PCA when they attempt to contact the IRS. This situation is clearly untenable." 

TIGTA also said the program has harmful consequences for tax compliance. For one, if someone makes a payment plan or other deal with the private agency, the IRS is not informed, and so unless the taxpayer contacts the IRS directly (which TIGTA pointed out can be a challenge), the taxpayer's records will still reflect the delinquent debt, meaning their account is still in the hands of the private agency, which can still call them about the original debt. TIGTA recommended that cases in which a taxpayer enters a partial payment be returned to the IRS. The IRS, however, disagreed, saying, "the PCAs were contracted to attempt collection on inactive tax receivables with respect to which the IRS has been unable to locate or contact the taxpayer or does not have the resources to work. The IRS working these cases, to the exclusion of higher priority work, is an inefficient use of IRS resources. If the taxpayer chooses to work with the IRS, they can contact the ACS or submit an offer in compromise." 

The report also noted that, once a taxpayer account is handed over to a private agency, there's no real distinction made between those who willfully, even criminally, refuse to pay and those who simply can't; internal IRS policy accounts for how cooperative a delinquent taxpayer is or is not being in terms of their enforcement actions, but the private agencies do not take this factor into account. The report noted that, when it comes to cases that would have been criminally enforced, passing the case onto the private agencies means they will not be held to full account. Further, even if a delinquent tax matter is resolved, it does little to disincentivize subsequent noncompliance from that person. In fact, TIGTA said the collection agencies benefit from further noncompliance because "if taxpayers continue to experience subsequent noncompliance ... the PCAs will earn commissions from future balances due which will be rolled up into existing payment arrangements." 

National Taxpayer Advocate Nina Olson has long been critical of the program, and she has brought up many of the same concerns that TIGTA eventually discussed in its recent report. More recently, she pointed out that, so far, most of the people targeted by private agencies are those undergoing significant economic hardship: 28 percent had incomes below $20,000, 19 percent had incomes below the federal poverty level, and 44 percent had incomes below 250 percent of the poverty level

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